House, Senate Republicans Reach Tax Deal: Here Are The Initial Details

One day after we reported that "Congressional Republicans reached a tentative tax agreement", the news of which sparked another risk surge into the close of trading, moments ago we got the second tax deal in 24 hours - if only for algo consumption - when the AP reported that House and Senate GOP leaders have reached a "tentative deal" on tax overhaul "in principle."

The AP quoted a "person familiar with the conversations who asked not to be named because the discussions are private" and who is certainly long stocks, as the replica headline was enough to send the S&P to new all time highs. 

The agreement "in principle" paves the way for final votes next week to slash taxes for businesses and give most people tax cuts starting next year. Top GOP aides say the deal was reached on Wednesday. They spoke on condition of anonymity because they were not authorized to speak publicly about the deal. Details still need to be drafted and assessed by congressional scorekeepers but the final House-Senate compromise is on track to be unveiled this week. 

The details, virtually identical to what we reported yesterday: the top individual tax rate would be lowered to 37% as and set the corporate tax rate at 21%, slightly higher than the 20% initially favored by President Trump. The mortgage interest deduction would be capped at $750,000, a mid-point compromise between the Senate and House bills.

The deduction for pass-through companies will be set at 20 percent, somewhat lower than the 23 percent included in the Senate-passed bill. That will be offset by lowering the top individual income rate to 37%. It is now 39.6%.

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Still, lawmakers will need to get a cost analysis of their agreement, so it’s not yet definite, "the person" said, who clearly gets around and was this time quoted by Bloomberg.

And since lawmakers still need to get a cost analysis of their agreement, not only is today"s "tentative deal" not yet definite, but it will almost surely be unwound when someone actually brings a calculator into the room.

Curiously, after jumping higher, stocks have since faded the kneejerk reaction higher, perhaps realizing that the more fiscal stimulus that is injected, the more tightening the Fed will have to unleash in the coming months as inflation become red hot.

In Critical Test Of Tax Reform Bill, Senate Narrowly Approves Motion To Start Debate With 52-48 Vote

Update (5:55PM EST): After a full day of debating the GOP tax reform bill, the Senate has now approved a motion to...drum roll please...debate the GOP tax reform bill.  As we detailed below, this was the first big test for the GOP"s tax bill before the entire Senate and it narrowly passed with a vote of 52-48.  No Democrats voted in favor of the procedural motion to begin debate and all Republicans towed the party line.

Of course, the GOP"s efforts to repeal and replace Obamacare also managed to survive this very same procedural vote earlier this year only to be killed at the last minute by John McCain. Which begs the question of whether the current tax reform bill will finally hand the Trump administration its first legislative victory or if it will meet the same fate as the numerous healthcare failures that preceded it...we should know later this week when the Senate is expected to vote on the legislation.

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Update (3:15PM EST): Senator Lisa Murkowski (R-AK), who was a key swing vote against several Obamacare repeal and replace bills earlier this year, has confirmed that she will vote in favor of the Senate"s tax bill.

Alaska"s Sen. @lisamurkowski will vote YES on the GOP tax bill, her office tells me.

— Garrett Haake (@GarrettHaake) November 29, 2017

Meanwhile, an earlier holdout on the procedural vote expected to be held within the next couple of hours, Senator Steve Daines (R-MT), has just confirmed that he"s now a "yes"...at least for the motion to proceed to debate.

[1/2] There has been some good progress for Main Street businesses in the tax cut bill. I was able to secure more than 60 billion in tax cuts for Main Street businesses. These Main Street businesses will be able to provide more jobs and higher wages in Montana and across the

— Steve Daines (@SteveDaines) November 29, 2017

[2/2] country. I"ve seen enough progress to vote yes to move the debate forward.

— Steve Daines (@SteveDaines) November 29, 2017

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Update (2:45PM EST): Although no official time has been provided, according to The Hill, Senator Tom Tillis (R-NC), who presided over the Senate floor during lunch, said he expected a vote on the tax bill in the 4 - 5pm EST timeframe.

