Two looming questions threaten to snag the seemingly smooth trajectory of the Republicans' massive tax legislation now in its final leg in Congress. How to satisfy demands of the rebellious GOP lawmakers from high-tax states who demand concessions over a cherished deduction? And how to pay for those concessions?
Even President Donald Trump has dropped his stubborn resistance to a smaller cut in the corporate tax rate as Republican leaders consider it as a way to pay for the House GOP rebels' demands.
About two dozen House and Senate lawmakers are in talks to iron out differences between the two bills. The Republicans aim to get a final blended package to Trump by Christmas. They want to chalk up a major legislative achievement to preserve the party's majorities in next year's elections and fulfill a Trump campaign promise.
Democrats, who are in the minority, will take part in the negotiations, too, but their imprint on the tax legislation will continue to be scant.
Both measures would cut taxes by about $1.5 trillion over the next decade while adding billions to the $20 trillion deficit. They combine steep tax cuts for corporations with more modest reductions for most individuals. They would bring the biggest overhaul of the U.S. tax system in 30 years, pushing into every corner of American society. They double the standard deduction used by most Americans to $12,000 for individuals and $24,000 for couples.
But there are significant differences. Behind some of the closed-door negotiations to meld the two bills, there will be rumblings of the rebellion by GOP lawmakers from high-tax states like New York, New Jersey and California that swept through the House this fall. Still, momentum is behind the Republican push through the House-Senate group.
Salt problem still shaking
The original tax plan by Republican leaders in Congress and the Trump White House called for eliminating the federal deduction for state and local taxes — a benefit embedded since the Civil War era that's claimed by around 44 million people. The tax plan architects eyed a honey pot of about $1.3 trillion over a decade in revenue lost from the deduction that could be reclaimed to help pay for the tax cuts.
That didn't fly with the Republicans in the House from high-tax states: Some threatened to vote against their party's sacrosanct tax bill. After months of negotiations and cajoling by GOP leaders, they wound up with a compromise in both the House and Senate bills. The state and local deductions for income and sales taxes would be totally repealed, but homeowners would be able to deduct up to $10,000 in local property taxes.
Now that's not enough. The California GOP House members, especially, want to restore the ability to deduct income taxes. Their state's income taxes are high while property taxes are somewhat contained by state law. Negotiations continue. One approach would be to allow taxpayers to deduct up to $10,000 in either income or property taxes, or in a combination of both.
How to pay for it? One of the big targets being looked at is the cut in the tax rate for corporations, a linchpin of the tax plan. It would slide from 35 percent to 20 percent under both bills, but there are quiet talks of letting it go to 21 or 22 percent. That may create new problems.
Opening the floodgates?
If a smaller corporate tax cut is used to pay for fuller state-local deductions, then other lawmakers with claims will clamor for concessions the way the high-tax state members did, some Republicans warn.
"That's a bad idea," says Sen. Pat Roberts, R-Kan., a member of the tax-writing Senate Finance Committee. Slashing the corporate rate to 20 percent "has been sort of the tent pole under the tent" of the tax plan, he said. With others lining up to press their demands, "pretty soon you're up to 25 percent. I realize we may have to do something in order to pass the bill, but I think it's a little dangerous. Once you start, I don't know where you stop."
Hands off, Sen. Marco Rubio, R-Fla., already is warning. Rubio successfully pushed for a doubling of the per-child tax credit to $2,000 in the Senate bill. (It's at $1,600 in the House version.)
"If tax reform conference weakens Child Tax Credit OR reduces corporate cut but (doesn't) make Child Tax Credit refundable for working families, going to be problems," he tweeted Friday.
Plenty of other problems
While the state-local tax conflict continues to dominate the scene, there are other key sticking points between the two bills. As a result, potential targets besides the corporate rate are being considered for compromise.
Key differences include: personal income tax rates, with the House bill shrinking the current seven brackets to four and the Senate measure retaining seven brackets but changing them; the mortgage interest deduction, which is more generous in the Senate bill; the alternative minimum tax, aimed at ensuring that higher-earning people and corporations pay at least some tax; and the tax treatment of the millions of U.S. businesses organized as "pass throughs," whose profits are taxed at the owners' personal income rate.
And only the Senate bill ends the mandate under the "Obamacare" health law requiring the bulk of Americans to buy health insurance or pay a tax penalty. Freeing up a hefty $318 billion in revenue, that repeal is expected to go into the final package.
Through the fall, Trump fiercely insisted that the new corporate rate had to be no higher than 20 percent, to make the U.S. competitive with industrial countries around the world.
Now seeing the urgency of prying out new revenue for the tax legislation, the president showed openness recently to a rate as high as 22 percent.
"It could be 22 when it comes out, but it could also be 20," Trump said. "We'll see what ultimately comes out."