Senate Tax Revamp Gains Traction

WASHINGTON—Republican efforts to overhaul the U.S. tax code gained momentum Tuesday when two key Senate Republicans expressed optimism about supporting the bill and a congressional committee advanced the measure for a vote on the Senate floor later this week.

Republican progress toward overhauling the nation’s tax code came while President Donald Trump squabbled with Democrats over spending legislation needed to prevent a government shutdown next month. The Senate Budget Committee approved the tax measure, 12-11, along party lines.

Mr. Trump in a twitter post on Tuesday morning dismissed striking a deal with congressional Democratic leaders Rep. Nancy Pelosi of California and Sen. Chuck Schumer of New York. Both lawmakers then skipped a meeting in the afternoon with Republican congressional leaders and the GOP president to discuss the impasse.

Investors cared more about the tax developments than the spending impasse. Stocks rallied on signs Republicans will complete their tax overhaul, pushing the Dow Jones Industrial Average up 255.93 points, or 1.09%, to a record high of 23836.71. The Dow is up five of the past six days and 20.62% so far this year.

“I think it’s going to pass,” Mr. Trump said, referring to the tax bill. He added there would be “lots of adjustments before it ends.”

Senate Republicans don’t yet have 50 votes locked down for the tax plan and are in the midst of completing agreements that accommodate an array of lawmaker concerns. But they emerged from a lunch meeting with the president expressing confidence about getting the votes they need.

“Everybody said the same thing,” said Sen. Mike Rounds (R., S.D.) after a lunch with Mr. Trump on Tuesday. “They all said, ‘We want to get to yes. We want to get to yes.’”

Senate Republican leaders have been trying to address the concerns of several groups of wary lawmakers in their own party, including Bob Corker of Tennessee and Susan Collins of Maine. On Tuesday they appeared to have made substantial progress.

If the Senate passes the bill this week, a House-Senate agreement on reconciling the two chambers’ competing versions of the measure would be the only remaining obstacle to completion.

The Senate tax bill would lower the corporate tax rate to 20% from 35%, repeal the alternative minimum tax, shrink the estate tax and lower individual rates. The individual tax cuts would expire after 2025, while the corporate tax cuts would remain in place, leaving about half of households worse off by 2027 than if Congress did nothing.

The plan would increase budget deficits by $1.4 trillion over a decade, plus additional interest costs. That price tag—created under an agreement Mr. Corker made earlier this year—is causing new concerns for Mr. Corker, who said he is concerned about deficits. Sens. Jeff Flake (R., Ariz.) and James Lankford (R., Okla.) said they shared the same concern.

Mr. Corker is worried the tax cuts won’t trigger the additional economic and revenue growth that many Republicans are expecting from their overhaul. He said he and other senators had an outline in place for an agreement to create an automatic mechanism that would alter the tax cuts if the plan doesn’t produce the expected growth and revenue results.

“I think we’ve come to a pretty good place,” Mr. Corker said. “We’ve got an outline of an agreement at every level that matters in the Senate to make it happen.”

Mr. Corker didn’t provide details of how that would work, and other senators said they were still negotiating the particulars. Still, the idea of potentially triggering tax increases down the road was running into opposition from some conservatives, including Americans for Prosperity, Americans for Tax Reform and Rep. Tom Cole (R., Okla.).

“I’m not going to vote to impose automatic tax increases on the American people,” said Sen. John Kennedy (R., La.) “I’d rather drink weed killer than do that.”

Ms. Collins said Tuesday that she was optimistic that there would be a way to address many of her concerns, including a deduction of up to $10,000 for property taxes.

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Ms. Collins said lawmakers were still determining how they would pay for adding the property-tax deduction. She had proposed keeping the top individual tax rate at 39.6%, instead of the 38.5% currently in the Senate bill for couples making at least $1 million, but she said there was no consensus over that idea.

Under current law, taxpayers who itemize their deductions can subtract state and local income or sales taxes as well as property taxes, but Republicans want to curb that break to pay for rate cuts. The Senate bill would repeal the deduction. The House bill preserves the $10,000 property tax break, a concession to Republicans from high-tax states.

If the Senate includes that property-tax deduction, House Republicans would have an easier time passing a final bill.

Ms. Collins has been objecting to a provision of the tax bill that would repeal the mandatethat individuals have health insurance. Ending the mandate would save the government money because fewer people would get insurance and the government would spend less on Medicaid and insurance subsidies.

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On Tuesday, Ms. Collins said she secured an agreement to vote on bipartisan legislation to stabilize the individual insurance market, helping ease her concerns. Mr. Trump had opposed that bill earlier this year, but told GOP senators on Tuesday he would support it, lawmakers said; the White House didn’t respond to a request for comment on that issue.

Republicans have 52 votes in the Senate and they can lose only two votes, assuming all Democrats vote no. There are several groups of wavering Republicans, but the statements by Mr. Corker and Ms. Collins move Republicans closer to locking those down.

At the Budget Committee vote, Sen. Ron Johnson (R., Wis.), who has said he opposes the bill because it doesn’t cut taxes deeply enough for pass-through businesses such as partnerships and S corporations, voted to move it forward.

Democrats said Republicans’ haste in moving a $1.4 trillion tax cut through Congress contradicts their own years of warnings about the economic harm of budget deficits.

“Where are all those deficit hawks now? Where are those charts and graphs?” said Sen. Patty Murray (D., Wash.). “Where is the moral outrage? Where is the concern for our children and grandchildren now?”

Republicans counter that tax cuts will spur enough economic growth to pay for themselves, even though independent estimates of their plans haven’t shown that.

The nonpartisan Joint Committee on Taxation may release its projections about the bill’s economic effects as early as Wednesday.

Thomas Barthold, the committee’s chief of staff, said in a letter that those estimates would assume that the Federal Reserve would respond aggressively to the tax bill by raising interest rates.

Such an assumption suggests that the JCT’s growth estimates will be modest, muted by projections of higher interest rates.

—Siobhan Hughes
and Peter Nicholas contributed to this article.