San Francisco Chronicle
Couple's gold discovery will be taxed at top federal rate
San Francisco Chronicle
The Gold Country couple who unearthed at least $10 million worth of 19th century gold coins in their yard last year will probably owe close to half of that sum in federal and state income tax - whether or not they sell the coins. There is no question ...
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Earlier this month, Illinois Representative Robyn Gabel (D-18th District) and Senator Mattie Hunter (D-3rd District introduced a bill (HB 5690 and SB 3524) that would add a ‘penny-per-ounce’ excise tax to sugary beverages in hopes to battle obesity across the state. Similar legislation was proposed in 2011 but was shot down by legislators. Rep. Gabel has stated that the new legislation “is projected to produce over $600 million each year for prevention, wellness and Medicaid services” in Illinois.
While legislators are quick to tout benefits of soda taxes, they come at great cost. Research shows that soft drinks, or sugar-sweetened beverages, only account for six percent of calories consumed by Americans, compared to 11 percent from sweets and desserts, and while soft drink sales have declined by twelve percent over the past decade, obesity rates have continued to rise. Several studies have gone on to show that taxation is not an effective way to reduce caloric intake as substitutions offset any projected benefits. In fact, a Cornell study has shown that in households where alcohol was regularly consumed, beer consumption increased to 172.4 ounces per month when a ten percent tax was applied to soda, increasing caloric intake by 1930 calories in the same time frame.
Beyond the economic and practical impact of the proposed soda tax, questions must be raised regarding the fairness of the tax. Soft drinks in Illinois are already subject to a 6.25 percent tax, compared to ‘qualifying food and drugs,’ which are taxed at a mere one percent. Furthermore, in Chicago, an additional 3 percent tax is levied against soft drinks sold at retail. This would mean that the new bill would effectively tax soft drinks twice statewide and three times in Chicago. When including commuters, this would mean that 2.9 million people, or 22.5 percent of Illinois’ population, would have to pay three separate taxes when purchasing a soft drink. The number grows even more when one considers the 46.37 million tourists that visited the Windy City in 2012. What is most troubling, however, is the fact that “sin taxes” have been shown to disproportionately affect low-income individuals.
While it is clear that the intentions of the bill are good, evidence shows that a soda tax would impact a large swath of people and target the poor without even achieving its stated goals. The tax system cannot be effectively used to combat obesity as individuals make dietary choices based on personal preferences and available resources. Arbitrarily levying a regressive tax is hardly the solution.
Conscripted Benevolence: IRS Enforcing Obamacare's Individual Mandate ...
Personal Liberty Digest
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House Ways and Means Chairman Dave Camp (R-MI) released a plan today to reform the federal tax code. He set out with the goal of simplification while maintaining revenue neutrality. While his plan maintains revenue neutrality, on first blush it appears to do little by way of addressing the complexity of the tax code, and in some ways, makes the tax code more complex.
We’ll have more analysis on the plan soon – it will take us days to get through the 979 pages of legislative text – but in the meantime, here are the basics.
Individual Income Taxes
Tax Brackets Consolidated to Three Brackets with a Top Rate of 35 Percent
The plan consolidates the existing seven tax brackets down to three brackets of 10, 25, and 35 percent. The 10 percent rate would apply to individual filers with taxable income below $35,600 and joint filers with income below $71,200. On taxable income above those levels, taxpayers will pay a rate of 25 percent. The individual AMT is eliminated and the brackets remain indexed to inflation, but based on chained CPI.
The additional surtax of 10 percent (the third bracket with a rate of 35 percent) will be levied on certain income based on a modified definition of AGI (MAGI) for individual filers above $400,000 and joint filers above $450,000.
The MAGI measure is adjusted gross income minus charitable contributions and qualified domestic manufacturing income, plus multiple streams of income excluded or deducted from AGI under current law, including employer provided health benefits, the self-employment health deduction, foreign income, tax exempt interest, untaxed social security benefits, and currently excluded 401(k) contributions.
The standard deduction increases to $11,000 for an individual and $22,000 for joint filers. There is also an additional deduction of $5,500 for single taxpayers with at least one qualifying child, which begins to phase out at $30,000 of AGI.
