Treasury Secretary Jack Lew said during the Senate Finance Committee's annual hearing on the President's Budget on February 10, 2016, that the Administration continues to view bipartisan agreement on business tax reform as a high priority and the ideal way to address inversions, which urgently require legislative action.

"[W]e're seeing more and more stories of companies going overseas, large companies — we can't wait a year to deal with this. We need to deal with this and deal with it now ... " Lew said. "I don't want to be leaving in a year watching more companies having moved overseas and I don't think anyone in this committee wants to look at that either. And the answer is you need legislation."

Lew was responding to Senator Chuck Schumer (D-NY), who, following his endorsement of an international tax reform framework in July 2015 with Senator Rob Portman (R-OH), said he is trying to bridge the partisan divide over the issue and remains "at the table ready to work." Schumer said the steep increase in the revenue estimate for the Administration's 19% minimum tax proposal to $350 billion/10 years from $206 billion in last year's budget should be a "warning signal or shot across the bow" to policymakers. Lew said the updated figure reflects an estimate of how much money is kept overseas and the degree to which it is subject to tax overseas.

Schumer said the Administration and many Democrats in Congress agree that at least some of the revenue associated with international tax reform must be dedicated to infrastructure investment, without which "it's going to be hard to pass something." Under the FY 2017 Budget, $176 billion of the total $300 billion/10 years generated by the proposed 14% one-time tax on previously untaxed foreign income would be dedicated to the 21st Century Clean Transportation Plan. A new $10.25 per barrel fee on oil to be paid by oil companies would provide an additional $319 billion/10 years for the plan.

Secretary Lew said such tax reform revenue should be dedicated to a one-time expenditure such as infrastructure investment, which has broad bipartisan support, because it cannot be used to cut rates without creating a system that loses revenue in the long run. "If we're going to ever get a business tax reform bill that has real bipartisan support, it has to include the infrastructure investment," he said. Senator Schumer said Speaker Paul Ryan (R-WI) understood that in negotiations last year. "I just hope that people on the other side won't pull away from that because it will make it much harder to pass," he said.

Both current House Ways and Means Committee Chairman Kevin Brady (R-TX) and Senate Majority Leader Mitch McConnell (R-KY) have said they want revenue from tax reform to be used solely for rate reduction.

Senator Dean Heller (R-NV) asked whether further investment is necessary given enactment of a five-year highway bill in 2015. Lew said the five-year bill was important but did not have sufficient funding for necessary expansions of infrastructure.

Other members raised the issue of international tax reform, including Senator Portman, who expressed concern about the competitiveness of the US tax system in contributing to inversions, and said something must be done this year. "I think if we wait a couple of years, which is what a lot of people are saying, we're going to lose so many more businesses. In fact, about every week or so we're going to lose one ... " he said.

As he did during a later hearing with IRS Commissioner John Koskinen, Ranking Member Ron Wyden (D-OR) called for cracking down on the "tax avoidance schemes" that result in the $67 billion annual corporate tax gap. He also noted the difference between the taxation of wage and investment income and asked whether the Budget does anything to close that gap. Secretary Lew said some proposals are repeats from prior budgets, like increasing the capital gains tax rate and addressing stepped-up basis, and mentioned the new proposal intended to ensure that the business income of high-income taxpayers does not escape self-employment taxes or the 3.8% net investment income tax.

Senator Heller also inquired about the 40% tax on high-cost health plans, also called the "Cadillac Tax," which the Budget proposes to revise by attempting to adjust for geographic variations. The proposal would change the threshold so the tax does not exceed the average cost of a "gold" level exchange plan in the state. Senator Heller expressed concern that the change would not affect his constituents and also asked whether any other tax has such a geographic adjustment, which Secretary Lew did not immediately respond to.

In an opening statement, Chairman Orrin Hatch (R-UT) said he does not believe the Administration has been straightforward about the nature of the debt restructuring authority it is seeking for Puerto Rico. "Specifically, the Administration is advocating to provide unprecedented debt restructuring authority to Puerto Rico with an explicit preference for public pension liabilities over debt issued by the Puerto Rican government, even though the Territory's current constitution gives preference to some of those latter debts," he said. With regard to Puerto Rico's debt crisis, Chairman Hatch said he is going to "come up with a different bill than the one we filed which would do the job to a large degree, or at least get us started on it in time to do it even more thoroughly."

Member statements and Secretary Lew's testimony are attached.

———————————————
ATTACHMENTS

Full Text of Hatch Statement

Full Text of Lew Statement

Full Text of Wyden Statement