Lawmakers in both the House and Senate had fought hard to keep the corporate rate low, with the Senate late Friday rejecting a Republican-backed proposal to push it up to 21 percent in exchange for more working-family tax breaks.
The Senate passed the final version of its bill on a 51-to-49 vote just before 2 a.m. Saturday, with Sen. Bob Corker (Tenn.) as the lone Republican voting against it on concerns that it would drive up the federal deficit. Democrats howled that the bill was not released until hours before passage, with lobbyist-driven handwriting still present on the final version.
Senate Republicans moved fast, in part, because they wanted to comply with Trump’s demand to send legislation for his signature by the end of the year.
The House and Senate intend to take steps as soon as Monday to set up a conference committee to negotiate the significant differences between the Senate plan and the version passed by the House last month. But Trump’s statement Saturday threatened to introduce a complication.
“Business tax all the way down from 35 to 20,” Trump told reporters, remarking on a core provision of the Senate bill. “It could be 22 when it all comes out, but it could also be 20. We’ll see what ultimately comes out.”
Moving the corporate tax rate up by 2 percentage points could raise $200 billion, money Trump might need to try to satisfy the concerns of Republicans frustrated that the plan does not reduce top individuals’ tax rates enough or of others such as Sen. Marco Rubio (Fla.), who argued that the bill should do more for low-income families.
Rubio complained Friday that colleagues would not even allow him to move the corporate rate to 20.94 percent, saying they acted as if this would be a “catastrophe.”
If the White House tries to lower the top tax rate for individuals, it would mark a sharp departure from several months ago, when then-chief strategist Stephen K. Bannon advocated for raising the top rate paid by the wealthiest Americans as a way to follow through on the populist principles Trump invoked in his campaign.
Lowering the corporate tax rate was a centerpiece of the plan, and Republicans have said that it will help businesses free up money to invest, grow and raise wages. They continually reshaped the tax-cut bills in the House and Senate to help businesses, even if it meant cutting back on tax benefits for individuals and families.
Senate Majority Leader Mitch McConnell (R-Ky.) dismissed suggestions that the corporate rate could rise to 22 percent, pointing to votes in both the House and Senate that would set it at 20 percent. “That would be a major change,” McConnell said in a telephone interview, adding that the vote showed he does not “have much of a margin.”
House conservatives have strongly opposed a higher corporate rate, with Rep. Mark Meadows (R-N.C.), chairman of the Freedom Caucus, saying that anything above 20 percent would be unacceptable. It remained to be seen how the president’s endorsement of a higher rate might impact their stance.
“The Freedom Caucus was the first to embrace the president’s call for a 15 percent corporate rate and has been consistent in its position, calling for a rate as low as possible but no higher than 20 percent,” Meadows said in a text message. “I am certain he will be signing a tax relief package by Dec. 21, which will meet the pro-growth standard the Freedom Caucus has demanded for many months.”
Saturday’s vote was a bright victory for Trump amid the political troubles facing the White House on other fronts, as well as for Republicans after the collapse of their efforts to repeal the Affordable Care Act.
Business groups welcomed the Senate vote, which moved them a major step on the way to their long-standing goal of lower corporate taxes. The current U.S. statutory rate of 35 percent is the highest among major industrial economies, though many corporations pay a far lower rate.
“The decades-long drive toward meaningful tax reform is closer than ever to becoming a reality,” said Tom J. Donohue, president of the U.S. Chamber of Commerce. “Momentum toward final passage is building rapidly.”
Key industries, including retailers and investment managers, are expected to benefit from the Senate bill. But others warned that the bill’s detailed provisions might offset any gains working Americans would enjoy via lower taxes.
Elizabeth Mendenhall, president of the National Association of Realtors, said that new limits on the deductibility of mortgage interest could cause home prices to “fall by an average of more than 10 percent,” hitting high-cost areas even harder.
Likewise, the bill eliminates the current deduction for state and local income tax payments and permits taxpayers to write off only $10,000 of their property taxes. That will “reduce disposable income for many taxpayers, likely outweighing the positive effect of lower” tax rates upon consumer spending, Moody’s Investors Service said.
Republicans brushed aside those concerns.
“This is a big moment for American families and small businesses ready to turn the page on an Obama-era recovery that has been far too sluggish,” said Sen. John Cornyn (R-Tex.)
Senate Republicans said that the tax cut ultimately will pay for itself through faster economic growth that will produce more government revenue, a claim that most independent economists and the nonpartisan congressional Joint Committee on Taxation reject. Even taking into account the effects of possible faster growth, the bill still would add $1 trillion to the $20 trillion national debt, according to the latest committee analysis.
Many economists also said that the tax cut is ill-timed, because the economy already is running hotter than the Federal Reserve believes is possible without eventually triggering higher inflation. The economic expansion is in its ninth year, making it one of the longest in U.S. history, and the jobless rate in October fell to 4.1 percent.
Later this month, the Fed is expected to raise rates for the third time in 2017. Most economists believe that the nation’s central bank will respond to the tax cut by raising interest rates more aggressively to head off incipient inflation.
“The worry for the Fed will be whether the economy might overheat, including the creation of bubbles in the stock market and among other asset classes,” said Mark Hamrick, senior economic analyst for Bankrate.com.
In last-minute actions, Republicans allowed taxpayers to use funds from college-savings plans for tuition at religious secondary schools and opted not to eliminate the alternative minimum tax. Instead, the AMT will be retained for corporations and limited to individuals earning $70,600 in taxable income and couples making $109,400.
Lawmakers also added a provision that provides favorable treatment for the oil and gas sector.
The president is betting that an eventual tax cut will pay off for Republicans in 2018. At a New York fundraiser Saturday, he said that Democrats had made a mistake by opposing the legislation.
“We got no Democrat help and I think that’s going to cost them very big in the election because they voted against tax cuts,” Trump said. “And I don’t think politically it’s good to vote against tax cuts.”
But the president is gambling that public opinion, which is hostile to the legislation, will reverse before Election Day. In a Quinnipiac University poll this month, 61 percent of voters said that the tax cut would mainly benefit the wealthy, while 24 percent said that it would help the middle class.
Paul Kane, Erica Werner and Heather Long contributed to this report.