It is worth noting that this proposal does not take any steps to eliminate the marriage penalty inherent in the rate structure.
Phase-Outs in Plan Create Additional Marginal Tax Rates
The proposal creates multiple implicit marginal tax rates due to multiple phase-outs and the income surtax. A major change would be the phase out of the 10 percent rate bracket for individual filers with income above $250,000 and joint filers with income above $300,000. In effect, this would phase in a tax claw back, where individual filers who make over $250,000 ($300,000 for joint filers) would face a 25 percent tax rate on all income below the 35 percent bracket on income over $400,000 for single, $450,000 for filing jointly.
The standard deduction and the child tax credit would face a phase-out as well. (Personal exemptions are eliminated, so no need for a phase-out there.) This would create new implicit marginal tax rates for taxpayers as their income increases and these provisions phase out.
The phase out for all of these provisions occur sequentially starting at $250,000 for singles and $300,000 for filing jointly, in this order: (1) the 10 percent bracket, (2) the standard deduction or equivalent amount of itemized deductions, and (3), the child tax credit.
Proposal Makes Significant Changes to Individual Tax Expenditures
Chairman Camp’s proposal makes changes to a significant number of individual tax expenditures. The lists below are not all inclusive. For a complete list, see the Ways and Means section by section summary.
Eliminated ProvisionsEliminates the personal exemption Eliminates the Pease provision which limits itemized deductions Eliminates state and local tax deduction Eliminates the alternative minimum tax Eliminates deduction of interest on education loans. Eliminates adoption tax credit Eliminates credit for green energy residential improvements Eliminates credits for qualified electric vehicles and alternative motor vehicles Eliminates first time homebuyer credit Eliminates deduction for tax preparation expenses Eliminates deduction for medical expenses Eliminates deduction for moving expenses
Modified ProvisionsReduces the principal cap for the home mortgage interest deduction from new mortgages from $1 million to $500,000 over four years. Reduces the maximum credits for the EITC to $200 for joint filers with no children, $2,400 with filers with one child, and $4,000 for joint filers with two or more children. For taxpayers with children, phase outs begin at $20,000 for single filers and $27,000 for joint filers. Converts some excludable 401(k) contributions to Roth-style retirement accounts for those contributing more than $8,750. Modifies allowable contributions to Roth IRAs, eliminating the income eligibility limit for contributors and prohibiting contributions to traditional IRAs. Consolidates the four higher education tax credits into a reformed American Opportunity Tax Credit. The new credit would provide a 100 percent credit on the first $2,000 of certain education expenses, and a 25 percent credit on the next $2,000 of expenses. The first $1,500 of the credit would be refundable.
Expanded ProvisionsExpands the child tax credit from $1,000 per child to $1,500 per child and $500 for non-child dependents. Credits will be indexed to chained CPI. Increases in the standard deduction to $11,000 for an individual and $22,000 for joint filers, with an additional deduction of $5,500 per qualifying child.
Capital Gains and Dividend Taxes Increase from 23.8 Percent to 24.8 Percent
Under the plan, capital gains and dividends would be taxed at the ordinary rate with a 40 percent exclusion. This means, with a top rate of 35 percent, the top effective rate capital gains and dividend rate would be 21 percent. Add this to the 3.8 percent Affordable Care Act surtax, for a total of 24.8 percent. However, it’s likely taxpayers will face higher marginal rates due to the phase out of the standard deduction, child tax credit, and 10 percent bracket.
Lowers the Corporate Income Tax Rate
Today, the top federal corporate tax rate is 35 percent. Chairman Camp’s plan would lower the top marginal corporate income tax rate to 25 percent. The rate reduction will be phased in over 5 years from 2015 to 2019.
Lengthens Asset Lives, Changes Tax Treatment of R&D and Advertisement
One of the major changes to the corporate code is the way in which the code treats business investment. The proposal would eliminate the current modified accelerated cost recovery system (MACRS) and replace it with a system similar to the alternative depreciation system (ADS). This will lengthen asset lives, reduce the present value of capital cost write-offs, and boost taxable business income relative to current law.
However, to mitigate some of the damage a switch to a system like ADS creates, the basis of the depreciable assets would be adjusted for inflation.
