The Senate Finance Committee held a hearing (April 26, 2016) on "Navigating Business Tax Reform" focused largely on the business tax working group's report from last year, though members did speak up in favor of international tax reform that some witnesses said is necessary in order for US companies to be competitive.

Senator Rob Portman (R-OH) referred to a recent Senate floor speech in which Chairman Orrin Hatch (R-UT) said there was a "glimmer of hope" with the recommendations of the leaders of the International Tax Reform Working Group last year, though its prospects were threatened "by the politics of the moment." Portman, who headed the group with Senator Chuck Schumer (D-NY), said without reform, the uncompetitive international tax system means the United States will keep losing workers and does not take advantage of the $2 trillion-plus locked up overseas. "We have got to get beyond the politics of the moment," Portman said.

Senator Schumer said during the hearing that he remains ready to work with Chairman Hatch to get something done on the international side first, possibly even this year.

Leaders of the Committee also focused on their own respective tax reform interests. In drawing attention to the work of the Business Income Tax Working Group, led by Senators John Thune (R-SD) and Ben Cardin (D-MD), Chairman Hatch noted his forthcoming proposal on corporate integration that seeks to eliminate double taxation of certain corporate business earnings. Ranking Member Ron Wyden (D-OR) highlighted his Cost Recovery Reform and Simplification Act of 2016, released today, that would replace current rules with "six categories for depreciation that are easy to work with."

The Business Income Tax group report that was released last summer, along with the International leaders' framework and three other reports, endorsed reducing the corporate tax rate without specifying a target rate and discussed the patent/innovation box concept and cost recovery issues, among other topics.

Witnesses at the hearing were:

— Mr. Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation, Congress of the United States, Washington, DC

— Dr. James R. Hines, Jr., L. Hart Wright Collegiate Professor of Law and Richard A. Musgrave Collegiate Professor of Economics, University of Michigan, Ann Arbor, MI

— Mr. Sanford E. Zinman, CPA, Owner, Sanford E. Zinman, CPA, PC, Tarrytown, NY

— Ms. Gayle Goschie, Vice President, Goschie Farms, Inc., Silverton, OR

— Dr. Eric Toder, Institute Fellow, Co-director, Urban-Brookings Tax Policy Center, Urban Institute, Washington, DC

In his testimony, Barthold said adopting a US innovation or patent box "presents unique policy and administrative issues, including the types of intellectual property that would qualify (for example, limiting it to patents or expanding it to include a broader range of intellectual property, such as trade secrets); whether a nexus requirement should be adopted to require development of the intellectual property to take place in the United States; how the intellectual property income would be taxed; and identifying what types of intellectual property income will receive preferential treatment." A primary question is whether qualifying income should include income from foreign-use of the intellectual property in question, he said, given that the United States could design an innovation box that requires domestic use.

Hines noted the high US corporate tax rate, and said the worldwide tax system puts US companies at a competitive disadvantage relative to firms from other countries. He also observed that a "promising direction of reform" lies in efforts that more effectively integrate corporate and personal taxes.

Toder said 1986-style tax reform that pays for reducing the corporate rate by broadening the business tax base is an insufficient solution, and that revenue neutrality should not be sought within the business tax base alone; rather, increased taxation of shareholder income and the introduction of new revenue sources should be considered as approaches for paying for a reduced corporate income tax rate.

Zinman discussed the current US business tax structure and its impact on the small and "micro" businesses on behalf of the National Conference of CPA Practitioners. Goschie, whose farm produces hops and wine grapes, advocated simplification of the tax code.

Responding to Portman's remarks about international tax reform, Hines said without it US companies will continue to lose out to foreign businesses. The more vibrant and competitive the American business sector is, the better for workers, he said; we don't have a competitive system so it reduces the productivity of labor.

During questioning from Chairman Hatch regarding his testimony that corporate integration could be a path forward, Hines said it could, but as long as the United States maintains a worldwide system it is never going to be competitive with other nations. Hatch said corporate integration could be complementary to international tax changes.

Asked by Senator Tom Carper (D-DE) whether it makes sense to begin addressing international tax challenges ahead of comprehensive reform, Hines said that should be the approach if the alternative is to do nothing. Responding to Senator Dean Heller's (R-NV) question about how to keep companies in America, Hines said enact a territorial system and lighten business tax burdens. "If you do those two things then you will keep a lot more companies in America," he said. Member statements and witness testimony from the hearing are attached.

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ATTACHMENTS

Hatch statement

Wyden statement

Barthold statement

Goschie statement

Hines statement

Toder statement

Zinman statement