Policy

Changes to GOP Tax Bill Restore Adoption Credit, Address Small-Business Concerns

Ways and Means Committee approves House GOP tax legislation

House Ways and Means Chairman Kevin Brady is leading this week’s markup of the House Republican tax bill. (Bill Clark/CQ Roll Call)

A substitute amendment to the House Republican tax bill that the Ways and Means Committee approved Thursday would reinstate the adoption credit and refine small-business provisions, among other changes designed to address concerns about the original measure.

The tax-writing panel approved the GOP tax plan along party lines, 24-16.

The amendment from Ways and Means Chairman Kevin Brady would affect 18 sections of the bill, according to a summary posted on the panel’s website.

The most significant change would be to the small-business section of the bill, which has drawn criticism from members and small-business groups.

The National Federation of Independent Business, which had come out in opposition to the House bill, had suggested tax writers graduate the small-business rate up to 25 percent for so-called pass-through entities, with a bracket or two under it.

The amendment does that in providing a 9 percent pass-through rate for  the first $75,000 in net business taxable income. The special 9 percent rate, which is phased in over five years, would only apply to active owners or shareholders who earn less than $150,000 in taxable income through their businesses. The rate would phase out at $225,000, according to the summary.

As part of the phase-in, the rate would be 11 percent in 2018 and 2019 and 10 percent in 2020 and 2021. The 9 percent rate would take effect starting in 2022.

Another concern shared by the NFIB and many rank-and-file members was  that professional service businesses would be unlikely to qualify for the pass-through tax rate. The amendment seeks to address that by allowing businesses of all types to use the preferential 9 percent rate.

The NFIB said Thursday it was throwing its weight behind the latest version of the bill.

“We are very grateful to Chairman Brady for listening to our concerns and working with NFIB to ensure that tax reform benefits the greatest possible number of American small business owners,” the group’s president Juanita Duggan said in a statement.

As an apparent revenue raiser, the amendment makes a change to the taxation of dividend payments made between related companies.

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Under current law, there is a provision known as the dividends received deduction that allows parent companies to deduct a portion of dividend income from a subsidiary that has already paid taxes on those profits.

The deduction is available at different rates with varies rules dictating how it is applied. 

The Ways and Means amendment would lower the current 80 percent dividends received deduction to 65 percent and the 70 percent dividends received deduction to 50 percent, “preserving the current law effective tax rates on income from such dividends,” according to the panel’s summary.

The amendment would also raise some additional revenue by increasing the so-called deemed repatriation tax rates used to tax businesses on earnings currently located offshore. The bill had originally proposed a 12 percent rate for cash and other liquid assets and a 5 percent rate on illiquid assets, but the amendment would increase those rates to 14 percent and 7 percent, respectively.

“We’re all moving toward the most pro-growth code we can, and those numbers are appropriate as we move the bill forward,” Brady said of the rate increase. “We continue to make improvements overall.”

Another change is an 8 percent surtax on life insurance income that the summary says is intended as a placeholder.

A Ways and Means spokeswoman said the reasoning behind the placeholder was to give the life insurance industry more time to provide information needed by the Joint Committee on Taxation to analyze specific proposals. 

“The Chairman is committed to continuing to work with the industry to come to a resolution on these issues,” the spokeswoman said in a statement.

“The original provisions were designed to both address policy issues as well as help contribute to lower tax rates for all businesses, large and small,” Brady said. “Some of those have unanticipated numbers attached to them. So we are working to make sure provisions focus where they were intended and generate the revenue that was intended.”

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