The plan would also alter the way in which tax law treats research and development (R&D) and advertisement costs. Rather than allowing a business to fully expense most R&D expenses, the business will have to deduct these costs over 5 years. Likewise, advertising will no longer be completely deducted in the year in which the expense was incurred. Certain advertising costs will be 50 percent deductible in the first year and rest will be amortized over 10 years.
Tax Rates Lowered for Pass-Through Businesses to 35 percent, 25 Percent for Those Engaged in Manufacturing
More than 50 percent of business income is taxed through the individual income tax code. As a result, these “pass-through” businesses face top marginal tax rates as high as 39.6 percent on their income.
Chairman Camp’s proposal would reduce the top marginal income tax rate faced by pass-through businesses from 39.6 percent to 35 percent. However, domestic manufacturing pass-through income will be exempt from the 10 percent “surtax” on incomes over $400,000, meaning this income would only face a lower 25 percent rate.
A Shift to a Territorial System, with a Retroactive Tax on Foreign Earned Income
Currently, U.S. corporations are taxed on their worldwide income, but allowed to defer taxes on foreign income that remains actively invested abroad. When corporations earn income overseas and bring this income back to the United States, the United States taxes it at 35 percent, minus any foreign taxes paid on the income.
The Camp proposal would deem accumulated past foreign earnings currently held abroad in cash as repatriated and retroactively tax it once at an 8.75 percent rate. Remaining non-cash accumulated foreign earnings held abroad (income that has already been reinvested in property, plant, and equipment) would be retroactively taxed at a lower 3.5 percent rate. The corporation has the option to pay this tax over an eight year period.
Going forward, the United States would switch to a territorial corporate tax system, which would exempt from domestic corporate taxation 95 percent of all active foreign income. Look-through rules, which allow corporations to move money between foreign subsidiaries without triggering U.S. tax liability, would be made permanent. Subpart F will be modified so that intangible income (such as royalties) will be taxed at a 15 percent rate, whether it is earned domestically or abroad. This is similar to the "patent boxes" found in other countries. There will also be a "thin-cap" rule that limits deductions for interest expense based on the leverage of the U.S. parent relative to foreign subsidiaries.
New Excise Tax on Big Banks
The proposal introduces a .035 percent excise tax on banks that are deemed “important.” This tax will be levied quarterly on these banks’ total consolidated assets in excess of $500 billion beginning in 2015.Repeal of Last-in, First-out Accounting
Businesses are currently allowed to choose one of two ways to account for the cost of inventory: Last-in, First-out (LIFO) and First-in, First-out (FIFO).
The proposal would repeal LIFO accounting. Existing corporate LIFO reserve would be added back into taxable income in four phases between 2018 and 2020, retroactively taxing this inventory.
Elimination of Many Energy Provisions
Under the Camp proposal, a number of credits and deductions for the oil and gas industry and green energy are repealed:Eliminates percentage depletion Eliminates credit for producing oil and gas from marginal wells Eliminates enhanced oil recovery credit Eliminates deduction for energy efficient commercial buildings Eliminates credit for alcohol used as fuel Eliminates credit for biodiesel and renewable diesel used as fuel Eliminates passive activity exception for working interests in oil and gas property Phases-out credit for electricity produced from certain renewable resources Eliminates credit for production of low sulfur diesel fuel Eliminates credit for production from advanced nuclear power facilities Eliminates credit for producing fuel from a nonconventional source Eliminates new energy efficient home credit Eliminates energy efficient appliance credit Eliminates credit for carbon dioxide sequestration Eliminates solar energy credit
Other Business ProvisionsSection 179 currently allows small businesses to expense up to $25,000 of the cost of qualifying property. The proposal would increase that amount to $250,000 and make it permanent. Section 199 manufacturing deduction allows businesses to deduct 9 percent of qualifying manufacturing expenses (6 percent for integrated oil and gas companies). This deduction is phased out completely. The Research and Development (R&D) tax credit gives businesses a tax credit for research and development expenses. The Proposal will make the R&D credit permanent while modifying how it is calculated. Disallows businesses from deducting the cost of executive bonuses if they are in stock and imposes a 25 percent excise tax on compensation over $1 million paid by non-profit, tax-exempt organizations. The Obamacare 2.3 percent excise tax on medical devices would be repealed.
