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The Tax Bill Conference Committee Can Make The Final Bill Responsible

Dec 8, 2017 | Taxes

Both the House and Senate versions of the Tax Cuts and Jobs Act (TCJA) as currently written would cost nearly $1.5 trillion on a conventional basis and at least $1 trillion on a dynamic basis; both bills also have at least $500 billion worth of gimmicks and expirations. As lawmakers go to conference to reconcile the differences between the two versions, there is still time to make the final bill more fiscally responsible.

Conferees should aim to meet the following three goals:

  1. Reduce the number and size of expirations and gimmicks.
  2. Maximize base broadening.
  3. Reduce (preferably to $0) the overall deficit impact.

As it stands right now, each bill has some components that are more fiscally responsible than its counterpart as well as other aspects that are more gimmicky. Below is a table comparing the two on some of the main features, noting the more fiscally responsible approach for each (shaded green) as well as the more gimmicky approach (shaded red):

Component House Bill Senate Bill
Tax Changes    
Rate Reductions
Rates of 12%, 25%, 35%, and 39.6%
(Average Cost of $100 billion/year)
Rates of 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%
(Average Cost of $150 billion/year)
Child Tax Credit
Expansion
Increased to $1,600/child and phased out at higher income than current law
Increased to $2,000/child and phased out at much higher income than House bill
Alternative Minimum Tax Eliminated
Exemption amount increased
Estate Tax Exemption increased to $11.2 million through 2024, then tax is eliminated
Exemption doubled; tax retained
Pass-Through Changes
Top rate limited to ~35% for active owners; 25% for passive owners
(Average Cost of $60 billion/year)
Creates a 23% deduction for business income capped at 50% of wage income; disallowed for active owners; disallows losses in excess of $250K/$500K
(Average Cost of $40 billion/year)
Tax Expenditures
Many expenditures eliminated or scaled back
Fewer expenditures eliminated or scaled back
Interest Deduction
Limited to 30% of income before interest, taxes, depreciation, and amortization
(Saves $18 billion/year)
Limited to 30% of income before interest and taxes
(Saves $30 billion/year)
Individual Mandate Kept in place
Penalty eliminated, causing lower spending to save a net $320 billion
Gimmicks    
Two- and Three-Year
Expirations
No major provisions
Sunsets more generous medical expense deduction after 2018; delays certain alcohol excise taxes until 2019; provides a tax credit for employers who offer family and medical leave that expires in 2020
Five-Year Expirations
$300 dependent credit that expires in 2023; requires R&E amortization beginning in 2023; full expensing expires in 2023
Expensing begins to phase down starting in 2023
Eight-Year Expirations N/A
All individual provisions expire in 2025; requires R&E amortization & other tax increases in 2025
Tax Cut Delays N/A
Corporate rate cut starts in 2019

Using the conference as an opportunity to make the bill more fiscally responsible would require taking the best from each bill. As we suggested, the conferees should:

Reduce the number and size of expirations and gimmicks. The Senate bill includes $500 billion to $600 billion of expirations and other gimmicks that help make the bill compliant with the Byrd rule (i.e., it does not increase long-term deficits) and also reduce the ten-year cost. While conferees may need to rely on sunsets to comply with the Byrd rule, they should not use them to reduce the ten-year cost. At a minimum, any expirations should take place after nine years rather than eight. And rather than allowing all individual provisions to expire, it would be more responsible (or less irresponsible) to only let the individual rate cuts expire. Of course, the better approach is to make everything permanent by ensuring the legislation is truly deficit neutral in 2028 and beyond.

Maximize base broadening. Under current law, the government is projected to offer over $18 trillion of tax expenditures over the next decade. The Senate bill, however, only proposes $3.6 trillion of base broadening. By comparison, the House proposes $4.3 trillion of base broadening. The Senate should adopt as many of the House’s base-broadening proposals as possible. Last week, we itemized many of these tax breaks in a table.

Reduce the overall deficit impact. While both versions have similar costs, there is still opportunity for a conference agreement to cost hundreds of billions less by taking the best elements from both plans. A good place to start would be to adopt the base broadening provisions in the House while retaining Senate proposals on pass-through businesses, the estate tax, and the individual AMT. A compromise could also take the (less costly) House approach on individual income tax rates and the child tax credit – or at least split the difference between the House and Senate.

Starting with the Senate bill as a base, we've come up with an illustrative plan that would reduce the bill's gimmicks by at least one-third, finance the removal of the corporate AMT, and reduce the dynamic cost of the legislation to close to $0. The illustration would retain the Senate's proposals on the estate tax, individual AMT, and pass-throughs while adopting most of the base broadening provisions from the House bill and splitting the difference between the bills in regards to rates and the child tax credit. On a dynamic basis alone, those changes would cut the cost of the bill to roughly $700 billion. To offset the remaining costs, the illustrative plan would also add two more changes – changing the corporate rate to 22 percent, as suggested by President Trump, and eliminating the state and local tax deduction (both corporate and individual) in its entirety.

An outline of our illustrative plan is below. All numbers are rough and rounded to the nearest $5 billion.

Provision Cost / Savings (-) Notes
Initial Cost of Senate Bill (Conventional) $1,450 billion  
Extend individual reforms permanently and snap back rates in 2026 as needed – rather than allowing individual reforms to expire in 2025 $150 billion Reduces gimmick
Remove R&E amortization $60 billion Removes gimmicks
Remove corporate AMT $40 billion House approach
Cost of Senate Bill with Reduced Gimmicks $1,700 billion  
"Split the difference" on individual rates -$200 billion Rates between House & Senate
"Split the difference" on child tax credit amount -$100 billion $1,800 per child
Move toward House CTC phase-out & program integrity -$50 billion House approach
Adopt most House "higher education" reforms -$50 billion No changes to taxation of tuition reductions
Eliminate exclusion of private activity bonds -$40 billion House approach
Cap mortgage interest deduction at $500,000 -$25 billion House approach
Apply 8% surtax on life insurance company income -$25 billion House approach
Phase out exclusion of gains from home sales -$20 billion House approach
Repeal rather than scale back orphan drug credit -$25 billion House approach
Repeal various energy tax breaks -$10 billion House approach
Repeal other business credits -$15 billion House approach
Repeal exclusion for employee awards -$5 billion House approach
Remove reduced floor for medical expenses -$5 billion House eliminates deduction entirely
Adopt other assorted House policies -$30 billion  
Retain Senate approach on individual AMT, estate tax, expensing, and pass-through entities n/a  
Subtotal, Cost of Modified Approach $1,100 billion  
Subtotal, Dynamic Cost of Modified Approach $700 billon  
Scale back corporate rate cut to 13 percentage points (22 percent rate) -$200 billion  
Eliminate the state and local tax (SALT) deduction for individuals and businesses -$500 billion  
Total, Dynamic Cost of Illustrative Plan $0  

A conference committee can do more than just merge the two bills; it can also resolve the many fiscal issues facing the TCJA, making it more fiscally responsible and pro-growth. Lawmakers should look closely at these changes as they consider presenting a final bill for an up-or-down vote.


Appendix: Starting with the House Bill

While this approach starts from the Senate bill, a similar proposal could be designed by starting with the House bill. Such a proposal could keep most or all of the House base broadening; keep or compromise on issues of tax rates, expensing, and the child tax credit; adopt the Senate approach with regards to the estate tax, individual AMT, and pass-throughs; and begin any expirations needed to comply with the Byrd rule no sooner than the end of 2026.