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House Panel Approves GOP Tax Measure

Chamber’s version differs markedly from Senate proposal

From left, House Ways and Means Chairman Kevin Brady, ranking member Richard E. Neal and California Rep. Mike Thompson attend a committee markup of House Republican tax bill on Thursday. (Tom Williams/CQ Roll Call)
From left, House Ways and Means Chairman Kevin Brady, ranking member Richard E. Neal and California Rep. Mike Thompson attend a committee markup of House Republican tax bill on Thursday. (Tom Williams/CQ Roll Call)

The House Ways and Means Committee on Thursday approved the Republican tax plan after making key changes such as raising repatriation tax rates on corporate cash held abroad, restoring the adoption child credit and changing the bill’s treatment of “pass-through” businesses.

Committee members voted along party lines, 24-16, to approve the legislation setting up a likely House floor vote next week. The substantive changes Thursday came in a so-called manager’s amendment from Chairman Kevin Brady who unveiled the package less than an hour before the panel took it up, prompting an outcry from Democrats.

After the four-day Ways and Means markup, the legislation will next head to the House Rules Committee — likely early next week — where any final changes could still be made by Republican leaders before the bill goes to the House floor later in the week.

The Brady amendment, adopted prior to final approval of the legislation on a party-line 24-16 vote, would change the rates at which corporate money brought back to the U.S. from overseas would be taxed.

The original draft of the House bill would tax overseas money at a one-time rate of 5 percent for illiquid assets and 12 percent for cash, and then transition to a so-called territorial system. Brady’s amendment Thursday would raise those rates to 7 percent for illiquid assets and 14 percent for cash.

“We’re all moving toward the most pro-growth code we can, and those numbers are appropriate as we move the bill forward,” Brady said of the rate increases. “We continue to make improvements overall.”

The move would increase the revenue offsets to help pay for restoration of other tax breaks in the manager’s amendment as well as bring the total cost of the bill down.

For example, the amendment would restore the adoption tax credit, something sought by many members on both sides. “We’re doing it because we want to provide a safe and loving home for a child,” Brady said, citing strong support for the credit he heard this week from Republicans and Democrats alike.

‘Pass-through’ business changes

The amendment provides a 9 percent tax rate for pass-through entities’ first $75,000 in net business taxable income. The special 9 percent rate, which is phased in over five years, would only apply to active owners or shareholders who earn less than $150,000 in taxable income through their business and then phase out at $225,000, according to a summary of the amendment.

The provision is aimed at addressing concerns that a new maximum 25 percent rate on pass-through income would not help business owners earning less than $200,000.

The new rate would also be applicable to all pass-through business sectors, including personal services providers such as doctors, lawyers, accountants and engineers. Rank-and-file Republicans and influential groups such as the National Federation of Independent Business had sought changes to make the benefits more broadly available.

The NFIB said in a statement that the amendement addressed their concerns and “would create substantial tax relief for millions of small business owners who were left out of the original bill.”

As part of the phase-in, the pass-through rate would be 11 percent in 2018 and 2019 and 10 percent in 2020 and 2021. The 9 percent rate would be effective starting in 2022.

Brady said the changes will allow startups to “keep more of their income in those crucial early years.”

The amendment does not include a provision to repeal the individual mandate in the 2010 health care law, which some key Republicans had sought.

Auto dealer exemption

Other changes to the bill under Brady’s amendment include an exemption from the measure’s limitation on net interest expense deductibility for businesses engaged in “floor plan financing,” an arrangement prevalent among automobile dealers. Such businesses in exchange could not benefit from full expensing for capital expenditures, which under the House bill would apply for five years.

The amendment would also require amortization of business research expenses over a five-year period starting in 2023, rather than full and immediate deductions which are available today. For research conducted outside the United States, the amortization period would be 15 years.

In addition, moving expense deductions would be preserved, but only for military families.

The Brady amendment also sparked concerns about a further rollback of the so-called Johnson Amendment, which prohibits political activity by churches and charities.

Not only would the underlying bill’s changes to allow churches to endorse political candidates remain, but the latest Brady amendment would allow any 501(c)3 organization to do so without risk of losing tax-exempt status.

“The chairman’s amendment made a bad provision worse,” said Lisa Gilbert of Public Citizen, a liberal organization. “It deepens a brand new secret money conduit and will lead to a flood of taxpayer subsidized secret political spending.”

The overall effect of these and other changes under the Brady amendment was partly aimed at making the legislation comply with the budget framework adopted by both chambers, which allows for up to $1.5 trillion in additional deficits over the next ten years. 

A previous amendment adopted by the committee Monday put the legislation over the limit, bringing the total ten-year cost to $1.574 trillion, according to the nonpartisan Joint Committee on Taxation.

Democrats complained that Brady sprung the sweeping amendment on them and called a vote without allowing time to review it — a move they said exemplified the closed, partisan process Republicans were using to draft and pass their tax bill.

“This process at best has been inartful, and at worst indefensible,” said Rep. Richard E. Neal of Massachusetts, top Democrat on the panel, noting that not one Democratic amendment had been adopted over four days.

Brady on Thursday also clarified a question raised repeatedly Democrats and other critics of the tax plan, about whether the bill would allow owners of pass-through businesses to claim deductions for certain state and local taxes that individual taxpayers wouldn’t be allowed to deduct under the plan.

In a letter to Oregon Democratic Rep. Earl Blumenauer, Brady wrote that small business owners would be able to deduct certain property taxes, up to a limit, as well as state and local sales taxes. The latter deduction would no longer be available to other taxpayers under the Republican plan. Pass-through business owners would not be able to deduct state and local income taxes, though.

Republicans also turned back a last batch of Democratic amendments related to the estate tax, wind energy credits, President Donald Trump’s personal taxes and more. All were rejected along party lines.

Senate Republicans on Thursday were set to release details of their own tax plan, an outline that included some notable differences from the House proposal. The Senate Finance Committee is expected to mark up the legislation next week, and Senate GOP leaders aim to pass their tax bill the week after Thanksgiving, according to Senate Majority Whip John Cornyn.

Trump has said he wants to sign a final tax code overhaul before Christmas.

Kate Ackley and Lindsey McPherson contributed to this report.

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