Senate Tax Changes: More Growth, More Subsidies

Comparing the House and Senate tax proposals.

Following the House-passed reconciliation bill, the Senate released its first full draft of the new tax package. While the text is likely to change in the coming days, it improves on the House bill by making the most pro-growth tax reforms permanent. Unfortunately, the bill doubles down on the use of tax code subsidies and undermines the House green tax credit repeal.

Below is a brief (and preliminary) summary of the major components of the proposed Senate bill, the House-passed bill, their status under current law, and my recommendation from the Cato Tax Plan. My summary does not include health care changes. Let me know if you spot any errors.

You can read the bill text here and the Finance Committee section-by-section summary here.

Pro-growth changes

Policies that permanently lower the effective tax rate on businesses, investments, and work are the biggest drivers of long-term growth. The Senate bill makes all of the pro-growth Tax Cuts and Jobs Act (TCJA) provisions permanent, dramatically improving the House’s temporary provisions. Both bills add temporary expensing for manufacturing structures, which could be improved by expanding the provision to all structures and making it permanent.

New and expanded tax preferences

Both bills include dozens of new and expanded tax preferences. The Senate scales back the House green energy reforms.

Each tax preference entails fiscal costs, adds complexity, opens new avenues for tax avoidance, and delivers little long-term growth. The Senate adds additional subsidies to the House list and adds new limits on some of the Trump campaign promises, making the provisions less expensive. Each of the following provisions should be repealed or further scaled back.

The House bill set the benchmark for repealing the Inflation Reduction Act (IRA) green subsidies, but the Senate watered down the House’s reforms. Congress should entirely repeal the IRA.

Base-broadening and subsidy elimination

Both bills make modest reforms to existing subsidy programs, raising the most revenue by repealing many of the IRA green energy tax credits (see table above). Repealing more tax preferences would improve the final bill.

Both bills generally maintain the TCJA limits on itemized deductions (except SALT) and repeal the personal and dependent exemptions. They also both include a new overall limit on itemized deductions. The House version applies a different limit to the SALT component.

Both bills include a “one-percent floor” for the corporate charitable deduction, and maintain important immigration status and pre-authorization requirements for refundable tax credits.

Anti-growth tax increases

Both bills avoid the most damaging tax increases that could have been included, like raising the corporate tax or increasing the top income tax rate.

Both bills include the retaliation tax (section 899), with the Senate’s version lowering the top rate increase from 20% to 15% and delaying implementation by a year. The Senate scales back the endowment tax from a top rate of 21% to 8% and does not include the tax on private foundations. Both bills include the new remittance tax, while the Senate version applies to a narrower segment of only cash transfers.

Disclaimer: Many of these provisions are complex. The summaries reflect my best interpretation on a first read and may be updated if my understanding evolves.