Meanwhile, Senator Susan Collins (R-ME) has just confirmed she will support the procedural vote for tax reform today but is still on the fence regarding her final support of the legislation.

*GOP SENATOR COLLINS SAYS SHE WILL BE A "YES" ON TAX BILL MOTION TO PROCEED

*SEN. COLLINS SAYS SHE"S NOT YET A `YES" ON FINAL VOTE ON TAXES

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Just yesterday a 12-11 party-line vote in favor of the tax reform bill by the Senate budget committee allowed Mitch McConnell to breathe a temporary sigh of relief after earlier objections by GOP members left many wondering whether the bill would even make it out of committee. 

Now, the controversial legislation is set for its first key test before the entire Senate after McConnell just confirmed that a crucial procedural vote intended to allow debate on the bill has been scheduled for later this afternoon.

As expected, McConnell says the Senate will vote later today on the Motion to Proceed to the GOP tax reform bill.

— Frank Thorp V (@frankthorp) November 29, 2017

Of course, the bill will need at least 50 votes to pass, with Vice President Mike Pence breaking a potential tie; Republicans hold 52 seats in the chamber, and no Democrats are expected to support the bill.

As the Wall Street Journal notes, key, last-minute modifications to the bill that allow for tax increases in the event of deeper deficits managed to attract the support of several key Senators who had previously been on the fence.

One group of senators that were on the fence and now appear set to support the bill are lawmakers concerned about the federal deficit. Led by Sens. Bob Corker (R., Tenn.), James Lankford (R., Okla.) and Jeff Flake (R., Ariz.), the group has been working on a plan to trigger automatic tax increases if the tax cuts lead to deeper deficits. By Wednesday, the deficit hawks sounded optimistic and said the details of a deal were closer to being worked out.

 

New details about the design of the fallback plan could mitigate some concerns. Republicans briefed on the plan said that it could be designed in a way to keep the backup plan from activating in the event of an economic recession. For it to work, the government would have to distinguish between a slowdown in tax revenue caused by tax cuts and a slowdown that is a normal feature of the economic cycle.

 

“We’re writing in a protection from recession so that way if there is a recession, the trigger turns off,” Mr. Lankford said on CBS. “The second part of that is if we do this large tax cut and we broaden the base of what’s happening economically, we better not have a recession at that point. This should actually charge up the economy.”

Meanwhile, Trump seemed confident yesterday after describing a GOP meeting on the legislation as "somewhat of a lovefest."

Trump calls today"s meeting with Republican senators "very special" and "somewhat of a lovefest" pic.twitter.com/QMc5kzBkz1

— Aaron Rupar (@atrupar) November 28, 2017

Of course, not all Republicans are onboard with the "lovefest" just yet at Senator Steve Daines (R-MT) still has some reservations over the treatment of pass-through income and Senators Mike Lee (R-UT) and Marco Rubio (R-FL) would like a slightly higher corporate tax rate to help fund a larger child tax credit for low-income families.

Still, not every Republican is ready to vote yes. Sen. Steve Daines (R., Mont.), who is concerned about the treatment of partnerships and other “pass-through” entities whose earnings pass through to individual owners’ tax forms, said that he wasn’t quite ready to cast a vote to allow the tax debate to begin.

 

Separately, Republicans were planning to try to make more changes to the tax bill by offering amendments later this week.

 

Sens. Mike Lee (R., Utah) and Marco Rubio (R., Fla.) are proposing an amendment to the tax bill that would increase the child tax credit for low-income families and pay for it by setting the corporate tax rate at 22%, instead of 20%.

 

That amendment would make the child tax credit fully refundable against payroll taxes and index the tax credit to inflation. Refundable tax credits go to households that don’t pay income taxes.

Passage of this key procedural vote today could setup the Senate to pass whatever modified version of the bill comes out of debate by Thursday or Friday of this week.

