(Bloomberg) -- The Republicans at the helm of the U.S. government are drawing closer to carrying out their pledge to cut corporate and individual taxes and create a potentially defining issue in the 2018 election that will determine control of Congress. The final hurdle is resolving differences between House and Senate versions of the legislation before it can go to President Donald Trump for his signature.
1. What are the next steps?
The bill passed by the Senate on Dec. 2 has to be reconciled with the one adopted on Nov. 16 by the House of Representatives. A House-Senate conference committee will be named to work out the differences, a process that could require hard choices. The committee's final product would still need to win approval in the House and Senate before it's sent to Trump.
2. When would lower tax rates take effect?
Assuming the tax cut is law by year's end, some of the provisions would take effect on Jan. 1, though individual taxpayers might not notice them until they file their 2018 taxes in the early months of 2019. The cut in corporate taxes could be delayed until 2019, depending on the outcome of House-Senate negotiations.
3. Will this get done by year's end?
The outlook has improved. On the website PredictIt on Sunday, bettors were assigning an 80 percent probability to Congress passing a corporate tax cut by the end of 2017, up from 35 percent on Nov. 17.
4. What's the deadline?
You wouldn't know it from all the rushing, but there really isn't one. This term of Congress runs through 2018. The need for speed is almost entirely driven by Republicans having a heavy political incentive to pass tax cuts after failing to achieve any other major legislative victory over the past year. Lawmakers are counting on being able to present the tax cuts to voters while running for re-election in 2018.
5. What tax-cut elements do the House and Senate agree on?
They both would lower the corporate tax rate to 20 percent from 35 percent; double the standard deduction and expand the child tax credit that many Americans use to lower their tax bill; allow companies to fully and immediately deduct the cost of their spending on equipment for five years (with some disagreement on what happens after that); and limit the so-called carried interest tax break for investment managers by applying it only to gains on sales of assets held three years or more.
6. What are the biggest sticking points?
The House and Senate differ on the number of tax brackets and the top rate for individuals, the start date of the corporate-tax cut (2019 in the Senate plan, 2018 in the House), whether to eventually end (House) or just temporarily limit (Senate) the inheritance tax on multimillion-dollar estates, and how big a cut to give to so-called pass-through businesses such as partnerships and limited liability companies. The Senate bill envisions tax cuts for individuals expiring at the end of 2025, rather than being permanent; it also incorporates a repeal of the requirement that most people have health insurance or pay a penalty, a cornerstone of the 2010 Affordable Care Act, also known as Obamacare. The House and Senate differ as well on what existing tax breaks would be narrowed or eliminated to keep the overall cost below $1.5 trillion over the next 10 years, as required by the Republicans' budget outline.
7. What are the obstacles to getting a tax cut done?
At this point, it's all about making sure enough House and Senate Republicans remain on board as their two bills are reconciled. Republicans have a narrower margin in the Senate. There, assuming Democrats continue their solid opposition, the 52-48 Republican majority allows no more than two dissenters. There was only one, Bob Corker of Tennessee, when the Senate passed its bill. In the House, Republican leaders have a cushion of 22 votes they can afford to lose. Thirteen House Republicans voted against the House's initial tax-cut bill, including 12 from New York, New Jersey and California, high-tax states that may lose the most from plans to repeal the deduction for money spent on state and local taxes, except for up to $10,000 spent on property taxes.
8. Would a tax cut make the economy grow faster?
In a Bloomberg News survey, economists said the planned cuts in the House bill would likely boost U.S. economic growth by about one-quarter of a percentage point in 2018. The Tax Foundation, an independent, right-leaning group in Washington, says over the long run, the House bill would boost U.S. gross domestic product by 3.6 percent, after correcting its initial estimate of 3.9 percent. Most important, perhaps, an analysis by the Joint Committee on Taxation released Thursday found that the Senate bill would generate enough economic growth to lower its $1.4 trillion revenue cost by only about $407 billion over a decade, leaving a 10-year revenue loss of roughly $1 trillion. That's alarming news for the Republican senators who have voiced concerns about tax cuts adding to the federal debt.
The Reference Shelf
- How the House and Senate tax plans stack up.
- The Senate bill has something for every Republican to hate.
- A QuickTake Q&A on chained CPI, which Bloomberg View columnist Barry Ritholtz calls "the increase hiding in the Republican tax cuts."
- A look at which stocks are rallying under the Trump tax trade.
- More on Bloomberg's survey of economists.
- A QuickTake Glossary of tax terms to know.
- It's better to be a business than a person under the planned tax cut, Bloomberg View columnist Justin Fox writes.
To contact the reporters on this story: Laura Litvan in Washington at llitvan@bloomberg.net, Anna Edgerton in Washington at aedgerton@bloomberg.net.
To contact the editors responsible for this story: Alexis Leondis at aleondis@bloomberg.net, Laurie Asséo, Laurence Arnold
©2017 Bloomberg L.P.
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