As the Republican-controlled House continues to make hurried, last minute edits to its tax reform bills before bringing it to a vote, politicos around the nation and the broader world are wondering how said bill will shape up once it’s been through the brutal legislative process. On the top of most bill-watcher’s minds are the variations in the House and Senate’s differing reform bills, which have many onlookers scratching their heads trying to sort out the differences between the two.
So, what are the 3 key differences between the House and Senate bills, and why do they matter? Furthermore, what’s the chance that a reform bill ends up getting through congress and getting signed by the president in today’s era of political gridlock, anyway? A quick review of the tax process as it’s been carried out thus far helps clear the muddied waters, and shows how close America may yet be to true tax reform.
#1: Different tax brackets
Perhaps the greatest conundrum in the GOP’s tax push is the difference of opinion between senators and congressmen when it comes to the total number of tax brackets. The House’s bill champions four different income tax rates, for instance, whereas the Senate is seeking a seven-bracket system. Such a glaring inconsistency will likely need to be ironed out before any bill can be agreed upon by both champers.
While the House’s bill top marginal rate is staying at its current 39.6 percent, the Senate is seeking a lower top rate of only 38.5 percent. While the gap between the two chamber’s top rate isn’t unbridgeable, republicans can’t afford to lose many, if any, votes in the increasingly contentious process. After GOP Sen. Johnson came out against the bill on Wednesday, tensions will be high to remedy the differences between the chamber’s plans, lest the republican majority fractures like it did during its failed attempt to repeal Obamacare.
While the Senate’s attempt to keep in more tax brackets could prove beneficial to the middle class, it will undoubtedly clash with President Trump and Speaker Ryan’s simplification agenda, which aims to make the tax code as easy to understand as possible. For any bill to pass, the tax bracket divide must be dealt with first and foremost.
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#2: Deduction difficulties
Tax brackets aren’t the only area where the GOP has found itself divided, either. Differing approaches to tax deductions taken by the Senate and House will likely lead to some ideological clashes, too, as the different plans call for opposing cuts or eliminations.
While both the Senate and the House aim to eliminate state and local tax deductions, the House aims to limit mortgage-interest deductions to the first $500,000 of value, whereas the Senate doesn’t touch it at all. About 30% of tax filers currently deduct state and local property taxes from their federal taxes, and differing members of the House and Senate may find themselves clashing over those figures based on whose district is impacted the most.
There are other, minor changes that should be readily surmountable, too. For instance, while the House offers a $1600 child tax credit, the Senate is offering $1650; such trivial differences aren’t likely to obstruct the passage of a reform bill, allowing senators and congressmen to focus on their more glaring disagreements as they move forward.
#3: Delayed cuts
Both the House and the Senate can agree on one thing; the top corporate tax rate needs to be cut. While members of both the House and Senate are gunning for the same top rate of 20 percent, however, the tax cuts aren’t planned to arrive at the same time. The House wants a more immediate cut in 2018, whereas the Senate is happy to bide its time until 2019.
Any move that seriously cuts corporate taxes is likely to result in massive losses of revenues and a spiking deficit. The Senate’s plan to push off the cuts until 2019, then, hopes to placate business leaders lobbying hard for a cut while also lessening the fiscal blow that such a cut will inevitably bring.
As the GOP’s plan to overhaul taxes gains momentum, the party can’t afford to lose a single vote in the tightly-contested political environment that’s dominated international media for these past few months. With the 2018 midterms rapidly approaching, leadership in both chambers is likely eager to see some reform accomplished, lest republicans find themselves without a signature legislative victory to campaign upon.
Expect these changes to be hashed out as quickly as self storage Hong Kong behind closed doors, then, and for the GOP to try and present a unified front as it eventually brings a bill to the floor in the face of staunch democratic opposition. Benjamin Franklin once claimed that the only certain things in life are death and taxes; the differences between the two bills will put that latter one to the test, and it’s now up to republicans to unify if they want to pass a bill.
Gary Eastwood is a CPA licensed senior accountant from Seattle, Washington. He received his CPA license from the Washington State Board of Accountancy in 2001 before relocating to Onawa, Iowa in 2008. Over more than 15 years of accounting experience, Gary has worked with multinational health service providers and independent CPA firms. He has a proven ability in dealing with business clients from a variety of backgrounds as well as leading companies to greater efficiency and profitability. He is familiar with both US GAAP and China GAAP.