November 6, 2017

House Ways & Means Committee Markup of H.R. 1, Tax Cuts and Jobs Act

Key Takeaways

Amendments: Chairman Kevin Brady (R-Texas) offered an Amendment to the Amendment in the Nature of a Substitute that included multiple provisions, including modifications to the bill’s international base erosion rules in Sections 4004, 4301 and 4303. Republicans voiced strong support for the amendment while Democrats opposed it. The amendment was agreed to in a 24-16 vote.
Republican Support for the Bill: Rep. Peter Roskam (R-Ill.) asked what the middle class can count on with H.R. 1, and whether all people will receive tax relief in 2019 with the proposed legislation. The Joint Committee on Taxation’s (JCT) Thomas Barthold explained that H.R. 1 would almost double the standard deduction, generally increase tax bracket break points, repeal the alternative minimum tax (AMT), retain and expand the child credit, and give a tax benefit to all income categories in 2019.
Democratic Opposition to the Bill: Much of the Democratic opposition focused on the lack of a public hearing with expert witnesses before the markup, and claimed the bill was written on a partisan basis. They also criticized the removal of itemized deductions, such as medical expenses, state and local taxes (SALT), education expenses, and changes to private activity bonds (PABs) and advance payment bonds (APBs).

Bill Considered

Opening Statements

Rep. Kevin Brady (R-Texas), Committee Chairman

In his opening statement, Chairman Brady called the Tax Cuts and Jobs Act “historic legislation,” saying the bill will bring “lasting relief” to American workers, families, and job creators. Brady called the current tax code “broken, complex, and unfair,” saying the legislation is meant to provide “overdue relief” for the American people, noting it has been more than three decades since the tax code was reformed. Brady stated the legislation would result in a four percent higher gross domestic product (GDP) in the long-term, a three percent increase in wages, and a four percent increase in after-tax income, and the “lowest tax rates in modern history” for American businesses of all sizes. Brady called the legislation a “restoration of basic freedoms” that would allow nine out of ten Americans to file their tax returns on a postcard.

Rep. Richard Neal (D-Mass.), Ranking Member

In his opening statement, Ranking Member Neal called the legislation a “bad idea for millions of Americans.” Neal criticized the partisan nature of the legislation’s drafting, noting the 1986 tax reform process was bipartisan, with “countless opportunities” to examine the legislation and make substantial changes, including 30 hearings, 450 witness testimonies, and 26 days of markup. Neal agreed the current tax system is complicated, and holds back businesses from competing in the global economy, stating there is a need for “real reform for real people.” Neal said the legislation “fails to provide needed improvements” to assist American families and expand opportunities, calling the legislation “flawed.” Neal noted the legislation could have a “huge influence” on the housing market, lead to lower home values, and eliminate new markets tax credit and advance funding in private activity bonds.

H.R. 1, the “Tax Cuts and Jobs Act”

Rep. Lloyd Doggett (D-Texas) moved to postpone consideration of the legislation to the following week, November 14, and to notice the first public hearing on the bill. Doggett stated the objective of the motion was “insight, not delay.” Doggett criticized the lack of any public hearings on the bill, and that the administration has sent no expert witnesses to testify. The motion was defeated in a party-line vote, 24-16.

Joint Committee on Taxation (JCT) Presentation by Thomas Barthold, JCT Chief of Staff
Barthold discussed the individual changes to income tax brackets, as well as the different provisions that would be repealed, such as personal exemptions. He discussed the maximum rate passthroughs would be subject to, the increase in child tax credit, modifications to the American Opportunity Tax Credit (AOTC) and 529 plans, and discussed both the itemized deductions for mortgage interest and charitable contributions. Barthold then explained changes to business income, to include lowering the corporate rate to 20 percent, repealing the alternative minimum tax (AMT) for corporations, the new limitation on net interest expense that can be claimed by businesses, the termination of private activity bonds (PABs) and advance payment bonds (APBs), and cross-border issues, including the movement to a territorial system base erosion protections.

Republican Support
Rep. Peter Roskam (R-Ill.) asked what the middle class can count on with H.R. 1, and whether all people will receive tax relief in 2019 with the proposed legislation. Barthold explained that H.R. 1 would almost double the standard deduction, generally increase tax bracket break points, repeal the AMT, retain and expand the child credit, and give a tax benefit to all income categories in 2019.

Rep. Tom Reed (R-N.Y.) voiced his support for the bill, explaining that it takes the (approximately) 70,000-page Internal Revenue Code (IRC) and moves to H.R. 1, a 429-page bill, making taxes less complicated and fairer for everyone.

