BEYOND THE NUMBERS
Last-Minute Changes Worsened Already Bad Senate Tax Bill
Rushing to pass a tax bill last week, Senate Republicans worsened its harmful provisions and highlighted the worst elements of their process for enacting it.
As the Senate began considering the Finance Committee-approved bill on Wednesday, Congress was already moving on a fast track on legislation to give large tax cuts to the wealthy and corporations, raise taxes for many low- and moderate-income people, boost the number of uninsured Americans by millions, and expand deficits, according to the Joint Committee on Taxation (JCT), Congress’ official scorekeeper. The process that Republican leaders were pursuing was designed to ensure that the public didn’t fully understand the bill, with major new provisions advanced without the benefit of hearings or expert analysis.
Revising the bill before passing it early Saturday, the Senate expanded provisions that overwhelmingly benefit the wealthy while rejecting proposals to improve the Child Tax Credit (CTC) for low-income working families with children and reduce the bill’s cost, which will exceed $1 trillion even under the most optimistic reasonable scenario. And they passed the bill only hours after releasing new language, a step that both prevented legislators and the public from understanding the bill’s impact and will likely have unintended consequences, resulting in a bill that’s even more costly and tilted towards the wealthy and large corporations than it now appears.
- Expanding the “pass-through” loophole. A major change that helped the bill gain the support to pass was a further expansion of its tax break for “pass-through” income — income from businesses such as partnerships, S corporations, and sole proprietorships that owners claim on their individual tax returns and is now taxed at the same rates as wages and salaries.
The Finance Committee-passed bill would have let business owners deduct 17.4 percent of their pass-through income from their taxable income, meaning that it would be tax free (subject to certain restrictions). That deduction is heavily skewed to the most profitable businesses and wealthiest business owners, who receive a greater share of their income from pass-throughs and enjoy a larger tax break per dollar of deductions since they are in higher tax brackets.
In response to demands by Senators Ron Johnson and Steve Daines, Senate Republican leaders raised the deduction percentage by nearly a third, to 23 percent. The underlying pass-through tax cut would cost $362 billion over ten years; the expansion cost an additional $114 billion, according to a JCT estimate released after the Senate passed the bill. (These estimates assume that the provision expires as scheduled at the end of 2025.)
- Modifying repeal of the state and local tax (SALT) deduction. The Finance Committee bill eliminated the SALT deduction, but Senator Susan Collins secured a change — making the provision identical to the House bill — that retained the deduction for property taxes (capped at $10,000), while eliminating the deduction for income and sales taxes. The income and sales tax deduction, however, is the most valuable part of the SALT deduction for most taxpayers, accounting for more than half of the total dollar amount of SALT deductions in 41 states and more than 70 percent of SALT deductions in 16 states.
Repealing most of the SALT deduction would strain state budgets, over time putting funding for education, health care, and other services at risk, or prompting states to raise more revenues from low- and middle-income households.
- Rejecting more help for working families with children. Senators Marco Rubio and Mike Lee called for strengthening the Finance Committee bill’s expansion of the CTC. They proposed boosting the credit for more than 10 million children in low-income working families who would get only a token increase of $75 or less from the bill’s CTC measure and for some of the 16 million children in modest-income working families who would get less than the bill’s maximum CTC increase of $1,000 per child. They would have offset the cost by slightly shrinking the bill’s deep corporate tax rate cut.
But Republicans moved forward without making any improvements for low-income working families, effectively continuing to give giving millions of families only a token CTC increase in order to protect an extra corporate tax cut.
- Adding cost. Senator Bob Corker raised alarms about the bill’s cost after JCT estimated that it would add more than $1 trillion to deficits even after accounting for its potential boost to economic growth. But Republican leaders did nothing to accommodate his concerns, and he ultimately voted against the bill. Indeed, the Senate approved amendments that increased the bill’s official cost by $34 billion, to $1.45 trillion over ten years. Its actual cost could reach roughly $2 trillion when taking into account its expiring provisions, phase-ins, and other maneuvers that hold down its official cost.
Some amendments also raised the bill’s potential cost. For example, by expanding the pass-through deduction, the Senate raised both the bill’s official cost and its potential cost if policymakers later make the deduction permanent, as congressional Republicans say they favor. To cover some of the cost of this and other amendments, the final bill increased the one-time tax on multinationals’ offshore profits. But because policymakers can use this revenue-raiser only once, it can’t help offset the ongoing cost of the pass-through deduction or other temporary tax breaks if policymakers extend them. And in the final hours before passage, the “manager’s amendment” — that is, the final bill — added provisions offering targeted tax breaks for oil and gas companies, mortgage bankers, and auto dealers, among others.
Since Senate Republican leaders didn’t release the bill to lawmakers or the public until immediately before the vote, it may well include other provisions that increase its cost and tilt towards the top — among other problems. Congress has an opportunity to address some of these problems when a House-Senate conference fashions a final bill out of the separate House- and Senate-passed versions. But without a more open, deliberative process, a final bill will likely have harmful effects even above and beyond the provisions we now understand.