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The long-awaited Blueprint on comprehensive tax reform released on June 24, 2016, by the House Republican Task Force on Tax Reform — led by House Speaker Paul Ryan (R-WI) and Ways and Means Committee Chairman Kevin Brady (R-TX) — proposes a 20% statutory corporate tax rate, a move toward a cash-flow consumption tax through immediate expensing and a limitation on business interest deductions, a border tax adjustment mechanism, a territorial international tax system, and elimination of most business tax credits aside from the R&D tax credit.

"The Blueprint generally will eliminate special-interest deductions and credits in favor of providing lower tax rates for all businesses and eliminating taxes on business investment," the document stated. Addressing one of the most controversial aspects of tax reform — how to treat pass-through businesses taxed at the individual level that would not benefit from a corporate rate cut — the plan would provide a new 25% business tax rate for sole proprietorships and pass-through entities.

The sixth and final plank of Speaker Ryan's "Better Way" campaign to provide voters policy choices ahead of the upcoming political conventions and the November elections, the Blueprint for "A Pro-Growth Tax Code for All Americans" is organized as a policy paper with some, but not nearly all, details of a plan to lower rates for businesses and individuals through base broadening and to change how the foreign earnings of US-based multinational corporations are taxed.

Ways and Means Committee staff has indicated they want to work with stakeholders to help fill in the many details missing from the Blueprint. Chairman Brady said in a news conference that members are inviting comments from the public and businesses as they prepare a tax bill that can be considered in 2017. There is no accompanying legislative text to the Blueprint and therefore no conventional revenue estimate, though the plan's authors claim it is intended to be revenue neutral under a "current policy" baseline if its macroeconomic effects are considered.

The Blueprint proposes a move toward a cash-flow approach for business taxation and a consumption-based tax, in the vein of the American Business Competitiveness Act (H.R. 4377) introduced in January by Ways and Means Committee member Rep. Devin Nunes (R-CA). Like the Nunes bill, the Blueprint calls for 100% expensing of all capital expenditures for tangible and intangible assets (including buildings but not land), and elimination of interest expense deductibility for most non-financial businesses by denying the deduction for net interest expense. Although disallowing only net interest expense deduction generally would exempt financial services companies (which tend to have more interest income than interest expense), the document says that the Ways and Means Committee will work to develop rules with respect to interest expense for financial services companies — including banks, insurance companies, and leasing operations — to take into account the role of interest income and interest expense in these business models.

The Blueprint envisions that immediate expensing of business investment would operate "as a more beneficial and more neutral substitute" for the deductibility of interest expense. A deduction for interest expense will be allowed against interest income, and any net interest expense would be carried forward indefinitely and allowed as a deduction against net interest income in future years. "The elimination of deductions for net interest helps to equalize the tax treatment of different types of financing and reduces tax-induced distortions in investment financing decisions," the document stated.

Net operating losses (NOLs) would be allowed to be carried forward indefinitely, but carrybacks of NOLs would not be permitted and the deduction allowed with respect to an NOL carryforward in any year would be limited to 90% of the net taxable amount for such year determined without regard to the carryforward. The last-in/first-out method of accounting would be preserved.

International

As part of the move to a territorial tax system with a 100% exemption for dividends paid from foreign subsidiaries, the Blueprint calls for a 8.75% tax rate on previously untaxed accumulated foreign earnings held in cash or cash equivalents, and a 3.5% tax rate on all other accumulated earnings, with tax liability payable over an eight-year period. This is the same tax treatment of accumulated foreign earnings called for under former Ways and Means Committee Chairman Dave Camp's (R-MI) Tax Reform Act of 2014.

The Blueprint also calls for a move to a destination-basis tax system, under which border adjustments exempt exports from tax while taxing imports, placing the tax jurisdiction as the location of consumption rather than production. The document cites the move toward a cash-flow approach for business taxation and a consumption-based tax as the basis for allowing the United States to counter border adjustments that other nations apply in their value-added tax regimes. Exempting exports from US tax and taxing imports regardless of where they are produced will eliminate incentives for US businesses to move or locate operations outside of the United States under a territorial tax system, according to the Blueprint, and therefore make it unnecessary to also include new anti-base erosion measures. The plan would also allow US goods, services, and intangibles to compete on a more equal footing globally, the document stated.

The move toward a consumption-based, cash-flow focused approach for taxing business income would permit the use of border adjustments, which are currently prohibited with respect to income taxes under World Trade Organization rules, the Blueprint said. The document adds that the destination-based territorial approach would allow the bulk of the current subpart F rules, including foreign base company income rules, to be eliminated. Only foreign personal holding company rules would "continue to play a role in addressing potential abuse and will be retained under this Blueprint," the document stated.

Individuals

For individuals, rates would be set at 12%, 25%, and 33%. The deductibility of mortgage interest and charitable donations would be retained, but other itemized deductions (including the deduction for state and local taxes) would be repealed. With regard to the deductions for mortgage interest and charitable donations, the Blueprint states that the Ways and Means Committee will consider options for modifying these deductions. (The exclusion for employer-provided health care is addressed in a separate health care policy paper.)

"Numerous other exemptions, deductions, and credits for individuals riddle the tax code, making it less fair for those who cannot take advantage of such provisions and more complicated for everyone … " the Blueprint stated. "This Blueprint will repeal these special-interest provisions to make the system simpler, fairer, and flatter for all families and individuals."

A 50% deduction would be provided for capital gains, dividends, and interest income, leading to basic rates of 6%, 12.5%, and 16.5%, the Blueprint stated. The alternative minimum tax and the estate tax would be repealed. The plan calls for the Ways and Means Committee to work to simplify and consolidate current tax provisions for higher education and retirement savings.

Highlights of House Republican tax reform Blueprint

IRS

The Blueprint calls for a new streamlined Internal Revenue Service centered on three major units: families and individuals, businesses, and an independent "small claims court" unit intended to allow routine disputes to be resolved more quickly. The new IRS will be headed by a newly appointed Administrator with the objective of managing the agency and administering the tax code "in an impartial, non-political manner for the benefit of American taxpayers."

The Administrator would be appointed by the President, with the advice and consent of the Senate, and would have a term of three years. The President would be able to reappoint the Administrator only once. The Blueprint also calls for the new IRS to have modern information systems, enabling taxpayers to communicate with the Service in an easy and efficient manner.

Path forward

Ways and Means staff have indicated that, with stakeholder input, they aim to draft legislative language based on the Blueprint for a tax reform bill by the end of the year. A "Path Forward" section of the Blueprint said stakeholder comments will affect the final legislation to be developed and ready for legislative action in 2017. The Ways and Means Committee Website includes a mechanism for submitting comments.

The Blueprint is attached.

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ATTACHMENT

Blueprint