Rep. Carlos Curbello (R-Fla.) asked if the proposed bill would help end job shifting overseas, to which Barthold explained that lower corporate rates will provide clear incentives to make investments in the U.S.

Much of the Republican commentary focused around praising the bill for giving taxpayers a tax break by increasing the standard deduction, as only 29 percent of taxpayers currently itemize deductions and projections show only six percent are likely to itemize under H.R. 1. They also stated that the bill will make the tax code simpler, increase jobs and create a stronger economy, making the U.S. more competitive globally.

Democratic Opposition
Much of the Democratic opposition focused on the lack of a public hearing with expert witnesses before the markup, and claimed the bill was written on a partisan basis. They also criticized the removal of itemized deductions, such as medical expenses, state and local taxes (SALT), education expenses, and changes to PABs and APBs.

Rep. Sandy Levin (D-Mich.) criticized House Speaker Paul Ryan (R-Wis.) for saying the proposed legislation focuses on middle-class relief, claiming that the distribution tables show otherwise.

Full and Immediate Expensing

Rep. Vern Buchanan (R-Fla.) asked what impact full and immediate expensing will have on businesses, to which Barthold replied that expanding expensing from $500,000 to $5 million for equipment will help businesses grow and create jobs.

Passthroughs

Rep. Erik Paulsen (R-Minn.) praised the lower passthrough rate of 25 percent, stating that it is the “lowest rate for mom and pop businesses in decades.” Other Republicans also supported the lower rate, explaining that it will help small businesses grow and create jobs.

Amendment Offered by Rep. Brady
Brady offered an Amendment to the Amendment in the Nature of a Substitute that includes conforming amendments to Section 1005, new rules to the earned income tax credit (EITC) in Sections 1004 and 1005, the exclusion from income for up to $5,000 of employer-provided dependent-care assistance through 2022 in Section 1404, the preservation of the treatment of self-created musical compositions and copyrights in musical works as capital assets in Section 3311, a three-year holding period requirement for qualification as long-term capital gain with respect to certain partnership interests received in connection with the performance of services in Section 3314, updates to Section 3804 regarding employee stock options, modifications to the bill’s international base erosion rules in Sections 4004, 4301 and 4303, and updates to the excise tax based on investment income of private colleges and universities in Section 5103.

Regarding the modifications to the base erosion rules: 1) “the provision taxing affiliated payments is revised to provide for a foreign tax credit, to exempt foreign affiliates’ routine returns, to exclude acquisitions of property priced on a public exchange, to compute a foreign affiliate’s profits based on foreign profit margins instead of global profit margins, and to coordinate with existing withholding tax rules; 2) modifies the provision taxing foreign high returns to clarify the scope of existing exceptions for certain local active financing and extraction activities; and 3) clarifies the computation of the deemed repatriation tax on grossed-up foreign taxes deemed paid.”

Republicans voiced their support for the amendment, to include Reps. Jim Renacci (R-Ohio), Jason Smith (R-Mo.), Tom Rice (R-S.C.), Kristi Noem (R-S.D.), Paulsen, Kenny Marchant (R-Texas), Roskam, Lynn Jenkins (R-Kan.), Patrick Meehan (R-Pa.), and George Holding (R-N.C.).

Democrats voiced their opposition for the amendment, noting a lack of time to process the language and packaging multiple amendments into one package, as well as a lack of dynamic scores for each provision, and included Reps. Neal, Doggett, Mike Thompson (D-Calif.), John Larson (D-Conn.), Ron Kind (D-Mo.), Brian Higgins (D-N.Y.), Terri Sewell (D-Ala.), Suzan DelBene (D-Wash.), and Judy Chu (D-Calif.).

Higgins voiced concern over a lack of infrastructure funding, to which Brady explained that he has been told by the Administration that an infrastructure plan will be following tax reform at some point.

Doggett specifically noted his concern over the international updates to the base erosion rules, stating it will create ways around the 10 percent on high income, and encourages companies to outsource jobs to foreign soil. He continued that he will be offering an amendment that ensures profits earned abroad are taxed the same as profits earned in the U.S.

Levin raised concern over the carried interest provision, asking Barthold what impact substituting the one-year period to three-years will have. Barthold explained that while the JCT has not analyzed the impact of provisions in the amendment, it should be a revenue raiser. Doggett also raised concern over the provision.

The amendment was agreed to in a 24-16 vote.

For more information on this markup, please click here.