Also included in the plan is a provision to prevent large multinational corporations from stashing profits overseas. The bill will propose a new business tax on American and foreign companies as part of a sweeping tax rewrite lawmakers intend to unveil Thursday, according to Senate Finance Committee aides.
The levy included in the Senate bill is a critical component of Republicans’ plans to overhaul how the tax code treats corporations, using both carrots and sticks. The plan will encourage domestic investment by lowering the corporate tax rate to 20 percent from 35 percent and will discourage companies from shifting money abroad by imposing the new tax. However, it remains to be seen whether the plan will have its intended effect: The Senate is expected to delay the corporate tax cut until 2019, according to a Republican senator and a lobbyist familiar with the plan who requested anonymity to discuss a plan that has not yet been released.
Those changes alone show the differences emerging as the House and Senate push forward with competing versions of the most ambitious tax code rewrite in decades. The Senate bill is expected to narrow the group of Americans subject to the estate tax, but not eliminate the tax entirely, as the House bill would. And the Senate plan will eliminate the deduction individuals now take for all state and local taxes, rather than limiting the break to just property taxes.
Republicans in the finance committee have been meeting with staff members for weeks to craft the Senate bill. Democrats criticized their process even before the bill was released on Thursday.
“Not a single Democrat has had any input into this bill,” the Senate minority leader, Chuck Schumer of New York, said on the Senate floor. “It was constructed entirely behind closed doors by the majority party, who have no intention of negotiating with Democrats because they’ve locked themselves into a partisan process that only requires a majority vote. And they’re going to try to rush it through this chamber with reckless speed.”
The Senate plan will impose a tax on American and foreign companies that shift money earned in the United States offshore but will do it in a simpler way than a complex plan outlined in the House version, the aides said. “It levels the playing field” between domestic and multinational companies competing in the same markets, a committee aide said.
Preliminary estimates indicate it would raise more than $130 billion in tax revenue over 10 years to help offset revenues lost from rate cuts, committee staff members said. The original House approach, which would have levied a 20 percent “excise tax” on payments between American and foreign companies that are affiliated with each other, would have raised an estimated $155 billion in revenue.
The Senate approach would impose a minimum tax, of sorts, on the profits earned in the United States by multinational companies.
Under current law, companies can avoid taxation on those profits by shuttling them to affiliated companies abroad, in countries where the corporate income tax rate is lower than it is in the United States. For example, the American subsidiary of a country based in Ireland, where the corporate tax rate is well below the American rate, could make payments to the Irish company for the use of its intellectual property. Those payments would be deducted from the American subsidiary’s profits, for tax purposes in the United States.
The new approach would apply only to large multinationals that make a significant amount of payments to foreign affiliates. It would levy a 10 percent tax on the difference between a company’s actual tax liability and the liability it would have faced for the profits it instead moved offshore.
So, for example, if a company made $100 million in American profits, but paid $80 million to a foreign affiliate for intellectual property rights, it would start with a tax liability of $4 million. (That’s from paying the bill’s proposed corporate tax rate, 20 percent, on an overall profit of $20 million.) It would then face an additional $4 million tax on the profits it shifted offshore. (The $80 million in payments would be subject to a 10 percent rate, which equals $8 million. Subtract the $4 million already paid, and you get the extra $4 million liability.)
Senate Finance Committee staff called that approach “more surgical” than the House bill.
The House watered down its excise tax proposal this week after it came under fire from a host of business and conservative groups, including the American Forest and Paper Association and Americans for Prosperity, an arm of the Koch political network.
In the House, Republicans were still wrestling with a critical math problem on Thursday over a sizable revenue hole to fill. To avoid a Democratic filibuster, the tax legislation can add no more than $1.5 trillion to federal budget deficit over a decade, and the House bill appeared to exceed that limit because it cut federal revenue by about $1.57 trillion over a decade, according to an estimate earlier this week by the Joint Committee on Taxation.
Keeping the cost of the tax bill to $1.5 trillion will be a tough task for lawmakers, who are trying to reduce both corporate and individual taxes. The cut to the corporate tax rate alone is estimated to cost nearly that amount over a decade.
Republicans are already under fire from fellow lawmakers and industry groups for scaling back valuable tax benefits for individuals, including deductions for state and local taxes, student loan interest and medical expenses.
Representative Kevin Brady, Republican of Texas and the chairman of the Ways and Means Committee, was expected to unveil an amendment to the tax bill at some point on Thursday, though it was unclear what revisions might be in the offing.
Mr. Brady did clarify on Thursday that the bill would not allow so-called pass-through businesses to deduct their state and local income taxes. Some lawmakers had raised concerns that the Republican bill appeared to allow pass-through businesses, which are currently taxed at the individual rates of their owners, to continue claiming the deduction for state and local income taxes, even though such a benefit would no longer be allowed for individual taxpayers, who would be limited to deducting $10,000 in property taxes.
In a letter to Representative Earl Blumenauer, an Oregon Democrat, Mr. Brady said that pass-through businesses would still be able to deduct sales and certain property taxes but said that “state and local income taxes paid by an individual owner of such a business would not be deductible on the individual’s tax return.”
One possible change to the House proposal is to repeal the Affordable Care Act’s requirement that most people have health coverage or pay a penalty.
Getting rid of that requirement, known as the individual mandate, would allow Republicans to take a step toward dismantling the health law. Significantly, it would also free up money to help pay for tax cuts. The Congressional Budget Office said on Wednesday that repealing the individual mandate starting in 2019 would reduce federal budget deficits by $338 billion in the coming decade. (As a result of repealing the mandate, the number of people with health coverage would decrease by 13 million by 2027, according to the budget office. As a result, the federal government would spend less on subsidies for health coverage.)
Republican senators, who will be briefed on the final plan on Thursday, were weighing the delicate trade-offs of potentially repealing the Affordable Care Act’s mandate and the possibility of repealing the estate tax.
“I’m for doing that, if it helps us get to the requisite number of votes,” said Senator John Cornyn, a Texas Republican who sits the finance committee. “If it hurts us getting to the requisite number of votes then I don’t think it should be included.”
Senator Jeff Flake, Republican of Arizona, said that he would also be happy to repeal the mandate but that he was wary of injecting the politics of health care into the tax debate.
“If we can do it, fine — if it doesn’t imperil the rest,” Mr. Flake said.
Senator Lindsey Graham, Republican of South Carolina, said that while he favored repealing the estate tax fully, he was reluctant to do so if it meant that the adoption tax credit, which he also supports, had to be eliminated. He is fully supportive of repealing the health law’s mandate and said that the employer mandate should also be on the table.
Mr. Graham said that for Republicans, the stakes of overhauling the tax code could not be higher.
“The party fractures, most incumbents in 2018 will get a severe primary challenge, all of them will probably lose, the base will fracture, the financial contributions will stop,” Mr. Graham said of the consequences if the tax effort collapsed. “Other than that it will be fine.”