Ways and Means Offers Changes to Tax Bill as Markup Begins

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By Colleen Murphy, Kaustuv Basu, and Laura Davison (Bloomberg BNA)

More tailored rules for multinational companies, a three-year holding period on carried interest, and a narrowed excise tax on college endowment income were among changes in a new amendment to the Republican tax bill House Ways and Means Committee Chairman Kevin Brady (R-Texas) released Nov. 6 as the committee began markup.

The carried interest amendment would impose a three-year holding period requirement for partnership interests received in connection with performing services to be eligible for long-term capital gain tax rates. The change would triple the length of time an asset would have to be held to qualify for the lower rate. Brady’s amendment also revised a provision that would tax affiliated payments to provide for a foreign tax credit, and tweaked the excise tax on high returns “to clarify the scope of existing exceptions for certain local active financing and extraction activities.” The changes come after Brady on Nov. 3 released a chairman’s mark that made other changes.

Other highlights of the amendment include narrowing the 1.4 percent excise tax on colleges’ net investment income to apply it only to institutions with assets of at least $250,000 per student. The amendment includes the option to defer recognition of income for up to five years for employees who receive stock options as compensation for the performance of services, as long as the stock isn’t publicly traded. The committee adopted the amendment 24-16.

The four-day marathon markup is expected to make changes to the bill ( H.R. 1) as Republicans receive feedback from constituents, industry groups, and House members.

The first day of the markup was an opportunity for both parties to stake out political positions and question Thomas Barthold, chief of staff for the Joint Committee on Taxation, about the budgetary and distributional effects of the bill, currently estimated by the JCT to cost about $1.41 trillion over 10 years. An estimate from the Penn Wharton Budget Model found that the bill would lower tax revenue by $1.75 trillion over a decade.

The markup came as the Senate prepares its own version of a tax reform bill, which could be released as early as Nov. 9. The Senate bill is likely to be a more moderate version of the House bill to comply with the Byrd Rule. The Byrd Rule restricts what can be in a reconciliation bill, prohibiting the ballooning of the federal deficit beyond a 10-year budget window, among other limitations. Reconciliation is the fast-track budget process that Republicans plan to use to pass a tax bill in the Senate with a simple majority. (For a road map of where to find key provisions in the tax reform bill, read Bloomberg Tax’s analysis.)

More Changes Coming

Among the bill changes Brady and his staff plan to make are those aimed at the insurance industry.

“Insurance is an industry where I think there are some unintended consequences from the first draft. I am re-examining those provisions to make sure we got it right,” Brady told reporters after meeting with committee Republicans Nov. 6.

There are 11 insurance-specific provisions in the bill that would raise about $50.8 billion in revenue to fund the measure’s tax cuts. Brady said he plans to work with the American Council of Life Insurers to make some adjustments to the provisions.

The bill could also include measures that would “simplify” the provisions limiting which passthroughs can pay a 25 percent tax rate. The bill, released Nov. 2, would focus a passthrough rate cut on only the highest-earning businesses, leaving out many small operators. The National Federation of Independent Business, a small-business group that usually aligns with Republicans, said it couldn’t support the bill.

Brady said some restrictions would remain—to prevent people who earn high wages from forming their own limited liability companies to get the favorable rate. “You’ve got to have the guardrails to make sure you’re really driving relief to owner-operator businesses,” he said. “So that’s always been recognized as safeguards we’d have to have in place.”

Historic Vote

Brady hailed the markup as historic, saying “all our efforts have led to this one moment—to this markup of the Tax Cuts and Jobs Act.”

Much of the committee’s time initially was taken up with questions for Barthold about the effects of the tax bill.

Republicans touted the bill’s potential to spur the economy—an outcome they hope to achieve through a corporate tax rate permanently lowered to 20 percent and what Republicans characterize as a territorial tax system. “It’s about helping taxpayers across the board,” Rep. Erik Paulsen (R-Minn.) said.

The markup is scheduled to wrap up by Nov. 9, when the committee is likely to approve the tax bill.

Republicans urged Ways and Means members to see the big picture rather than focusing on small provisions, a message they have pushed for weeks.

“This bill cuts taxes, creates jobs, energizes this economy, results in higher wages and more money in the average worker’s paycheck. That’s the goal here,” said Rep. Dave Reichert (R-Wash.). “The overall big picture is across this country, at every income level, we see tax relief.”

Democratic Angst

Ways and Means Democrats hammered on what they say is the tax bill’s potential to increase taxes for the middle class and blow up the deficit in years to come.

Rep. John Lewis (D-Ga.) called the bill a disgrace; Rep. John B. Larson (D-Conn.) likened it to a “great charade.”

They also highlighted discrepancies between tax breaks for corporations and the middle class. Corporations would still be able to deduct sales tax on business purchases and deduct state and local taxes, Rep. Suzan DelBene (D-Wash.) said. Meanwhile, a teacher wouldn’t be able to deduct the cost of supplies like pens and pencils, she said.

With assistance from Lynnley Browning and Sahil Kapur (Bloomberg)

To contact the reporters on this story: Colleen Murphy in Washington at cmurphy@bna.com; Kaustuv Basu in Washington at kbasu@bna.com; Laura Davison in Washington at ldavison@bna.com (Bloomberg BNA)

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com (Bloomberg BNA)

For More Information

Text of the amendment to the amendment in the nature of a substitute to H.R. 1 is in TaxCore

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