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Senate plan would scrap income and property tax deductions

Lisa Mascaro and Jim Puzzanghera, Tribune Washington Bureau on

Published in News & Features

WASHINGTON -- Senate Republicans on Thursday proposed a tax overhaul that does away with deductions for all state income and property taxes, going further than the version proposed by the House and delivering a blow to residents high-tax states, according to senators briefed on the plan.

The Senate plan also would delay a proposed new lower 20 percent corporate rate until 2019 in order to avoid adding more than $1.5 trillion to the deficit, which would violate terms of the recently passed budget, Republicans said. The House tax plan, at President Donald Trump's urging, offered an immediate corporate cut from the current 35 percent rate.

In another difference, the Senate plan proposes a slightly lower top individual tax rate than the House version, which would keep the current 39.6 percent. The Senate plan would lower the top individual rate to 38.5 percent, sources said. It would apply to individuals earning $500,000 or more and couples earning $1 million or more, according to Sen. John Hoeven of North Dakota.

The Senate plan will not include a repeal of the requirement under the Affordable Care Act that individuals have health care insurance, according to Sen. Bill Cassidy, R-La. That idea had been pushed by some as another way to save money.

Cassidy said the Senate version also will preserve deductions for medical expenses, which were eliminated in the House version.

Hoeven said the plan would similarly keep the deduction for parents who adopt children, a key demand of many evangelical groups.

Senate Republicans have been looking for new revenue sources to keep the package within the $1.5 trillion deficit limit, but their approach sets up a showdown with the House over key provisions, including the repeal of deductions for state, local and property taxes.

Republicans in the House had brokered a fragile compromise with lawmakers from New York, New Jersey and California to preserve the property tax deduction, capped at $10,000 per household, while doing away with the other state and local tax deductions.

Altering that agreement could cost Republicans votes in the House.

Because Democrats in both the House and Senate are expected to reject the bill after being shut out of the largely partisan process, Republicans must keep their slim majorities together for passage. They can lose no more than about 20 GOP votes in the House and two in the Senate, if Vice President Mike Pence is called on to break a Senate tie.

Administration officials signaled Thursday they would be OK with a short delay in dropping the corporate rate.

"I think the sooner we get the 20 percent rate, the better it is for the economy," Treasury Secretary Steven Mnuchin told Fox. "Obviously right away is better than a year, but a year is better than obviously a longer phase-in."

The Senate plan would preserve the current mortgage interest deduction for loans up to $1 million, rather than the $500,000 cap proposed by the House.

Like the House, it would raise the standard deductions to $12,000 for individuals and $24,000 for couples.

The Senate bill does less to simplify individual taxes, opting to keep several of the deductions that the House bill would eliminate, and maintaining seven tax brackets instead of the House bill's four.

The House plan proposed streamlining tax brackets to: 12 percent, 25 percent, 35 percent and 39.6 percent. The Senate proposes 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent and 38.5 percent.

"When you have fewer brackets, there are some people within each bracket that might get hit differently," said Sen. David Perdue, R-Ga. "By having a few more brackets, it protects against that."

Another key difference is that the Senate plan would continue taxing so-called pass-through businesses at the individual rate that would apply to the owner, currently capped at 39.6 percent. The House proposed capping the top tax rate for such entities, which includes small businesses, real estate partnerships and law firms, at 25 percent.

But to ease the tax burden on pass-throughs, most would be allowed to deduct about 17 percent of their business income from their taxes.

Both the House and Senate are rushing toward final passage this year on the top GOP priority.

Senators emerged from a private briefing upbeat, but not fully backing the proposal as they delve into the details.

"The goal is to raise family incomes and to unleash the tremendous potential in this country for that, and I think this proposal will do that," said Sen. Lamar Alexander, R-Tenn.

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