In less than three hours, I'll be testifying to the U.S. House Judiciary Committee's Subcommittee on Regulatory Reform, Commercial and Administrative Law. The subject of the hearing is the Business Activity Tax Simplification Act (BATSA) of 2013, H.R. 2992, co-sponsored by Rep. Bob Goodlatte (R-VA) and Rep. Bobby Scott (D-VA).
What is BATSA? BATSA re-affirms the physical presence rule - the rule that states can impose corporate income taxes and other business activity taxes only on companies that have phyiscal presence in a state.
States are unfortunately becoming more aggressive about reaching beyond their borders to impose taxes on out-of-state companies with neither property nor employees in the state. Not only do these parochial actions harm the national economy, they're bad tax policy because they violate the benefit principle that people should pay taxes where they receive benefits from government services.
You'll hear more on my testimony later. But I wanted to share the story of a fellow witness at today's hearing, Pete Vegas. We've tried to get the word out about Pete's story since he first reached out to us in 2011. Pete runs a food manufacturing company, with facilities in California, Arkansas, and Texas, and they sell their products all over the country. While in Washington State on a personal trip, he stopped by an existing customer to say hi and introduce himself.
Later, revenue officials learned that Pete's trucks were going into the state, so they sent what they call a nexus questionnaire (what I would call a fishing expedition) to Pete's company, asking "How many times per year" did he visit Washington? Pete answered "once." Big mistake. Washington then sent Pete an invoice for seven years of back taxes of their gross reciepts tax, the Business & Occupation Tax, plus interest and penalties -- $180,000 in total.
Pete's a fighter and he appealed and ultimately won. (Hear his story in his own words here.) But for every Pete Vegas who fights overly aggressive state tax actions, lots of businesses get trampled. Today, I'll be explaining the physical presence rule and why it's important, and why it's constitutional and appropriate for Congress to set rules on the limits of state authority to tax multistate companies that have all their property and employees in other states. Stay tuned.
IRS offers online, local assistance for filing 2013 taxes
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People who receive income from sources aside from an employer should make sure they know whether they need to include those as taxable income on their return. ... Consider new taxes for 2013. Lawmakers mostly kept tax laws unchanged in 2013, but there ...
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By Kevin Drawbaugh and Patrick Temple-West (Reuters) - Many of the most profitable U.S. corporations paid little or no federal income tax from 2008 to 2012, according to a five-year study issued on Tuesday by a left-leaning tax activist group. Citizens for Tax Justice looked at 288 profitable Fortune 500 companies and said that 26 of them - including Boeing Co , General Electric Co and Verizon Communications Inc - paid no federal income tax in the five-year period. The group also said that 111 of the 288 companies paid no federal income tax in at least one of the five years measured. In a reflection of how the tax code's complexity leaves many issues open to question, corporations sometimes dispute the way Citizens for Tax Justice calculates its numbers.
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Taxes: How to Keep What You Earn and Get Paid to Do It
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Those paid via 1099 are usually hammered in taxes (and I am one of them) as we are responsible for federal, state, and local income tax (depending on where you live), as well as the dreaded self-employment tax. The IRS will match the 1099 form you ...
Tomorrow, Chairman Dave Camp of the House Ways and Committee is expected to release his long-awaited tax reform plan. As always we will evaluate it based on the principles of sound tax policy, which have guided the Tax Foundation since 1937 and generations of economists since then, and before, going back to Adam Smith. Particularly, the following four questions arise regarding Chairman Camp’s plan (or any tax reform proposal):
1. Does it make the tax code simpler?
The complexity of the tax code is apparent to virtually everyone. It’s 70,000 pages long, 4 million words, sits a foot tall when printed, takes over 6 billion hours for Americans to comply with, etc. Tax reform should reduce significantly these measures of complexity.
2. Does it make the tax code more transparent?
Another problem with our tax code and the tax writing process is the lack of transparency. First of all, many taxes are hidden from the ultimate taxpayers, e.g. corporate taxes are ultimately paid by workers to a large degree. How many taxpayers and how many voters know that? Or ask yourself this: how does Congress decide how much tax revenue a particular bill or proposal might raise? Now imagine how uninformed the average voter is on this. Do voters or members of Congress understand the differences between static and dynamic scoring? Early signs indicate that Chairman Camp’s efforts are leading to a healthy and public debate on these issues.
