As Republicans close in on finishing up the budget process, they will soon have to confront a number of under-the-radar tax issues that could well inflate the price tag of their overhaul even more, such as how much to expand the child tax credit and how much interest on debt they’ll let businesses deduct.
An expanded child credit is at the heart of the GOP’s pitch that the tax overhaul will be a boon to the middle class, and has attracted support from people ranging from Ivanka Trump to Sen. Marco Rubio, as well as conservative groups who are pushing to make it as generous as possible.
“Tax reform will not pass unless we significantly expand the child tax credit,” said Mr. Rubio, Florida Republican.
Mr. Rubio and Sen. Mike Lee of Utah have pushed legislation to provide an additional credit of $2,500 per child. The senators have gotten support in their effort from Ms. Trump, the president’s adviser and daughter, who has been talking about the issue since the campaign.
The recently released Republican framework, which calls for lower overall rates and a streamlined code, simply says the child tax credit will be “significantly” expanded and that the plan will increase the income levels when it starts to phase out to try to incorporate more middle-income families.
Still, increasing both the dollar value and the credit’s accessibility would likely drive up the overall cost of the GOP tax plan. The Senate cleared a 2018 budget blueprint last week that allows for up to $1.5 trillion in deficit-financed tax cuts, but Republicans have struggled to coalesce around major loopholes or deductions they plan to eliminate to offset at least some of the cost.
While expanding the credit would surely win support from social conservative groups, it might not even be the most effective way to increase take-home pay for families, said Rep. David Schweikert, Arizona Republican.
“There’s more to it than just saying ‘hey, let’s double the child tax credit,'” Mr. Schweikert told The Washington Times. “Because things that actually create economic growth may be the most family-friendly thing you can do.”
“Turns out the math may be more complicated and require a mix, where you need economic growth for people to have jobs, at the same way being able to also afford the children,” said Mr. Schweikert, a member of both the tax-writing Ways and Means Committee and the conservative House Freedom Caucus.
On the business side, Republicans have proposed slashing the corporate tax rate from 35 percent to 20 percent and allowing businesses to immediately deduct their capital expenses for at least five years.
But some in the GOP say they’d like businesses to continue to be able to write off net interest on their debt, a carve-out the Republican framework says will be “partially limited.”
“I worry that if we’re too aggressive in clipping, limiting corporate interest deductibility, we will unintentionally limit the growth potential of this tax reform effort,” said Rep. Andy Barr, Kentucky Republican.
He said many companies, including in the real estate industry, rely heavily on debt financing.
The Tax Foundation estimated that getting rid of the deduction, as envisioned by the House GOP’s tax blueprint from last year, would raise $1.2 trillion over 10 years.
That’s a huge sum, especially since Republicans have already junked a trillion-dollar border tax and many in the GOP want to preserve the deduction for state and local taxes paid, another $1 trillion-plus carve-out on the chopping block.
Talk of junking many of the special provisions in the code has generated a flurry of lobbying from special interest groups, including the BUILD Coalition, a business lobbying organization that’s working furiously to preserve full interest deductibility.
“The BUILD Coalition has always been committed to pro-growth tax reform. To achieve that objective, our coalition of business practitioners believes full interest deductibility must be maintained,” spokesman Mac O’Brien said in an email.
Like with the Obamacare repeal debate, Republicans will have to balance various demands from within competing wings in their caucus and will end up having to pick and choose which special carve-outs they can afford to scrap or expand.
If they can’t scrub enough loopholes from the code to offset the cost of provisions like an expanded child tax credit, deficit hawks like Tennessee Sen. Bob Corker could cry foul if the price tag gets too high.
On the other hand, the GOP has to write a tax bill that’s aggressive enough to satisfy conservatives like Sen. Rand Paul, who last week called for a $2.5 trillion tax cut — $1 trillion more than the Senate’s newly passed 2018 budget anticipates.
The budget, which could be reconciled with the House version as soon as this week, includes a fast-track provision that will allow Republicans to pass their tax overhaul with a simple majority in the House and Senate, bypassing a possible Democratic filibuster.
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