This week MMG was keeping a close eye on tax reform as the House passed the GOP bill and the Senate moved closer to finalizing its own bill, one with quite a few differences from the one in the House. Plus, the Senate Banking Committee made progress on regulatory relief for small financial institutions.
Regulatory Relief for Small Banks Could Be Coming
Republican Sen. Mike Crapo of Idaho, the chairman of the Senate Banking Committee, has come to an agreement with nine Democrats on his committee on a bill that would ease regulatory restrictions on small and midsize banks imposed by the Dodd-Frank Act, per Bloomberg. Key provisions from the section-by-section summary include:
- Systematically Important Financial Institutions: Raising the threshold for qualifying as such to $250 billion from $50 billion
- Volcker Rule: Exempting banks with less than $10 billion in assets and total trading assets and liabilities less than 5 percent of total assets
- Community Bank Leverage: Requiring that federal banking agencies establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8 percent and not more than 10 percent
- Bank Holding Company Act: Would exempt banks from Section 13 of the Bank Holding Act if they have less than $10 billion in total consolidated assets, and total trading assets and trading liabilities that are not more than 5 percent of total consolidated assets
House Passes Tax Bill
The House passed its version of the GOP tax reform bill on Thursday night in a 227-205 House vote (13 Republicans and all Democrats voted against the bill), according to the WSJ. The bill would reduce the current seven income brackets to four, lower the corporate tax rate to 20 percent, lower the pass-through rate to 25 percent, increase the child tax credit, double the standard deduction, lower the state and local tax deduction to $10,000, and double the estate tax exemption from $5.49 million to $11 million—phasing it out completely in 2024.
Pensions & Investments outlined several key provisions in the bill:
- A 25 percent rate for pass-through business income for partnerships
- A limit of interest deductibility to 30 percent of a company’s EBITDA (the WSJ explores the EBITDA issue here)
- A restriction of the capital gains rate of taxation on carried interest to only those investments held for at least three years.
Note: businesses with less than $25 million in gross receipts, auto dealerships, real estate and public utilities would all be exempted.
Next? The Senate…
Senate Tax Bill Passes Key Committee
Politico reports that the Senate Finance Committee passed its version of the GOP tax reform plan by a party-line vote Thursday night, shortly after the House version passed its final vote. The bill will now go to the Senate floor for consideration, where Republicans have a 52-person majority, leaving them room to lose only two votes (with Vice President Pence as the tie-breaker). Sen. Ron Johnson of Wisconsin has already announced he will not support the bill because of concerns surrounding the treatment of small businesses, and Sens. Corker of Tennessee and Flake of Arizona are both concerned about the cost of the plan.
Axios outlines key differences between the House and Senate bills, which include:
- Individual Taxes: The Senate would keep the current seven income brackets.
- Corporate Tax Rate: The Senate would delay implementation of the 20 percent corporate tax rate until 2019.
- Pass-Through Taxation: The Senate would include a deduction for 17.4 percent of business income until 2026.
- Child Credit: The Senate would include a $2,000 credit per child.
- Standard Deduction: The Senate would double this deduction to $12,000 for an individual and $24,000 for a couple; but unlike the House, this sunsets in 2026.
- State and Local Taxes: The Senate eliminates the deduction completely, but returns it to current law in 2026.
- Estate Tax: The Senate doubles the exemption, but it returns to original law in 2026.
In addition, the Senate bill would limit interest deductibility to 30 percent of EBIT (vs. EBITDA) for companies, with an exemption for businesses with less than $15 million in gross receipts, public utilities and real estate.
Ben Marsico works on public policy issues for ACG.