3. Does it make the tax code more neutral?
The most critical failing of the tax code is the many cases of non-neutral treatment, resulting from years of piling on rewards or punishments for this or that special interest. The most egregious example, and the one most detrimental to long-term economic growth, is the non-neutral treatment of consumption today versus consumption tomorrow. A pure income tax double taxes saving and investment, through corporate taxation, shareholder taxation, and estate taxation. This causes less saving and investment, which means more consumption today but less tomorrow. Because saving and investment are the key to long term economic growth, America is limiting its future with such a relatively heavy reliance on income taxation. Tax reform properly understood addresses at least one of the layers of double taxation of saving and investment, either through reduction of corporate taxes, reduction of shareholder taxes (for example, by crediting shareholders for corporate taxes paid), or reduction of estate taxes. This is what most countries outside the U.S. have been doing for the last 20 years, leaving the U.S. far behind.
4. Does it avoid retroactivity?
As with any law, tax laws should be stable over time and not apply retroactively. This is a basic fairness issue, but it also lets taxpayers better plan their affairs, particularly long-term economic decisions like investment and hiring.
For more on the perils and promise of tax reform, including the growth effects of various changes, see our publication from earlier today.
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For Same-Sex Marrieds, a Tax Season to Look Back
New York Times
Tax season doesn't usually stir up emotions about the meaning of family and equal rights. But this year is different, at least for the tens of thousands of same-sex married couples who, for the first time, will be required to file federal income tax ...
With the rise of e-cigarettes (or vapor cigarettes, as they are also known), states face new complications for their tax codes. Washington State may soon decide that e-cigarettes should be subject to tobacco taxes too.
Tobacco taxes have long ceased to merely compensate for the health risks associated with cigarettes, but have turned into major revenue raisers for states. As such, any decline in tobacco consumption can threaten to reduce state revenues. This pernicious dependence of government services on an officially discouraged behavior is something we have criticized before, and is one of the many problems with the so-called “sin taxes.”
The proposal in Washington State fundamentally alters the tobacco tax. Indeed, it actually redefines the nature of the tax, and changes it to not only any consumable tobacco, but also any electronic product that delivers nicotine. A non-electronic nicotine patch is just fine: but an electronic tobacco-free cigarette is apparently just not just fine. This major change to focus (inconsistently) on nicotine rather than tobacco is significant.
There are justifiable reasons for taxing some products at higher rates. If the consumption of a product imposes uncompensated costs on the rest of society (such as through unregulated pollution or noise) then it may be fair and economically efficient to impose an excise tax equivalent to the difference between the market price and the actual economic costs, or costs to society. The argument for tobacco is that the smoking population imposes costs on the rest of society in the form of shared medical costs of entitlement programs, which are funded by taxpayers, and also in the form of second-hand smoke, which is a cost borne by anyone who walks into a smokey bar.
Whatever the validity of those arguments, however, they have absolutely no application to e-cigarettes. E-cigarettes don’t cause damaging second-hand smoke and don’t include the harmful tar and chemicals that cause lung cancer. Insofar as they substitute for more damaging products, they may actually have positive externalities. Taxing e-cigarettes may make the people of Washington less healthy rather than more. If the relative price of e-cigarettes rises, fewer people will switch away from traditional cigarettes, which means more second-hand smoke and more lung cancer.
Taxing e-cigarettes this way does not make sense. It is rather cynical for legislators to, on the one hand, decry the damage caused by tobacco, especially on young people, and on the other hand add new taxes on a safer alternative.
Read more on cigarette taxes here.
Read more on Washington here.
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Local Investigators Report Spike In Identity Theft Cases During Tax Season
But be warned: the tenacious investigators of the IRS will not stop in their pursuit of those responsible for stealing from the federal government and the American people.” In addressing the taxpaying public, SAC Robnett stated, ... These items were ...
