By Richard Rubin

WASHINGTON -- Senate Republicans have been slow and quiet in the tax policy debate this year, overshadowed by dramatic proposals from the House of Representatives and big promises from President Donald Trump.

That's starting to change.

GOP senators are gearing up to shape negotiations over competing ideas from the House and administration and put their own stamp on U.S. tax policy. Senate Finance Committee Republicans met last week with Treasury Secretary Steven Mnuchin and White House economic policy chief Gary Cohn, and both men are to talk taxes on Wednesday with Republicans and Democrats on the panel.

While Republicans are all generally heading in the same direction on taxes, the Senate may be the place where the boldest and most controversial ideas -- the House's border adjustment plan, Mr. Trump's 15% corporate tax rate -- get sanded down.

"We have to work within the parameters of what's achievable and what's realistic," said Sen. John Thune (R., S.D.). "There will be different ideas coming in from different directions but eventually hopefully we'll be able to distill all those and come up with something that can get 51 [votes] in the Senate."

Mr. Thune, the third-ranking Republican in the Senate, is releasing a bill Wednesday that's his entry in that effort, a plan on deductions for business capital expenses that could be folded into a broader Senate tax proposal.

With a 52-48 margin in the Senate and Democrats being dead set against plans they describe as most beneficial for the wealthy, Republicans can lose just two of their own members on a budget that sets the outline of a tax overhaul and then again on the tax bill itself.

They'llhave a limited window to act between the end of the health-care debate and the beginning of the 2018 political season.

Mr. Thune's bill would give companies an incentive to invest with provisions that allow firms to write off such investments as equipment purchases. His bill would make permanent a temporary provision of the tax code that allows them to write off 50% of such purchases in the first year of an investment, on top of existing depreciation deductions. He would allow 100% first-year write-offs for small companies by raising a $510,000 limit for deducting capital expenses to $2 million. That deduction would phase out completely for companies spending more than $5 million.

Mr. Thune's approach, which focuses the benefit on smaller firms, is a narrower alternative to a House Republican plan, which would let all companies deduct capital expenses in the first year.

The 100% write-off for all companies is one of the most pro-growth elements of the House plan, said Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee.

"It is all about driving productivity and investment, which really drives wages in the U.S. economy," he said on Tuesday. "We'll continue to bring that proposal and our ideas on how to unleash business investment to the table."

Mr. Thune also parts with House Republicans on the treatment of corporate interest payments. House lawmakers want to repeal the deductibility of interest on debt. Mr. Thune says he's looking at limits on the deduction for interest costs. But he's against a complete repeal in part because it would hurt the debt-dependent agricultural sector, which has outsize influence in the Senate, where farm states have big sway.

And then there is the House proposal for a border-adjusted tax that would be levied on imports but exempt exports. GOP senators' objections, along with a blistering public campaign by retailers, have dimmed the chances for it.

A similar dynamic could play out on the repeal of the interest deduction, which raises more than $1 trillion and helps pay for corporate tax rate reductions and the plan to incentivize investment.

"The business community is dead set against" a repeal, said Martin Sullivan, chief economist at Tax Analysts, a nonprofit publisher. "They've set up their capital structure based on the advantages of debt and it would take them years and years to unwind that."

Senate Republicans will have their own internal struggles. Some members, such as Pat Toomey of Pennsylvania and Rand Paul of Kentucky, are most focused on reducing tax rates, regardless of its impact on projected revenue. However, Majority Leader Mitch McConnell reiterated his preference for a so-called revenue-neutral bill that would lower rates while leaving the government's overall intake of tax revenue unchanged.

Getting business rates down without repealing the interest deduction or including a border-adjusted tax will be challenging.

"There are going to be critics of any way you try to provide revenues to buy down rates," Mr. McConnell said on Bloomberg TV Tuesday.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

May 16, 2017 19:14 ET (23:14 GMT)

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