Senate plan to scrap income and property tax deductions would be a blow to Californians

Congressional Republicans advanced two competing visions of tax reform Thursday, setting up a potentially bruising battle in the weeks ahead as they struggle to agree on a bill President Trump can sign.

With the Senate GOP’s unveiling of its tax plan, key differences with the House version became apparent. Among the biggest potential losers in both plans are residents of California and other high-cost states, who rely heavily on itemized deductions for state, local and property taxes.

The Senate plan eliminates all such state and local deductions, while the House proposal retains property tax deductions up to $10,000. As a trade-off, the Senate version would preserve other popular deductions targeted for removal in the House plan, such as for medical expenses.

Both the Senate and House plans would lower the corporate tax rate from 35% to 20%, but the House would make the cut immediately, while the Senate would delay implementation for a year, until 2019, in order to save an estimated $108 billion.

There are also key differences in how new individual rates would be set, the repeal of the estate tax and a variety of other provisions.

Those and other discrepancies will need to be settled, while also making sure the tax breaks don’t add to the federal deficit by more than the agreed-upon $1.5 trillion over 10 years.

But Republicans appear motivated to fulfill one of their party’s top campaign promises. This week’s GOP losses in state elections served as wake-up call and could provide momentum to push for passage of tax legislation by Christmas, assuming they come to an agreement.

“This comprehensive tax reform will make a huge difference for America,” said Senate Majority Leader Mitch McConnell (R-Ky.). “This is going to be an extraordinary accomplishment.”

Outside analysts criticized the Republican approach as heavily tilted toward corporations and the wealthy and adding to the nation’s debt. But House Republicans muscled forward with their version Thursday afternoon as the Ways and Means Committee approved a measure on a party-line vote.

Majority Leader Kevin McCarthy (R-Bakersfield) said the full House would vote to pass its bill next week, despite opposition from some New York, New Jersey and California lawmakers concerned about the elimination of deductions for state income and sales taxes.

Both proposals, developed in coordination with the White House but with almost no input from Democrats, have as their centerpiece a sizable corporate rate reduction to 20%, the lowest since 1939. Though Trump has pushed lawmakers to make the cut immediately, House leaders and administration officials have indicated they are open to the one-year delay proposed by the Senate.

“I think the sooner we get the 20% rate, the better it is for the economy,” Treasury Secretary Steven T. Mnuchin told Fox Business Network on Thursday. “Obviously right away is better than a year, but a year is better than obviously a longer phase-in.”

The Senate plan also proposes a slightly lower top individual tax rate, 38.5%, compared with the House version, which would keep the current 39.6%. The Senate plan’s top rate would apply to individuals earning $500,000 or more and couples earning $1 million or more, according to Sen. John Hoeven (R-N.D.).

Perhaps the biggest political battleground will be the Senate Republicans’ plan to do away completely with deductions for all state income and property taxes, torpedoing the fragile compromise House leaders reached with GOP lawmakers from New York, New Jersey and California to preserve the property tax deduction. Altering that agreement could cost Republicans votes in the House.

Rep. Lee Zeldin (R-N.Y.) said he planned to vote against the tax bill unless it is changed. “I remain a no on both the House and Senate proposals in the current form,” he said in a statement. “It is disappointing that the draft Senate bill is likely to completely eliminate [state and local tax deductions]. However, the fight is not over.”

“Let’s stop pretending this tax proposal is good for everybody: the middle income people of New York, California, Illinois and New Jersey are footing the bill for a tax break for people elsewhere,” wrote Rep. Dan Donovan (R-N.Y.) in the New York Daily News.

In exchange, the Senate would keep other popular write-offs, including those for medical expenses, student loan interest and adoptions. The House also voted Thursday to retain the adoption write-off — which it had previously earmarked for removal — following protests from evangelical Christian groups.

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

On the estate tax, while both proposals would double the exemption to $11 million for individuals and $22 million for couples, the House fulfills the longtime GOP goal of repealing it — in seven years — while the Senate would retain it.

Both proposals would raise the standard deductions to $12,000 for individuals and $24,000 for couples, in hopes of simplifying filing for many taxpayers. But both would also end the $4,050 per-person personal exemption used by many Americans to lower their tax bills.

And both increase the child tax credit, to $1,600 in the House and $1,650 in the Senate. That fell short of the $2,000 sought by Sen. Marco Rubio (R-Fla.) and the president’s advisor and daughter, Ivanka Trump.

The Senate plan did not include a repeal of the requirement under the Affordable Care Act that individuals have healthcare insurance. That idea had been pushed by some as another way to save money.

The Senate bill does less to simplify individual taxes, maintaining seven tax brackets instead of the House bill’s four. The House plan proposed streamlining tax brackets to: 12%, 25%, 35% and 39.6%. The Senate proposes 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%.

“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%. The House proposed capping the top tax rate for such entities, which includes small businesses, real estate partnerships and law firms, at 25%.

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

Because Democrats in both the House and Senate are expected to reject the bills 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.

Also on Thursday, House Republicans muscled through a last-minute package of changes to raise more revenue and address concerns by groups such as the National Federation of Independent Business.

Jack Mozloom, a spokesman for the federation, says the group supported the change and now intends to back the House bill, “barring any surprises.”

Last week, the group said it could not support the bill because the new top rate of 25% for pass-through businesses wouldn’t be a benefit to most of its members, who already pay no more than that rate. Thursday’s amendment created a new, lower 9% tax rate for the first $75,000 in business income, which will be phased in over several years for small pass-through businesses.

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.).

Others, though, particularly fiscal conservatives, remained skeptical that the tax cuts would generate enough economic growth to cover the costs.

“I remain concerned,” Sen. Jeff Flake (R-Ariz.) said in a statement. “We must achieve real tax reform crafted in a fiscally responsible manner.”

In a statement, the White House said Trump was “encouraged that the House and Senate have shown great unity in achieving our common goals.”

lisa.mascaro@latimes.com

Twitter: @LisaMascaro

jim.puzzanghera@latimes.com

Twitter: @jimpuzzanghera

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UPDATES:

3:30 p.m.: This article was updated with more details and analysis.

12:20 p.m.: This article was updated with changes to the House bill and comment from the National Federation of Independent Business.

11:14 a.m.: This article was updated with more details about the Senate plan and reaction from senators.

10:30 a.m.: This article was updated with details about the top tax bracket.

10:15 a.m.: This article was updated with Mnuchin’s comments.

9:35 a.m.: This article was updated with additional background about the repeal of state tax deductions.

9:10 a.m.: This article was updated with Sen. Bill Cassidy’s comments.

This article was originally published at 8:35 a.m.