We will provide updates on this crucial procedural vote as they develop throughout the day.

The Delays Begin: Release Of Republican Tax Bill Postponed Until Thursday

In our comprehensive review of the GOP tax bill which was scheduled to be unveiled tomorrow, we noted the following key caveat  "There are a lot of unknowns in this process, the biggest of which - of course - is whether the bill will be delayed from its scheduled Wednesday appearance." In retrospect, and in light of the conflicting reports about what may be contained in the final draft of the bill, this has proved prophetic because moments ago, Axios reported that week"s 2nd biggest events - after Trump"s announcement of Jay Powell as the next Fed chair - the release of the Republican tax bill is being postponed by at least one day, from Wednesday to Thursday.

The delay of the scheduled release, by the House Ways and Means Committee, reveals the difficulties the team has had in resolving how to raise enough money to pay for the massive corporate tax cuts. Political hot button issues — like the treatment of 401k savings — are still in flux. The delay shouldn"t affect the timing for the mark-up, which is expected to happen Monday.

Separately, the Hill adds that the GOP now says the bill will be released on Thursday as lawmakers scramble to reach a consensus on how to restructure the nation’s tax laws.

Fights over possible changes to the tax status of 401(k) retirement plans and the state and local taxes deduction are at the center of the delay. Lobbyists chattered throughout the day over whether Wednesday’s big unveiling of the GOP tax package would have to be delayed as it became clear that lawmakers were differing over various reductions.

 

Hours before the decision was made to punt the release for a day, Ways and Means Committee Chairman Kevin Brady (R-Texas) told reporters that he intended to release text of a bill Wednesday — but that it would not be a chairman’s mark. This would allow Brady to make changes to the text through the weekend ahead of a planned markup on Monday in the Ways and Means Committee.

 

President Trump had sought to quash any changes to 401(k) plans last week, but it has become clear that Republicans have not stopped talking about shifting the tax status of the plans as they seek to ensure their bill does not add to the deficit after its first 10 years. Republicans have discussed lowering the amount people can put into their retirement plans before taxes, which could increase the amount of revenue initially hit by taxes. 

 

Brady appears to be moving toward a compromise that would allow a deduction for local property taxes — a concession that could win at least some support from the blue-state Republicans. “I think we"re moving in the right direction,” Rep. Leonard Lance (R-N.J.) said on CNN Tuesday.

 

The bill"s unveiling would launch the GOP"s blitzkrieg effort to try to pass legislation by Thanksgiving and trigger a lobbying bonanza from both supporters and opponents. Any delay in the bill’s introduction is not helpful giving the time pressures, though the delay of one day would not affect the planned Monday markup.

Meanwhile, earlier on Tuesday Bloomberg reported that Republican tax writers were planning to keep the top individual income tax rate unchanged at 39.6%. 

The top rate may apply to taxpayers with adjusted gross incomes of about $1 million and higher, said the people who asked not to be named because the discussions are private. Currently, the 39.6 percent rate kicks in at $418,400 of taxable income for single filers and $470,700 for married couples filing jointly.

 

The White House and GOP leaders’ tax framework released last month called for reducing the current seven income brackets to three -- 12 percent, 25 percent and 35 percent, with the flexibility for the tax-writing committees to add a possible fourth bracket for top earners.

The delay itself is not surprising as the final bill is expected to somehow reconcile numerous other, often conflicting items among which:

• Are middle-class cuts from the budget framework (like doubling the standard deduction and expanded child tax credits) included?

• Is the SALT deduction included (or capped in some way)?


• What level is the corporate tax rate (over/under Trump’s 20% target)


• Is there a fourth tax bracket (rumblings suggest incomes above 1mm USD would be affected)


• Is the tax cut retroactive to Jan. 1, 2017?


• Is there a repatriation deal for money kept overseas?


• Does it add to the deficit?  If so, how much?


• Will extraneous issues be slipped into the draft to entice specific voters?
  
