Tax Reform More Likely After Senate Election Result


Tax Reform More Likely After Senate Election Result

The Alabama election result may lead to a tax bill by end of next week, suggests Ed Mills, Washington Policy Analyst.

December 13, 2017

The win last night by Doug Jones (D-AL) places enormous pressure on Congressional Republicans to finish the conference on the tax bill before he is sworn into office (likely at the beginning of next year). We believe this pressure likely results in a tax bill by the end of next week. Conferees are beginning to discuss some of the potential compromises in the bill and are set to meet with President Trump later today. If all goes according to plan, Congressional Republicans would like the House and Senate to pass the conference report on Monday and Tuesday of next week, with a bill signing by President Trump as soon as next Wednesday. Conferees have begun to float a potential 21% corporate tax rate, lowering the top individual rate to 37% and limit the mortgage interest deduction (MID) to $750,000. Work remains on the alternative minimum tax (AMT) for business and individuals, the timing of the corporate tax cut and many of the international provisions of the bill. Progress is also being made on the end of the year spending bill and support is increasing for the bipartisan health care insurance fix sought by Senator Collins (R-ME).

Alabama Senate Election

Doug Jones becomes the first Democrat elected to the Senate from Alabama since 1994 and his victory will send shockwaves in DC. Democrats will make a push for Jones to be seated as soon as possible, but Senator Majority Leader Mitch McConnell indicated today that the winner of the senate race would not be seated until January 2018. The results of the election are close and the Republican candidate, Roy Moore, has yet to concede the race. While Jones appears to be the winner, it will not be official until the Secretary of State certifies the race, following an official canvasing of precincts. This is expected to take at least until later this month, giving Senate Republicans a narrow window to finish the tax bill before he is seated.

Tax Deal Details Emerge

While still not yet a done deal, it appears that negotiates on a final tax package are beginning to emerge. Negotiators appear to be willing to set the corporate tax rate at 21% versus the 20% in the House and Senate bills. There is a push to start the cuts in 2018 versus 2019 but that decision will likely be subject to the budgetary constraints of the overall bill. In an effort to offset some of the impact of the State and Local Tax (SALT) deduction, negotiators have floated a top tax rate of 37%, down from the current 39.6% and 38.5% in the Senate bill. This may prove to be a politically tough change for the overall bill. In a compromise on the MID, existing mortgages are expected to be grandfathered at the $1 million level, but a new cap at $750,000 will be imposed on new mortgages. No deal has been struck on the individual or corporate AMT, but we expect the corporate AMT to be removed or altered in the final package. The international provisions in the bill appear to be most in flux and are likely going to need future refinement in a technical corrections bill in 2018.

Affordable Care Act (ACA)

The repeal of the individual mandate of the ACA is likely to survive the House and Senate conference, but progress is being made to pass bipartisan legislation that would restore some of the cost-sharing payments from the federal government in an effort to prevent significant increases in individual premiums. This fix is key to keeping the vote of Senator Collins (R-ME). Senator Collins and the Chairman of the Senate HELP Committee met with Vice President Pence yesterday to work on a deal that could be included in the end of the year spending bill. While the addition of this provision will cost the spending bill support from congressional Republicans, it would add significant support from Democrats, preventing a government shutdown on December 22.

Technical Corrections Bill

There is growing expectation that a technical corrections bill will be needed in 2018 to fix any unintended consequences of the current bill. That bill will need 60-votes to pass, so Democrats will be needed for any fixes. We will be watching to see if Republicans attempt additional changes to SALT next year to win over Democratic support. Congress would have until April 2019 to make a fix to prevent the full SALT changes from occurring.

Next Steps

The tax conferees are set to meet in their first public meeting later today. Following the meeting we expect a final deal to be struck in the coming days. The final conference package still faces some parliamentarian hurdles in the Senate, but are unlikely to derail the bill. The House and Senate will have to vote on a final conference report, which cannot be amended and is subject to a majority vote. If the bill clears the House and Senate, it then is sent to president for his signature.

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