What is the plan? House and Senate will convene to work on common ground for tax plan
December 1, 2017
The U.S. House passed a tax plans Nov. 16 that would cut the corporate tax rate nearly in half.
As of press time, the Senate had not yet voted on its plan but leaders believed they had enough votes to pass it.
The Senate plan has some similar and some very different provisions from the House plan.
Some of the major topics being discussed in both the House and Senate versions of the bill are corporate tax cuts, personal deductions being discontinued, the individual mandate on Obamacare, increases in standard deductions and child tax credits.
Both versions cut corporate taxes from the current 35 percent to a 20 percent rate.
While the Senate version seeks to eliminate some deductions, and would make real estate taxes no longer deductible, Senator John Thune (R-SD) who serves on the Senate Finance Committee and helped compose the bill, assured Tri-State Livestock News that the changes to real estate tax deductions would not apply to property tax deductions for businesses including farms and ranches.
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"Property taxes on a farming operation are a cost of doing business. On the Senate bill we do away with itemized deductions on state and local taxes," but property taxes that are currently deductible as a business expense, will still be a deductible expenditure.
Thune said that less than one-third of South Dakota's tax filers itemize on their tax paperwork.
Interest, however, will be affected. While businesses currently can deduct interest as a business expense, this changes in the Senate version of the bill, but Thune said smaller sized operations may not be affected.
"If your average gross receipts are under 15 million dollars, you can continue to deduct. If you are above 15 million in gross receipts, you can choose between interest deduction or expensing."
Thune believes one ag-friendly aspect of his bill is the doubling of the exclusion on the death tax. Currently operations valued at 5.5 million dollars are not required to pay the "death tax" or estate tax, a tax that is required when an estate is passed on upon the death of the owner. The Senate tax bill would double this exempted value to 11 million dollars. The House version includes the same provision but sunsets in 8 years, while the Senate version is permanent.
While currently farmers and ranchers can deduct up to $500,000 in equipment purchases, the Senate bumped that up to $1 million, and rather than expensing it over several years, the full value of the item can be expensed the year of the purchase.
The Senate also doubles the "child tax credit" from $1,000 to $2,000.
"Being able to expense things immediately will be a huge benefit, to help farmers and ranchers expand and not spread the cost out over five to seven years."
Thune said the tax cuts leave about 5.5 trillion dollars that will need to be made up. He expects that about 4 trillion will be offset in the form of "base broadeners," or deductions that will no longer be allowed, like real estate taxes, state income taxes and more.
The remaining 1.5 trillion, Thune and his republican colleagues believe, will be made up with an overall bump in taxes created by a growing economy. "According to the congressional budget office, the economy had been growing at 1.8 or 1.9 percent per year. If we grow it at 2.2 to 2.3 percent per year, we cover the debt that's left." Thune said that is a doable thing. "Since the end of World War II, the economy has grown at an average of about 3.5 percent. The last decade we were stuck at less than 1 percent but we think we can do better. The last two quarters have been over three, so we are already ahead of the curve."
By cutting the corporate tax rate from 35 to 20 percent, Thune believes companies will re-invest in America. "If you reduce taxes, some is pumped back into business, some to shareholders and some to increasing wages." Analyses show that the proposed lower tax rates should result in $3,500 to $4,000 in increased income per household in the country, he said. "There is no guarantee," he admits, though.
Republicans are also hoping the adjusted tax rates will encourage companies with off-shore tax-sheltered accounts to move those funds to domestic banks.
National Cattlemen's Beef Association President Craig Uden, a Nebraska cattle producer who had campaigned for provisions that will double the exemption for the estate tax immediately and end it in five years, said the House bill is "a step in the right direction" but still creates "undue and unfair burdens for certain segments of our industry."
In the House bill, Uden praised the preservation of the step-up in basis upon inheritance and provisions to fully expense the cost of new investments, increase Section 179 small-business expensing limits, and expand cash accounting.
But Uden noted that the House bill "would also significantly limit the ability of some businesses from deducting their interest expenses. This could be a big problem for some members of the cattle-production business."
The National Farmers Union said the House bill would increase the federal debt and jeopardize farm program funding.
An opponent of regressive taxation, increased federal debt, and legislation that jeopardizes farm program funding, NFU urged House members to vote against the legislation.
"NFU is alarmed by the House's decision to pass highly flawed tax reform legislation that has disastrous implications for American family farmers and ranchers," said NFU Vice President of Public Policy and Communications Rob Larew.
"The policies put forth by this bill would increase the tax burden on family farmers and the middle class, and they add a massive $1.5 trillion to our national deficit. On top of that, they potentially put funding for vital farm safety net programs on the chopping block and jeopardize passage of the farm bill," he commented on the House version of the bill.
Farm groups were preparing a coalition letter urging action on the PAYGO problem with the Senate bill, but the congressional Republican leadership convinced the farm lobbyists not to make that letter public, The Hagstrom Report reported.
The "Pay As You Go" (paygo) rule requires immediate, spending cuts to a number of mandatory programs for a bill that cuts taxes and doesn't completely make up for the lack of income with revenue increases. The GOP tax cut plan is expected to add $1.5 trillion to the debt over the next decade. Under paygo rules, the government would have to make $150 billion in mandatory spending cuts every year for the next 10 years.
We will try to break down the biggest aspects of each bill to show you what they might mean to you.
Corporate tax rate:
House version: large corporations tax rate drops from 35 percent to 20 percent
Senate Version: same but the rate cut would be delayed until Jan. 1, 2019.
Full and Immediate Expensing:
House: businesses would be allowed to fully and immediately deduct the cost of new equipment. This provision would be available for five years.
Child Tax Credit:
House: credit for a child younger than 18 increases from $1,000 to $1,600, and includes an additional $300 credit for each parent as part of a consolidated tax credit. The parent credit expires in 2023
Senate: Double credit for children under 18 – from $1,000 to $2,000. Credit would phase out at $500,000 rather than the current $110,000. Sunsets in 2026.
House: No change
Senate: Eliminates the penalty for failing to maintain health coverage, starting in 2019.
State and Local tax deductions:
House: repeals the deduction for state and local income taxes or sales taxes while preserving the deduction for state and local property taxes, with a $10k cap.
Senate: repeals the deduction for all state and local taxes
Medical expense deduction
House: repeal the deduction for large medical expenses
Senate: no change
House: It would tax companies' accumulated offshore earnings at 14 percent for cash holdings and seven percent for non-cash holdings. Currently multinationals pay the 35 percent corporate rate but they can defer taxes on foreign earnings until they bring them back to the U.S., or "repatriate" them.
Senate: It would tax companies' accumulated offshore earnings at 10 percent for cash holdings and five percent for non-cash holdings.
House: Standard deduction would be $12,000 for individuals and $24,000 for joint filers
Senate: same but the expansion would sunset in 2026
Pass-Through Business Income (According to Joe Rosenberg, Urban-Brookings Tax Policy Institute, "…pass-through entities are businesses that don't pay the corporate income tax or any entity-level tax. But, rather, the profits are passed through to the owners of the business. And then the owners report that income on their individual tax returns and pay tax on it, along with the rest of their normal income.")
House: Lower the rate for pass-through income from 39.6 percent to 25 percent, with a 9 percent rate on the first $75,000 of net business income for joint filers making less than $150,000 or the first $37,500 for individuals making less than $75,000
Senate: Provide a 17.4 percent deduction for pass through owners. Owners would pay at their individual income rate on income after the deduction.
–Editor's note: Some information gathered from Bloomberg and the Hagstrom Report