  • Minimum wage hike
  
  
  • Border wall funding
  
  
  • Debt ceiling compromise
  
  
  • Planned parenthood funding
  
  

And much more. In light of this, the biggest surprise would be if the GOP actually manages to have a just one day delay.

This means that for markets Thursday is now shaping up as an especially painful day, with announcements due on not only the next Fed chair, but also the layout of the tax bill. The good news is that no matter what the "news" actually is, the market will hit new all time highs.

Democrats Plot Debt Ceiling Fight And Government Shut Down To Thwart Trump Tax Cuts

After 8 years of bashing Republicans for using debt ceiling votes as leverage to try to force spending cuts, Democrats now seem intent upon doing pretty much the same thing, well, at least the "using the debt ceiling as leverage" part.  In fact, after repeatedly calling for a "clean" debt ceiling vote (i.e. one without attached conditions) House minority leader Nancy Pelosi recently hinted, in her typical incoherent manner no less, that Democrats may now be looking into using the debt ceiling vote as leverage to thwart Trump"s forthcoming tax proposals.

"I don"t have any intention of lifting the debt ceiling to enable the Republicans to give another tax break to the wealthy in our country.  To further exacerbate the challenge that is created when they have their trickle down economics."

"The president keeps saying "the tax bill is moving through Congress," it doesn"t exist.  It doesn"t exist.  So you understand the frustration.  It doesn"t exist.  There is no tax bill moving through Congress."

As Bloomberg points out, Democrats have been the key to passing "clean" debt ceiling increases in the past but hypocrisy is not a concept that is well understood in Washington D.C.

It’s unclear how this would work in practice, but Democratic aides in both chambers said they are discussing possible strategies to tie the debt ceiling to blocking tax cuts.

Such an approach would be a significant change for Democrats, who have spent the past eight years arguing that debt ceiling increases should be free from conditions, and could further complicate efforts to raise the government’s borrowing authority when the current limit is reached later this year.

Democrats have been willing in the past to provide Republicans enough support on “clean” debt-ceiling measures to help make up for the loss of votes among conservatives, mostly in the House, who refuse to support them without deep cuts to domestic programs. Democrats were key to helping resolve the 2011 fight over the debt limit, a protracted standoff that contributed to S&P Global Ratings’ decision to downgrade the U.S. to AA+ to AAA.

Ironically, efforts to use the debt ceiling as leverage could, presumably for the first time ever, partially align the interests of Democrats with the most conservative voices in Congress, many of whom would have no problem shutting down the federal government for a while.  After being singled out and blamed for the last government shutdown in 2013, the House Freedom Caucus undoubtedly welcomes Pelosi"s sudden support.

Already, members of the House Freedom Caucus have said they will push for spending cuts in this year’s debt-ceiling debate in exchange for their support. On Friday, President Donald Trump’s chief economic adviser, Gary Cohn, said the White House would consider spending cuts or policy changes favored by Republicans in order to avert an unprecedented default. That appears to align him with White House budget director Mick Mulvaney, but against Treasury Secretary Steve Mnuchin, who has called on Congress to pass a “clean” debt-ceiling hike.

“Treasury secretary would love to do a clean debt ceiling -- I get that. But if we need to get things attached to get it through, we’ll attach things,” Cohn said on CNBC.

Several conservative groups met at the White House last week to discuss a strategy. Ideas they discussed included caps on mandatory programs such as Social Security and Medicare, extending automatic across-the-board spending cuts and matching any debt-limit increase with spending cuts, according to two participants in the meeting.

Republicans in both chambers are seeking to draft and approve a tax-cut package this year that would lower individual and corporate tax rates, although no proposal has been circulated yet. Several leaders, including Senate Majority Leader Mitch McConnell, have said they want any tax overhaul to be revenue-neutral. But Trump has repeatedly promised large cuts.

So, by all means, fight on Nancy...for one time in your multi-decade political career you may actually slip up and save taxpayers some money.