For weeks, Republicans have brushed aside the critique—brought by Democrats and backed up by congressional scorekeepers and independent analysts—that their tax plan is a bigger boon to the rich than a gift to the middle class.
On Wednesday, GOP lawmakers demonstrated their confidence as clearly as they could, by giving a deeper tax cut to the nation’s top earners.
A tentative agreement struck by House and Senate negotiators would reduce the highest marginal tax rate to 37 percent from 39.6 percent, in what appears to be the most significant change to the bills passed by each chamber in the last month. The proposal final tax bill would also reduce the corporate tax rate from 35 percent to 21 percent, rather than the 20 percent called for in the initial House and Senate proposals, according to a Republican aide privy to the private talks.
Republican leaders hope to move rapidly to enact the tax bill into law next week, and President Trump said during a speech on Wednesday that if Congress meets his Christmas deadline, the IRS could ensure that Americans would see the tax cuts in their paychecks by February. The victory by Democrat Doug Jones in Tuesday’s special Senate election in Alabama gave the GOP another reason to rush, as top Republicans rejected pleas by Democrats to wait until Jones is sworn in to hold final votes on the tax bill. Republicans can only lose two votes from their side to pass the legislation through the Senate, and one member, Senator Bob Corker of Tennessee, has already signaled he remains opposed.
Negotiators agreed to a number of other compromises as they reconciled differences between the House and Senate, the aide said. In a nod to complaints from high-tax states like New York, New Jersey, and California, taxpayers would be able to deduct up to $10,000 from either their state-and-local income or property taxes. Previous versions of the tax bill completely scrapped the SALT deduction for income taxes and capped it at $10,000 only for property taxes. The new cap for the mortgage-interest deduction would be $750,000, which represents a midpoint between the $500,000 cap in the House bill and the current maximum of $1 million, which the Senate had left unchanged.
And according to Bloomberg, Republicans sided with the Senate in maintaining popular deductions for medical expenses and graduate-student tuition. And in a victory for conservatives, the Affordable Care Act’s individual insurance mandate would be scrapped as in the Senate bill. Many other details remained unknown, including whether lawmakers will have to set the tax cuts for individuals to expire earlier than previously planned or raise revenue elsewhere to accommodate Senate budget rules. The Senate bill would force Congress to extend most of the personal tax cuts after six years. Republicans said they hoped to release text of the agreement by the end of the week.
The most surprising change, however, remains the lowering of the top rate. It’s particularly noteworthy because it doesn’t represent a compromise between the two competing proposals; rather, it’s an entirely new proposal. Neither the House nor Senate bill called for lowering the top rate that far. The House version kept it at 39.6 percent, while the Senate reduced it only to 38.5 percent.
The Republican aide said the last-minute switch was requested by House negotiators in exchange for accepting the Senate’s structure for treating “pass-through” businesses whose owners file their taxes as individuals. They’ll now be able to take a 20 percent deduction.
But the broader significance is the apparent resolution of a long-running debate within the party about how to tax the nation’s highest-earning individuals. For years, Republicans sided with supply-side economists who argued that reducing top marginal rates incentivized investment and hiring, and in turn would boost growth. In their original tax framework, party leaders called for returning to the top rate of 35 percent enacted under President George W. Bush. But under pressure from the Trump White House, the document said “an additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code
is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.”
Conservative activists recoiled at that language, complaining that Republicans were surrendering the argument over taxation to the progressive vision embodied for years by former President Barack Obama. And while the new agreement does not go as low as the 35 percent top rate of the Bush years, it is nonetheless a win for the right. “The goal is to help every American,” said Tim Phillips, president of the Koch brothers-backed advocacy group, Americans for Prosperity. “It’s not to pick and choose a few Americans to help, or certain groups.”
Conservatives who as recently as Monday were drawing a line in the sand on a corporate rate no higher than 20 percent were quiet on Wednesday when it inched up to 21 percent, having apparently been mollified by the corresponding reduction in the top individual bracket. “Overall we like what we know about,” said Jason Pye, vice president of legislative affairs for FreedomWorks. “We would have loved to get that 20 percent rate, but the agreement is close enough.”
Republicans have not closed the deal quite yet. Senator Susan Collins of Maine has criticized the idea of a lower top rate in the past and won’t commit to the final tax bill until she sees the text. And Senator Marco Rubio of Florida appears even more perturbed at the change after having tried and failed to get Republicans to lift the corporate rate as a way of paying for a greater expansion of the child tax credit. “20.94% Corp. rate to pay for tax cut for working family making $40k was anti-growth but 21% to cut tax for couples making $1million is fine?” Rubio tweeted when he heard details of the deal. But the Florida senator made a similar critique of the original Senate bill before voting for it anyway.
Democrats made their own, largely futile attempt to slow the fast-moving bill on Wednesday at the lone official meeting of the House-Senate conference committee. “This is the ultimate betrayal of the middle class,” thundered Senator Ron Wyden of Oregon. At various points, Democrats called the meeting “a sham,” “a mockery,” and “a farce” as they noted ruefully that Republicans were going through the motions of transparency mere minutes after striking a deal among themselves behind closed doors. “This is the United States Congress, not the Duma,” complained Representative Lloyd Doggett of Texas, accusing Republicans of presiding over “a steady erosion of democracy.”
Republicans, however, were unbowed. They championed their bill as a generational overhaul of the tax code, one that would simultaneously unleash a new wave of economic growth and boost the middle class by doubling the standard deduction and reducing rates at every income level. Only Representative Don Young of Alaska, the famously ornery dean of the House, broached the possibility that the party’s promises might not come to fruition. But he, too, was willing to take the chance.
“If it doesn’t work, blame us,” he snapped at the Democrats. “But if it does work, say, ‘God they did a great job.’”