US: What’s next for House Tax Bill - Wells Fargo
Latest release of the US Tax Cuts and Jobs Act marks a major milestone for Republicans’ tax reform efforts, but there are still several hurdles to clear before it becomes law, and the timeline is a bit tight, according to analysts at Wells Fargo.
“Last week, Republican leaders released the full details of a highly anticipated tax code rewrite. The bill did not disappoint in its sweeping nature. Nearly every facet of the U.S. tax code would be affected by the proposed changes. According to the bill, the individual tax brackets would be collapsed to four from seven, and, while the top rate was unchanged, it now would apply to a higher income threshold. The standard deduction and child tax credit would both be increased, and the personal exemption would be eliminated. The bill eliminates or limits a slew of individual tax deductions, including the deductibility of mortgage interest and state and local taxes. On the corporate side, the statutory rate is reduced from 35 percent to 20 percent. In addition, a special rate of 25 percent would apply to “pass-through” businesses that have in the past filed under the individual income tax brackets.”
“On balance, our biggest takeaway is that this a bold opening bid from Republican House leaders. A key question throughout this process has been whether policymakers would be willing to eliminate/reduce popular tax breaks, such as the mortgage interest deduction, to help offset the across- the-board tax cuts for individuals and businesses. If passed, the controversial pay-fors in the House bill are likely to face stiff opposition from several interest groups in the Senate. In the absence of some of these large revenue raisers, deficit neutrality beyond the 10-year budget window becomes a challenge. Senate reconciliation rules require deficit-neutrality beyond the 10-year window, which is why policymakers often consider making some tax cuts temporary.”
“A final vote on the House floor is likely to occur the week of November 13th. The Senate is expected to release its own version of a tax bill on November 8th and target passage of its bill the week of November 20th. Assuming the process is still going strong at this point, and assuming the Senate bill differs from the House bill, there would be two possible outcomes: the House could take up the Senate bill as is, or the two chambers could go to conference committee, hammer out the differences and vote again.”
“A challenge will be other pressing items that may distract Congress from the tax reform efforts. Most important is the December 8th deadline to keep the government funded, which will require at least some support from Democrats. With Democrats demanding a permanent fix to Deferred Action for Childhood Arrivals (DACA) and President Trump insisting on funding for a border wall, the policy gap that needs to be bridged appears quite large. Furthermore, the “back-up” plan of another short-term funding bill looks like it too will be controversial if a deal on immigration is not near. We maintain our view that the final tax cut bill will not be passed until the first quarter of next year.”