Senate Republican tax plan may eliminate property tax deductions and delay corporate cut

As they prepare to unveil their own sweeping tax plan, Senate Republicans are revisiting key provisions of the GOP House proposal, including possibly eliminating property tax deductions as well as state income tax deductions, increasing the size of child-care credits, offering more help to small businesses and having corporate tax cuts phase in or expire, according to those familiar with the negotiations.

The final outline of the Senate plan, scheduled to be released Thursday, remained a work in progress, officials cautioned.

“Everything is on the table,” said one Republican official Tuesday evening, who did not want to be identified discussing the talks.

House and Senate Republicans agreed on an early framework for the tax overhaul — lowering corporate rates to 20% and consolidating individual brackets.

But as House Republicans push ahead with a vote next week on their bill, Senate Republicans are constrained by Senate rules that require their package not increase the federal deficit by more than $1.5 trillion over a decade.

Core to the Senate’s dilemma is how to make the corporate tax rates immediate and permanent — as President Trump wants — which has left them searching for revenue streams so they don’t add to the deficit.

They are considering various options: Fully repealing state and local tax deductions that are important to California and other high-tax states, including property taxes; adjusting individual tax brackets so higher-income households that earn less than $1 million fall in the top 39.6% rate; retaining some type of estate tax; or repealing parts of Obamacare.

They are also considering simply allowing the corporate rate to expire at the end of the decade, sources said.

At the same time, senators are trying to make the bill more beneficial to small businesses and middle-income households, in response to Democratic complaints that the bill mostly aids corporations and the wealthy. President Trump interrupted his Asian trip Tuesday to dial in to a meeting of 12 Democratic senators he is hoping to win over, telling them it was an “awful” bill for rich people, according to a source familiar with the call.

Senators in recent days have responded to concerns raised by the National Federation of Independent Businesses that few small-business owners would benefit from a provision in the House plan to lower the tax rate on so-called pass-through businesses to 25%. Currently such businesses pay at the individual rate, topping at 39.6%

But the vast majority of small businesses already pay about 25%, the NFIB complained.

Some senators are talking about raising the House bill’s 30% cap on business income that can receive the 25% rate to 50% or more, to allow a greater number of small-business owners to benefit.

Others want to increase the child tax credit to help families. Florida Sen. Marco Rubio, working with Ivanka Trump, wants the credit increased to $2,000. The House bill, which would boost the credit from $1,000 to $1,600, “falls short,” he said.

Senators are also hearing from lobbyists who want to reverse certain provisions in the House bill, such as restoring an adoption tax credit supported by evangelical Christians.

“This is just like Republicans not to think this through and put it on the backs of orphaned kids,” said Jim Daly, president of Focus on the Family. “Can we just have a little bit of heart?”

Representatives for the Koch brothers are planning to target a complicated excise tax in the House bill that affects foreign transactions of multinational companies.

But such changes will increase costs substantially, forcing senators to search for new ways to raise revenue, such as delaying the corporate tax cut, which takes place immediately under the House version.

Senators are also likely to give up hopes of a full repeal of the estate tax, paid mostly by the wealthy. The House plan doubles the exemption to $22 million for couples and eventually repeals it fully after six years.

Senators may also propose a full repeal of state and local income taxes, including property taxes, according to those close to the talks. That idea would hit high-cost states like California hard and pose political challenges for many GOP House members from high-tax states.

The House bill caps property tax deductions at $10,000, but eliminates deductions for state and local income or sales taxes. That compromise arose after Republican lawmakers from New York and New Jersey threatened to withhold their support for the GOP plan.

Texas Sen. Ted Cruz came out against the House plan to restrict state and local tax deductions, calling it unfair.

“There are some taxpayers who are losing exemptions — particularly in some high-tax states like New York or California — that could conceivably be paying higher taxes,” Cruz said. “I think that is a mistake. I think tax reform needs to cut taxes for everybody.”

But his solution may only complicate the tax bill’s path to passage. Cruz on Tuesday threw his support behind an idea already endorsed by Trump and others to pay for the tax cuts by repealing parts of the Affordable Care Act, particularly the mandate that all Americans have health insurance.

Doing away with the mandate would cut federal spending on subsidies that help lower-income Americans buy insurance under the law.

Tacking an Obamacare repeal onto the tax overhaul has been panned by House Speaker Paul D. Ryan and Senate Majority Leader Mitch McConnell. They worry it would complicate passage and risk derailing a year-end legislative accomplishment.

But even with Trump’s backing, repealing parts of Obamacare is unlikely to find much support in the Senate, especially from those Republicans, including Sen. Lisa Murkowski (R-Alaska), who voted earlier this year against GOP proposals to scrap the law.

“You’ve already got a lot of weighty and considerable issues on the tax side, so when you mix healthcare in, you may unnecessarily complicate it,” she said.

Meanwhile, lawmakers on the House Ways and Means Committee continued debating their bill Tuesday.

It aims to simplify the tax code by closing many common deductions, replacing them with a standard deduction of $12,000 for individuals, or $24,000 for couples. It would also limit mortgage loan deductions to $500,000, and end mortgage deductions for second homes.

The House bill also eliminates the deduction for personal losses from wildfires, earthquakes and other natural disasters, but keeps the break for victims of the recent severe hurricanes, another blow to California, where fires last month destroyed nearly 8,800 structures and killed 43 people.

Outside analysts warn against GOP claims that tax cuts will spur economic growth, covering the $1.5 trillion in additional deficit spending.

On Tuesday, Fitch Ratings said the proposal would likely deliver “a modest and temporary spur to growth,” but result in a federal deficit that hits 4% of GDP by next year, up from 3.5% in fiscal 2017.

“Tax cuts may lead to a short-lived boost to output, but Fitch believes that they will not pay for themselves or lead to a permanently higher growth rate,” the ratings agency said.

Similarly, the nonpartisan Tax Foundation found that while the plan would generate nearly 1 million new jobs, the economic growth would not be sufficient to cover the $1.5 trillion cost of lost revenue.

In the Senate, Republicans including Sen. Bob Corker (R-Tenn.) and Sen. James Lankford (R-Okla.), among others, have raised concerns about relying on deficit spending to pay for tax breaks.

lisa.mascaro@latimes.com

@LisaMascaro

Jim.Puzzanghera@latimes.com

@JimPuzzanghera

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