Republicans’ push for a major tax-cut bill is moving forward, with two key actions on Nov. 16 on Capitol Hill—House passage of a $1.4-trillion measure and Senate Finance Committee approval of a bill with a similar net price tag but key differences from the House version.
Design and construction industry groups say neither bill provides enough tax relief for “pass-through” business entities—sole proprietorships, partnerships and S corporations—that are common throughout those industries. Pass-throughs are taxed at individual, not corporate, rates.
The version that the House approved on Nov. 16 by a 227-205 vote includes a small break for pass-throughs. The Senate Finance measure, cleared on a 14-12 vote along party lines, includes a 17.4% deduction on business income for pass-throughs. The original provision set an income ceiling for firms in engineering, architecture and other service industries in order to take the deduction.
Two days before the Finance Committee vote, Chairman Orrin Hatch (R-Utah) made important changes in his original proposal, including a provision to repeal the Affordable Care Act's mandate for individuals to get health insurance. That proposal gave the committee an additional $300-plus billion to use for other breaks. Hatch took some of that revenue to sweeten the pass-throughs' deduction by raising the income levels for service-industry firms to be eligible, to $500,000 for joint-tax-return filers or $250,000 for individual filers.
That wasn't enough, however, to win over the American Council of Engineering Companies or Associated General Contractors of America.
ACEC CEO David Raymond said in a Nov. 16 statement that both the Senate Finance version and House bill would hurt engineering firms organized as pass-throughs. Raymond said the bills "will leave many of the nation’s small and mid-sized engineering firms out in the cold, and for some, saddled with more of a tax burden, not less."
Both bills also would repeal deductions for individuals, and pass-throughs, for some or all of their state and local taxes. Brian Turmail, an AGC spokesman, said via email, "We certainly see the elimination of the state and local deduction for pass-throughs is a problem." After looking at Hatch's changes, Turmail added on Nov. 15, "Our initial read on the updated [Senate] version is that it takes away all deductions for pass-throughs after eight years, while making all deductions for [corporations] permanent. So, assuming our analysis is correct, we cannot be supportive of this version of the bill."
Another industry source, who requested anonymity, said via email, before Hatch's revisions, that the tax-bill framework that the White House and House and Senate Republicans announced on Sept. 29 called for a maximum differential of five percentage points between the corporate rate and pass-through rate. But the source says Hatch's plan "falls well short" on that score.
He adds that in the Hatch bill, "There is no equity for pass-through businesses and, as drafted, no successful pass-through business would receive the promised 25% rate, much less anything close to it." Both the House-passed and Senate GOP proposals cut the corporate—or "C corporation"—tax rate to 20%, from 35% now, though the Senate Finance version postpones the cut from taking effect for one year.
The industry source also says that, depending on an S corporation's home state, the repeal of the state-and-local-tax deduction will raise that entity's marginal tax rate. He adds, "The average S corporation will pay a marginal rate of around 34%, or 14% above the C corporation rate."
The source says that pass-throughs employ the largest share of U.S. workers and account for most of the total business income, but are "being treated as an after-thought in this legislation."
The National Association of Home Builders strongly opposes the House bill, NAHB Chairman Granger MacDonald said in a statement that the House measure "provides a huge windfall to major corporations paid for in large part by millions of working-class home owners, who will see their housing tax incentives severely diminished."
But Association of Equipment Manufacturers President Dennis Slater praised the House's action. He said in a Nov. 16 statement that the legislation "will provide long-term tax relief for equipment manufacturers and their customers."
But Slater sees room for improvement, too. For example, He said AEM wants to see lawmakers ensure that "small, family-owned manufacturers benefit from tax reform." He added, "AEM continues to be concerned that limits on interest deductibility will have a chilling effect on equipment manufacturers and dealers.
Construction and engineering groups also were disappointed that the GOP tax-writers, in both chambers, didn’t include provisions to provide new revenue for infrastructure, such as a “fix” for the financially weak Highway Trust Fund.
Pete Ruane, American Road & Transportation Builders Association CEO, said in a statement that finding more revenue for the trust fund is the responsibility of the tax-writing committees. He added, "Thus far, the ball has been dropped."
Ruane added that a lack of congressional action to shore up the trust fund "could 'tube' President Trump's plan for infrastructure." Trump has proposed a $1-trillion infrastructure investment infusion, but Capitol Hill's nearly all-encompassing focus on the tax bill has pushed infrastructure to the sidelines.
The House bill also would end private-activity bonds, another infrastructure financing tool. The Senate Finance bill leaves those bonds intact.
AGC and ARTBA, along with the American Association of State Highway and Transportation Officials and other groups, wrote House Ways and Means Committee leaders on Nov. 3, stating that ending private-activity bonds "severely conflicts with the need to deploy all types of funding sources for transportation infrastructure improvements, including private capital."
In broad strokes, drafters of the House and Hatch proposals say they have similar aims, including tax cuts for individuals and corporations. Democrats, however, are blasting both plans as giving away too much to companies and to the wealthiest taxpayers.
There are some differences, however, between the two versions. The effective date of the lower corporate rate is one important one.
In addition, the House measure would allow individuals (and pass-throughs) to deduct up to $10,000 a year in state and local property taxes, but not income or sales taxes. The Hatch version cancels all types of state and local tax deductions for individuals and pass-throughs.
If the Senate approves a tax measure, differences with the House version would be worked out in House-Senate negotiations. The final compromise version then would come to each chamber for a floor vote.
Story updated 11/13/17 p.m. with additional industry comments.
Second update on 11/16/17 with further industry comments and House floor vote.
Third update on 11/17/17 with Senate Finance Committee approval, new industry comments
Corrected headline to be $1.4 trillion.