Senate learns from the House tax bill

Friday , November 10, 2017 - 4:00 AM

RAMESH PONNURU, Bloomberg View

Senate Republicans are releasing their own version of tax reform. Based on what I have heard, it has a family resemblance to the one their House colleagues are getting ready for a vote. But the differences suggest that the senators have learned two lessons from the reception to the House bill.

Both bills are based on a “framework” to which the White House, House Republicans and Senate Republicans agreed. Both cut tax rates on income for corporations and pass-through businesses, and both allow business investment to be written off more rapidly. Both expand the standard deduction, a move that delivers middle-class tax relief (or softens the blow of other steps that raise taxes for some middle-class households) and reduces the number of people who itemize.

Both eliminate the personal exemption and increase the child credit — the Senate's version by slightly more than under the House bill. That swap leaves the tax code roughly as pro-parent as it is now.

The first lesson Senate Republicans appear to have learned is that simplification is complicated.

The original framework called for three to four tax brackets, and House Republicans chose to go with four. Senate Republicans are sticking with the current seven. Republicans typically present a reduction in the number of brackets as a crucial step toward simplifying the tax code — although the number of brackets does not meaningfully increase the amount of time it takes to file income taxes.

The extra brackets should mean that the Senate bill does less than the House bill to disturb the existing distribution of tax burdens. (We’ll soon see what the number-crunchers have to say.) It also makes it easier for Senate Republicans to avoid some of the work-arounds the House Republicans chose.

The House version created a “clawback” feature to keep couples making more than $1.2 million a year (and singles making more than $1 million) from getting the benefit of rate cuts intended for people making less money. The effect is to create a “bubble rate.” Couples making between $1 million and $1.2 million will pay a marginal tax rate of 39.6 percent. Those between $1.2 million and $1.6 million will pay 45.6. And then people making more than that will pay 39.6 percent again. (All of these numbers exclude the Obamacare surtax.)

The Senate dispenses with this complexity. It also dispenses with the House’s $300 filer credit, not needing it to make it appear better for the middle class. And more of the Senate's changes to the tax code apply to the entire 10-year period covered by the bill.

The House lets some expire in the middle of the period. Republicans think those provisions will have enough political support to be extended. The expirations are in the bill to make its impact on revenues looks smaller. What may have influenced Senate Republicans: They don’t want to make it look as if they are pulling a fast one on the middle class by providing tax relief that is scheduled to disappear.

The second lesson Senate Republicans have learned: Pick your battles. The adoption tax credit has a pretty strong justification, is popular, is especially popular with social conservatives, and does not cost the federal government much revenue. So Senate Republicans, unlike the House Republicans, are keeping it. For similar reasons, they’re also keeping the medical-expense deduction and the additional standard deduction for blind people.

Senators have also gone easier in tackling the mortgage-interest deduction. The House bill caps the loan value on which interest can be deducted at $500,000. The Senate has a higher cap of $750,000. The House does not allow deductions on mortgages for second homes. The Senate does. (Update: At the last minute, Senate Republicans decided not to lower the cap on the mortgage-interest deduction at all.)

But the Senate bill is bolder than the House one in another area. It completely eliminates the deduction for state and local taxes, where the House eliminates it for income and sales taxes but allows it for $10,000 in property taxes.

That’s an easier fight for Senate Republicans than House Republicans. There are a few dozen House Republicans representing Republican parts of high-tax Democratic states. Those states elect few Republican senators.

President Donald Trump has told Democrats that they will like the Senate bill better than the House one. They probably won’t like it very much. But on balance they ought to like it a bit more, and the Senate bill seems more likely to be politically defensible with the public, too.

Ramesh Ponnuru is a Bloomberg View columnist. He is a senior editor of National Review.

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