This week (June 27 - July 1)

Senate in, House out: The Senate is in session but the House is in recess.

Last week (June 20-24)

Tax reform blueprint: The House Tax Reform Task Force Blueprint on comprehensive tax reform released by House Speaker Paul Ryan (R-WI) and Ways and Means Committee Chairman Kevin Brady (R-TX) June 24 proposes a 20% statutory corporate tax rate, a 25% business tax rate for pass-through entities, a move toward a cash-flow consumption tax through immediate expensing for all businesses and a limitation on business interest deductions, a territorial international tax system, a border tax adjustment mechanism, and elimination of most business tax preferences aside from the R&D tax credit and LIFO. 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 that would lower rates for businesses and individuals and would 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 details missing as the Committee works to draft legislative language based on the Blueprint for a tax reform bill by the end of the year, for legislative action in 2017. There is no accompanying legislative text to the Blueprint and therefore no conventional revenue estimate, though the plan 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 by 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 deductibility of net interest expense. 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.

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 transition tax of 8.75% on previously untaxed accumulated foreign earnings held in cash or cash equivalents, and 3.5% on all other accumulated earnings, with tax liability payable over an eight-year period. It also calls for a move to a destination-basis tax system, under which border adjustments exempt exports from tax while taxing imports. 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 use border adjustments, prohibited with respect to income taxes under World Trade Organization rules, to counter those that other nations apply in their value-added tax regimes. The goal of exempting exports from US tax and taxing imports regardless of where they are produced is to 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.

For individuals, rates would be set at 12%, 25%, and 33%. The deductibility of mortgage interest and charitable donations would be retained — modifications will be considered by Ways and Means — but other itemized deductions (including the deduction for state and local taxes) would be repealed. "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.

Reaction to Blueprint: There has already been some reaction to the House Republican tax reform plan from other lawmakers. Senate Finance Committee Ranking Member Ron Wyden (D-OR) released a statement saying: "There is no question it's long past time that we reform our badly broken and overly complicated tax code. Few would disagree that we need a fresh set of simple rules that creates good jobs at home, helps our country compete and win internationally and is fiscally responsible. Any serious, bipartisan reform effort must help all hard working Americans get ahead. The House GOP's framework goes in the opposite direction, allowing the privileged few to push what they rightfully owe onto the backs of middle class families."

Ways and Means Democrats on Section 385 regulations: House Ways and Means Committee Ranking Member Sander Levin (D-MI) and other Committee Democrats wrote to Treasury Secretary Jack Lew June 22 asking for consideration of whether "exceptions or special rules, including transition rules," are appropriate for proposed debt-equity regulations under Section 385. The letter expressed support for guidance in the area to combat "aggressive tax planning designed primarily to reduce a corporate taxpayer's U.S. income tax liability," but said there may be "a number of unforeseen circumstances in which the regulations could adversely affect ordinary course business transactions between related parties in the absence of tax avoidance motives." It mentions concerns raised about challenges certain business sectors, including financial services, insurance, and utilities, may encounter in implementing the regulations due to various regulatory requirements unique to those industries. "We also have been informed that there are broader concerns related to various internal cash management practices such as cash pooling, and appreciate that Treasury is continuing to examine the effect of the proposed regulations on those practices," the letter stated. The letter, signed by 10 other Democratic members of the Committee in addition to Levin, also requests an opportunity to meet with the Secretary to discuss concerns related to the regulations, prior to the close of the comment period if possible.

Public hearing: Meanwhile, the IRS announced a public hearing on the Section 385 proposed regulations, to take place on Thursday, July 14, at 10:00 a.m.

Presidential race: Tax policy also figured prominently in the presidential race, as presumptive Democratic nominee Hillary Clinton delivered a pair of speeches on consecutive days criticizing the economic proposals of presumptive Republican nominee Donald Trump, then advocating her own ideas. In a June 21 speech in Columbus, OH, Clinton portrayed Trump's tax plan as a giveaway to the rich. "He'd give millionaires a $3 trillion tax cut. Corporations would get $2 trillion more …" she said. "Now, even in this era of rising inequality, this is like nothing we've ever seen. Now, you and I know that the wealthiest Americans and the biggest corporations don't need trillions of dollars in tax cuts." The following day, in Raleigh, NC, Clinton promoted her proposals to claw back benefits for companies that outsource jobs to other countries, impose an exit tax on inverting companies, and increase taxes for high-income individuals. "When people say the game is rigged, the best evidence is the tax code," she said. "It's riddled with scams, loopholes and special breaks, like the carried interest loopholes that lets some hedge fund managers pay a lower tax rate than a teacher or nurse." In his own speech June 22, Trump mentioned tax reform as a priority for his first 100 days in office. "We'll pass massive tax reform to create millions of new jobs and lower taxes for everyone," he said. "And we are, by the way, the highest-taxed nation in the world. Please remember that."

Quote of the Week

"For the first time in history, we'll change the way America taxes its businesses so they can compete and win, whether on Main Street or in Madrid. And when they win, they will not be charged one dime to bring those profits back home here to America to be invested in good jobs, research and growth. For the first time we'll end the penalties in the current tax code that too often force American companies to move their jobs, their technologies and headquarters overseas. No longer will we be the only major country that still taxes its own exports. No longer will American products lose out to foreign competitors simply because they are proudly stamped 'Made in America.' For the first time, local businesses will be able to immediately write off unlimited investments in buildings, equipment and technology." — House Ways and Means Committee Chairman Kevin Brady (R-TX), June 24

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