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The Missouri House of Representatives passed House Bills 1295 and 1253 last week, which would change the way the state taxes individual and corporate income, respectively. Unfortunately the bills include distortionary carve-outs and fail to address the state’s severely antiquated individual income tax code.
House Bill 1295
HB 1295 very slightly reduces Missouri’s top income tax rate. The Show-Me state currently has ten brackets, with a top rate of 6 percent kicking in at just $9,000 of income. In particular, HB 1295 would drop the top rate from 6.0 percent to 5.3 percent over a period of seven years beginning in 2015. Each year, if the state meets certain revenue requirements, the rate would decrease by one-tenth of one percent.
Overall, this would only reduce the number of brackets from ten to nine—a barely noticeable change. We noted that this was a “glacial pace” when we discussed a similar plan last year, and that critique still stands.
Instead, Missouri should do one of two things: reduce the number of brackets, or increase bracket levels so that they reflect the current economy (or both). Since the top rate kicks in at just $9,000, it is likely that a large majority of taxpayers fall in the top bracket. The other nine brackets just add unnecessary complication and don’t make the code any more progressive. Instead, Missouri should consider a single-rate individual income tax with a generous personal exemption.
It’s also worth noting that an ideal code, brackets should also be indexed for inflation to prevent bracket creep over time—something that the Missouri tax code fails to do. Unfortunately, an amendment offered to inflation-adjust brackets was not adopted.
House Bill 1295 would also create a pass-through business income deduction (phased in over a period of five years with a maximum deduction of 50 percent of business income) and an additional low-income deduction of $1,000 for taxpayers with state adjusted gross income of $20,000 or less. There would be no need to do either of these things if brackets didn’t kick-in at such low levels of income.
Governor Nixon noted in his State of the State address that he would “not support anything that takes money out of our classrooms,” reminding lawmakers of his income tax cut veto last year. According to the Associated Press (AP):
Nixon said last week that he’s willing to sign legislation cutting individual income taxes by up to one-half of a percentage point, but only if certain contingencies are included to protect funding for schools. Nixon also has objected to the proposed tax break for business income, saying it rewards “creative accounting instead of a hard day’s work.” He has threatened to veto any bill that doesn’t abide by his parameters.
I expect that the amendment passed diverting more revenue towards education was meant to partially assuage the Governor’s first concern. Governor Nixon is correct in his critique of the business tax break. Special carve-outs like this simply encourage individuals to structure themselves as pass-through entities for tax reasons, even if there is no economic or business reason for doing so. A better option would be to apply this deduction to all types of businesses, regardless of their type.
Once the provisions were fully phased, HB 1295 would reduce general fund revenues by just over $700 million.
House Bill 1253
HB 1253 would make changes to Missouri corporate income tax rates, contingent upon certain revenue requirements. The rate would be lowered from the current level of 6.25 percent to 3.125 percent over a five-year period. Similar reductions would be made to the state’s Bank Tax rate, as well. (The Bank Tax is levied at a rate of 7 percent of net income on financial institutions. Ninety-eight percent of revenues go to local governments and the remaining two goes to the State General Fund.) Missouri only obtains 1.4 percent of its total state and local tax collections from the corporate income tax, so a rate reduction is both smart and feasible.
Not so smart is the bill’s creation of a business income deduction similar to HB 1295. It also would be phased-in over five years, contingent upon revenue requirements. Overall, HB 1253 is expected to reduce general fund revenues between $71.9 and $347.3 million.
Though I commend Missouri lawmakers for realizing their tax system is flawed, there are better ways to change it than what was passed by the House. Most of the problems lawmakers are trying to fix with these bills stem from an outdated individual income tax system. Rather than try to pick away at the negative effects that result from it (such as implementing the pass-through deduction and the new low-income deduction), they should consolidate brackets and adjust them for inflation. The lower corporate rate is a good move, but the Kansas-style pass-through income carve-out isn’t.
Both bills passed the House, with members voting on party lines. They now await action in the Senate. AP reported earlier this year that a Senate panel was favorable to income tax cuts and even had a bill similar to the House version (SB 509). But the St. Louis Post-Dispatch reported that a “clash” with the Senate was “likely” since many Senators want bolder cuts and special interests abound.
More on info on both bills can be found below.