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Senate vs House on TCJA: what conference kept, traded, and dropped

The conference report the House passed this morning picks winners from two bills that disagreed on brackets, pass-throughs, the AMT, and the estate tax

The Editors
Staff, Incorporator.org
10 min read Updated
Contents 9 sections
  1. How we got to December 19
  2. Individual brackets: the Senate won on structure, the House on the top rate
  3. The pass-through problem: two mechanisms, one compromise
  4. The corporate AMT: the House wanted it gone; the Senate, at the last minute, kept it
  5. The estate tax: House repealed it, Senate doubled the exemption, conference picked the Senate
  6. Deemed repatriation: three numbers, all of them Senate-adjacent
  7. SALT, mortgage interest, the individual mandate, and the small things that split
  8. What to watch in the Senate vote tonight
  9. Sources

he House passed the Tax Cuts and Jobs Act conference report this morning, 227 to 203, and the Senate is expected to vote tonight or tomorrow. The conference bill is not the Senate bill, and it is not the House bill. It is a third document, stitched together over two weeks in December, that picked winners from two versions that disagreed on more than the commentary suggested.

This is a field guide to what the two chambers sent to conference, and what conferees kept from each. For anyone who has been tracking TCJA since the Better Way blueprint in January and the Big Six framework in October, the through-line is that most of the big structural choices got resolved the Senate's way, with a few House wins on timing and magnitude.

How we got to December 19

The House Ways and Means Committee marked up H.R. 1 on November 6, 2017. The full House passed it November 16, 227 to 205, with every Democrat and thirteen Republicans voting no. The Senate Finance Committee reported its substitute amendment after a week of markup, and the full Senate passed its version in the early morning of December 2, 51 to 49, with Bob Corker of Tennessee the only Republican to vote no. Corker's objection was the deficit impact, which he had already flagged in October.

The conference committee convened December 13, released its report December 15, and filed the conference bill as an amendment to H.R. 1. The Joint Committee on Taxation published its distributional analysis the same day as JCX-67-17 and its macroeconomic analysis as JCX-69-17. The House vote this morning sends the conference bill to the Senate. If the Senate passes it unchanged, which the whip count suggests it will, the President has said he intends to sign before Christmas.

Three days from now, the enacted statute will be the conference bill. The House bill and the Senate bill are already historical documents. They are worth understanding anyway because they show what the two chambers could agree on and what they could not, and the list of disagreements is the best available map of which provisions are fragile and which are load-bearing.

Individual brackets: the Senate won on structure, the House on the top rate

The House bill collapsed the individual code to four brackets: 12%, 25%, 35%, and 39.6%. The top rate stayed put. The 25% bracket started at $45,000 for single filers and $90,000 for joint filers, which is an expansion of the middle rate downward in exchange for the consolidation.

The Senate kept seven brackets but cut most of the rates: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. The top rate fell by 1.1 points, the 25% bracket became 22% and 24%, and the structural shape of the code stayed roughly recognizable.

Conferees took the Senate's seven-bracket structure and pulled the top rate down further: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate lands 2.6 points below current law rather than 1.1, and the rest of the rate schedule is the Senate's. This is a Senate win on structure with a House-style concession on the top marginal rate, and it is the shape of the individual code for tax years beginning after December 31, 2017.

The individual cuts sunset after December 31, 2025, in both the Senate bill and the conference bill. The House bill made them permanent. The sunset is a Byrd-rule artifact; the Senate could not permanently cut individual rates without breaching the $1.5 trillion ten-year reconciliation instruction, and the House lost that fight because the bill has to clear the Senate under reconciliation or not at all.

The pass-through problem: two mechanisms, one compromise

The House bill offered pass-through owners a maximum rate of 25% on qualifying business income, defined with a capital-percentage safe harbor and a services exclusion that was legislatively tortured. A professional services firm got 30% of its income treated as business income, taxable at 25%, and 70% treated as labor income, taxable at the owner's ordinary rate. The remainder of partnership and S-corp income qualified for the 25% rate in full, subject to an anti-abuse rule.

The Senate took a different route: a 23% deduction against qualified business income, not a separate rate. The deduction phased out for specified service trades or businesses above $500,000 for joint filers and $250,000 for single filers, and non-service businesses got a wage-or-capital limitation above those thresholds. The deduction mechanism matters because it preserves the code's bracket structure and applies against whatever the owner's top rate would otherwise be, rather than replacing it.

Conferees kept the Senate's deduction architecture, moved the percentage to 20, and set the threshold at $315,000 joint and $157,500 single. The resulting provision is new Section 199A. For a pass-through owner in the 37% bracket with no wage or capital limitation bite, the effective top rate on qualifying business income is 29.6%, which is 37 times 0.8. The House's 25% headline was lower, but the Senate's deduction mechanism is cleaner, more auditable, and more portable across future rate changes.

Section 199A sunsets with the rest of the individual provisions on December 31, 2025. The rulemaking Treasury will need to publish on what counts as a specified service trade or business, and on the wage and capital limitations, is not yet drafted. The JCT score assumes aggressive anti-abuse regulations that do not exist.

The corporate AMT: the House wanted it gone; the Senate, at the last minute, kept it

The House bill repealed the corporate alternative minimum tax outright. That was the position TCJA negotiators had taken all year, and it was the position reflected in the September framework. The corporate AMT had been a mid-1980s answer to a set of problems the base-broadening in this bill was meant to fix anyway, and keeping it alongside a 20% statutory rate would have been a drafting accident.

