Despite Passing Tax Bill, House Dems, Reps Disagree on Path Forward

While the bipartisan tax bill awaits action in the Senate, two House committees held hearings last week debating the merits of 2017 tax reforms under the Tax Cuts and Jobs Act (TCJA; PL 115-97) — and the next steps to take.

Back in January, the Tax Relief for American Families and Workers Act of 2024 (HR 7024), a $78 billion proposal by head House and Senate taxwriters, passed the House with much fanfare. The bill, a compromise negotiated by Senate Finance Committee Chair Ron Wyden (D-OR) and House Ways and Means Chair Jason Smith (R-MO), has since stalled in the Senate.

In an effort to continue the conversation and spur Senate action, the House Small Business and Ways and Means committees held hearings last week on the impacts of the TCJA and current tax reform needs.

Republicans touted the benefits of the TCJA, including increases in wages, a drop in the poverty rate in the years following its passage, and tax revenues above estimates. With many TCJA provisions set to expire at the end of 2025, Smith said, “Congress must act soon to prevent what will be the largest tax hike in history on workers, families, farmers, and small businesses.”

Meanwhile, Democrats focused on who really benefited from the TCJA’s tax cuts. House Ways and Means ranking member Richard Neal (D-MA) said the TCJA “didn’t pay for itself, it didn’t increase revenue, and it certainly did not increase wages.” Neal added that corporate tax gains largely went to “shareholders and high paid executives,” with very little flowing to average workers. He called for more investment in childcare, paid leave, and other community services over further corporate tax relief.

The discussion in both committee hearings cast light on priorities and lingering issues in tax reform.

199A deduction.

One recurring topic was the pass-through deduction — which provides a 20% deduction for qualified business income — established by the TCJA at Code Sec. 199A. Both committees heard testimony from small business owners who undoubtedly benefited from the 199A deduction. Witnesses touting its benefits included a coffee roaster and a convenience store chain operator.

However, some Democrats questioned whether large corporations received the lion’s share of the 199A deduction’s benefits. Representative Judy Chu (D-CA), who was at both hearings, said the while the 199A deduction was aimed at small businesses, the majority of the benefits have gone to the wealthiest companies.

Discussion also swirled around why the 199A deduction was not made permanent under the TCJA. Some legislators contrasted this with the permanency of cuts to the corporate tax rate under the TCJA. Witness Walter Rowen, president of Susquehanna Glass Co. and co-chair of Small Business for America’s Future, said that while the small business community found the changes under the TCJA, including the 199A pass-through deduction, helpful, they don’t equate to the benefits realized by large companies — namely a permanent drop in the top corporate tax rate to 21%.

Capitalization, amortization of R&D expenses.

Under the TCJA, Code Sec. 174 requires certain research and development expenses to be capitalized and amortized over a five-year period for US-based companies, and over 15 years for non-US companies. Previously, taxpayers could immediately deduct these expenses. The pending tax legislation would restore expensing for US-based R&D retroactively through 2025, while maintaining the 15-year amortization for foreign R&D expenses.

Representative Ron Estes (R-KS) told the Ways and Means Committee that immediate R&D expensing must be addressed, adding that “since amortization took effect, the growth rate of R&D spending has slowed dramatically from a 6.6% on average increase per year over the previous five years to less than one half of 1% over the last 12 months.” Witness Austin Ramirez of Husco International, which makes hydraulic and electro-mechanical control systems for automotive and off-highway equipment, agreed, calling it “the single most important issue in the tax reform right now.” He contrasted US tax treatment of R&D expenses with China’s 200% super deduction, adding that since 2022, the change in R&D expensing created “a $20 million hole in [his] balance sheet.”

Chuck Wetherington of BTE Technologies, a 40-person medical device manufacturer, asked the Small Business Committee to prioritize doing away with the new requirement to amortize R&D expenses. With the ability to immediately expense costs, Wetherington said his company would be able to expand and increase its employee headcount substantially. He also told legislators that small manufacturers need “consistent, straightforward, and predictable taxes,” adding that while the House took steps in the right direction, “Congress must deliver.”

Child Tax Credit.

Finally, debate continued over the Child Tax Credit (CTC), which Senate Finance Committee Ranking Member Mike Crapo (R-ID) identified as a sticking point in a February statement. Crapo expressed concern that the tax bill’s provisions would “transform the CTC from primarily working family tax relief into a government subsidy,” in that statement.

Chu emphasized the importance of the CTC, calling it a “powerful tool” for reducing poverty and “helping more Americans enter the workforce.” She lambasted Senate Republicans who she said won’t “consider even a modest improvement to the CTC that the House passed on a bipartisan basis.” Representative Terri Sewell (D-AL) agreed, adding that what really helped families in her district were 2020 changes under the American Rescue Plan Act (PL 117-2) that made the CTC temporarily fully refundable.

Smith said that in his district, which has a median household income of $40,000, families “benefited greatly from the doubling of the Child Tax Credit” under the TCJA. He added that looking ahead to 2025, the CTC is something that needs to be addressed, but “we need to make sure work requirements are in it.”