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Senate introduces tax bill, keeps most retirement contributions intact

Sen. Orrin Hatch, R-Utah, chairman of the Senate Finance Committee

Proposal mirrors House tax on endowments, diverges on pass-through businesses

Senate Republicans released their proposal for tax reform Thursday, shortly after the House Ways and Means Committee approved its package along party lines.

Like the House bill, the Senate version keeps most pre-tax retirement contributions intact. Annette Guarisco Fildes, president and CEO of the ERISA Industry Committee in Washington, praised that move, but said her group will continue to advocate against any decreased incentives. "A move to Rothification would have decreased the incentive for employees to save and upset decades of work by employers to improve retirement security and financial well-being," she said in a statement.

Retirement savings advocates were not happy that the Senate's proposal does not allow for catch-up contributions, even those made after tax, for higher income earners making $500,000 or more annually. Although it would not affect as many people, they worry that it sets a dangerous precedent for means-testing the tax advantages of defined contribution plans that could lead to lower caps.

Unlike the House bill, the Senate version does not reduce the tax rate on partnerships' pass-through income, instead calling for a 17.4% deduction that would benefit more income groups.

The Senate plan does not address carried interest but it is likely to be added during markup; the House proposal would maintain the current carried interest as long as investments are held for at least three years.

Dean Zerbe, a former top Senate Finance Committee aide who is national managing director of tax consulting firm Alliantgroup, expects limits to carried interest to stay in some form, as negotiators figure out how to pay for further amendments.

One of the biggest surprises is how both versions go after what Mr. Zerbe calls "fat cat" compensation, including deferred compensation and $1 million-plus salaries in the non-profit world. "It's been a long, slow boil. I think there's just a lot of unhappiness with the charitable sector," he said.

Private universities would also be taxed for the first time on investment assets, under both Senate and House plans. Those with at least 500 students and assets of more than $250,000 per student would pay 1.4% on net investment income. "There's just a general issue with these colleges getting massive tax breaks," Mr. Zerbe said.

The House version also calls for public pension plans to pay taxes on income earned from investments, as early as 2018, by expanding the rules on unrelated business taxable income.

The House is expected to vote on its package next week, while the Senate Finance Committee will mark up its version Nov. 13, with a vote planned for after Thanksgiving.

The Senate has less leeway in how a final package adds up because it cannot increase the federal deficit more than $1.5 trillion over the next decade. That means Senate negotiators will have to find more sources of tax revenue if they want to increase any tax breaks.

On the Senate floor Thursday, Committee Chairman Orrin Hatch, R-Utah, addressed "the elephant in the room," noting that Senate Democrats have not gotten on board. Senate Republicans cannot afford to lose more than two defections from Republicans to pass tax reform.