The Senate bill, in the floor substitute filed the week of December 1, kept the corporate AMT at its 20% rate. The provision survived because the Senate needed the revenue to balance other late-stage changes, and because the drafting window closed before anyone walked through the interaction. Corporate tax directors spent the first week of December reading floor text and realizing that a 20% statutory rate plus a 20% AMT rate, with the research credit and the orphan drug credit still targeted by the AMT computation, was going to produce an actual AMT liability for real companies for the first time in the provision's history.

Conferees repealed the corporate AMT in the final bill. The repeal was the single most consequential mechanical change between the Senate-passed text and the conference report, and it happened because practitioners read the floor substitute carefully and told Ways and Means and Finance staff what it would do. The individual AMT survives in modified form, with a higher exemption and a higher phase-out threshold, both sunsetting in 2025.

The estate tax: House repealed it, Senate doubled the exemption, conference picked the Senate

Under current law, the federal estate tax applies to the excess of a decedent's taxable estate over the basic exclusion amount, which is $5.49 million for 2017 per Rev. Proc. 2016-55. The House bill doubled the exclusion to roughly $11.2 million effective 2018 and repealed the tax entirely effective for decedents dying after December 31, 2023, retaining step-up in basis.

The Senate bill doubled the exclusion for tax years beginning after 2017 and before 2026, and then sunset the doubled exclusion back to the pre-TCJA level at the end of 2025. The tax stayed on the books throughout. Step-up in basis was untouched in both versions.

The conference bill took the Senate's approach. The doubled exclusion is in, repeal is out, and the sunset is at the end of 2025. For an estate planner, this is a meaningful planning window with a hard cliff at the back end, and it is the basis on which a lot of the irrevocable trust work that will happen in 2018 and 2019 is going to be marketed. The House's 2024 repeal would have been a very different planning universe; it is not the one we are getting.

Deemed repatriation: three numbers, all of them Senate-adjacent

Section 965 in each bill imposes a one-time transition tax on the accumulated post-1986 untaxed foreign earnings of specified foreign corporations held by U.S. shareholders, split between cash and cash-equivalent earnings, which pay a higher rate, and illiquid earnings, which pay a lower rate. The House bill set the split at 14% and 7%. The Senate bill set it at 14.49% and 7.49%. The conference report lands at 15.5% for cash and 8% for non-cash.

The conference rates are above both the House's and the Senate's. That is not an error. Conferees needed revenue to cover the individual bracket reductions and the corporate AMT repeal, and the deemed repatriation base is both large and politically easier to tax than almost anything else in the bill. For U.S. multinationals with large unrepatriated offshore earnings, the difference between the House's 14% and the conference's 15.5% is material, and it is the largest single revenue raiser in the international title.

The election to pay the tax in installments over eight years survived from both bills. The base is calculated under Section 965 as of November 2, 2017 or December 31, 2017, whichever produces the greater measurement; the bill picks the higher of the two balances, which is another revenue choice the House would not have made in isolation.

SALT, mortgage interest, the individual mandate, and the small things that split

The state and local tax deduction fight was largely settled before conference. The House bill allowed a deduction of up to $10,000 for property taxes and no deduction for state income taxes; the Senate bill allowed the same $10,000 cap but let taxpayers choose between property and state income taxes under the cap. The conference report took the Senate's flexibility with the same $10,000 cap.

Mortgage interest: the House bill capped acquisition indebtedness at $500,000 for new loans and eliminated the deduction for home equity indebtedness. The Senate kept the cap at $1 million for new loans and also eliminated the home equity deduction. Conference settled at $750,000 for new loans, which is lower than the Senate and higher than the House, and also eliminated the home equity deduction.

The Senate bill repealed the Section 5000A individual shared responsibility payment, effective for months beginning after December 31, 2018. The House bill did not touch it. Conferees kept the Senate's repeal. The CBO has the repeal scored at roughly $300 billion over ten years of reduced federal outlays on the premium tax credit and Medicaid, which is the single largest offset in the bill, and it is a Senate-only item that would not have survived a House-led conference committee.

The standard deduction, the personal exemption repeal, the child tax credit increase to $2,000 with a $1,400 refundable portion, the 20% corporate rate effective January 1, 2018 rather than January 1, 2019, and the full expensing under Section 168(k) through 2022 with a five-year phase-out are all provisions where the two chambers agreed on direction and conferees picked the more expensive of the two numbers in most cases.

What to watch in the Senate vote tonight

The Senate parliamentarian will issue any Byrd-rule rulings before the vote; the expectation as of this morning is that the conference bill clears procedurally without further amendment. Corker has signaled he will vote yes on the conference report after voting no on the Senate bill, citing the deemed repatriation rate increase and the AMT repeal as changes that improve the package. Jeff Flake, who secured a commitment on DACA in exchange for his December 1 vote, has signaled yes. John McCain is absent for medical reasons; the Majority Leader does not need his vote to clear 50 with the Vice President breaking the tie, and the whip count says 51.

If the Senate passes the conference report unchanged, the bill goes directly to the President. If the Senate amends it for a Byrd ruling, the House has to vote again, which is on the calendar for contingency. Either way, this is enacted law before year-end, which means the 20% corporate rate, Section 199A, and the AMT changes are all operative for tax years beginning after December 31, 2017, which for most corporations is fiscal 2018.

For any business that has been holding off on a year-end transaction pending clarity, the clarity exists now. The conference report is not going to change between this morning and the President's desk. The regulations are another story, and that is 2018's work.

Sources

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