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Friday November 24th, 2017 1:28PM

Tax split between House, Senate poses a big challenge

By The Associated Press
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WASHINGTON (AP) — The House and Senate tax overhaul plans are broadly similar, but crucial differences are creating headaches for Republican leaders determined to keep myriad interest groups and factions of the GOP satisfied. And then there's the ambitious timetable they've set of finishing in time to get legislation to President Donald Trump by Christmas.

The most politically challenging decisions involve dealing with popular and widely used tax deductions, structuring tax cuts for business and balancing personal income tax rates between middle-class families and the rich.

All of these decisions come against a generous — but firm — 10-year, $1.5 trillion cap on the measure's cost to the federal deficit. Both House and Senate have adopted accounting gimmicks to squeeze tax cuts that appear larger down to fit that restraint.

Trump's enormously expensive demand for a cut in the corporate tax rate to 20 percent — from the current 35 percent — is a big complication, as is unrest among House Republicans hailing from affluent suburban districts who are upset over the proposed loss of the deduction for state income taxes.

Here's a rundown on the major differences between the House and Senate bills:

INDIVIDUAL TAX RATES

The Senate measure keeps the current number of personal income tax brackets, seven, though it changes the rates to 10, 12, 22.5, 25, 32.5, 35 and 38.5 percent. That last top bracket for the wealthiest earners carries a higher rate of 39.6 percent under current law.

The House bill goes further toward simplifying the tax system. It shrinks the number of brackets from seven to four, with rates of 12, 25, 35 and 39.6 percent.

Lots of numbers here for congressional negotiators to play with, to move up or down.

The inheritance tax on multimillion dollar estates, called the estate tax, is an especially hot-button issue. Democrats point to the proposed GOP changes as proof that the Republicans are out to help wealthy people like Trump and his family.

Currently, when someone dies, the person inheriting the estate must pay taxes on its value above $5.5 million for individuals, $11 million for couples. The House bill initially doubles those limits and then repeals the whole tax after 2023. The Senate version doubles those exemption amounts — but doesn't repeal the tax.

To repeal or not to repeal? That may be the class-warfare question.

DEDUCTIONS

The Senate bill would eliminate a taxpayer's ability to deduct state income taxes and local property taxes. But the final bill may have to closely track a House compromise that provides a property tax deduction of up to $10,000 or else risk a revolt from GOP lawmakers from New York, New Jersey, and California.

The Senate bill preserves popular individual tax breaks for large medical expenses, mortgage interest, electric vehicles and college costs that were targeted by the House. The House limits deductibility of mortgage interest to the first $500,000 of a loan, riling the real estate and housing industries, and eliminates a deduction for medical expenses that's often taken by families facing crippling nursing home costs.

BUSINESS:

Both the House and Senate versions slash the tax rate for corporations to 20 percent from the current 35 percent. But there's a big twist: The Senate bill delays the rate cut for a year.

The delay was put in to reduce the bill's cost by $100 billion or so — but it's opposed by the White House and House Republicans. Wall Street hates it too. U.S. stock markets sold off Thursday in response to news of the proposed deferral, with industrial and technology stocks leading the decline, before recouping some of the losses by the close of trading.

Might the implementation delay be traded for a smaller corporate tax cut, something above 20 percent?

Trump actually had been demanding 15 percent and reportedly was initially furious at the 20 percent figure. The issue is setting the corporate rate at a level that experts and tax writers believe would bring the U.S. closer to its overseas competitors.

The electric car industry — notably makers Tesla and Chevrolet — and producers of wind power for generating electricity are losers under the House bill. The tax credit of up to $7,500 for plug-in electric vehicles would be repealed, and the credit for wind energy would be reduced. But the Senate version retains the incentives.

The loss of tax credits for renewable energy would free billions to help pay for the corporate tax cuts in the legislation. But in addition to environmentalists' objections, the prospect also angers some Republican senators, including powerful Chuck Grassley of Iowa, who has vowed to defend the credit.

There's a special rate for businesses whose profits are counted in the owners' personal tax returns. Millions of U.S. businesses use this "pass-through" format. The House bill taxes many of them at a maximum 25 percent, down from 39.6 percent currently, and adds a lower minimum rate. The Senate version would set a new 17.4 percent deduction for "pass-through" income, aimed to help smaller businesses.

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