March 20, 2017 EY Center for Tax Policy: This Week in Tax Reform for March 17 This week (March 20-24) Congress in: The Senate and House are in session. The Senate agenda could include work on nominations and Congressional Review Act disapproval resolutions. The House will continue its focus on the American Health Care Act, possibly to include consideration in the Rules Committee and on the House floor. Last week (March 13-17) Congress continues to focus on Affordable Care Act (ACA) repeal and replace legislation, which cleared another hurdle this week with approval by the House Budget Committee. The American Health Care Act still faces challenges in the full House and Senate, as Republican leaders and the White House navigate the competing concerns of moderates and conservatives. The fate and timing of the effort has the following ramifications for tax reform, as Republican leaders and others have noted: the health reconciliation bill must be resolved before they move forward with the process for tax legislation; repealing ACA taxes would mean the associated revenue need not be addressed in tax reform; and the duration and difficulty of the ACA debate could have political effects on other agenda items. Ryan on ACA, tax reform: On Fox News March 13, House Speaker Paul Ryan (R-WI) said not enacting an ACA repeal/replace bill would complicate tax reform. "It puts us about a $1 trillion further down the path or away from doing tax reform. So, it's a very important point," Ryan said. "We can't get to the next budget either, which is where tax reform is done. So, it really would gum up the works and it would make tax reform that much harder to achieve because we'd have all these Obamacare taxes to deal with as well." On Fox Business News a day later, Speaker Ryan said Congress could not have undertaken tax reform prior to health care legislation because, "Our committees, frankly, weren't ready to be able to write tax reform in this space of time. They're getting ready now. They're still working on it. And more importantly, it would have been a trillion dollars more difficult to do tax reform had we done that first. That's a big deal." Asked about the disparity between the 20% statutory corporate income tax rate in the House Republican Blueprint on tax reform and the 15% rate targeted by President Trump, Speaker Ryan said, "We believe we can have a revenue neutral tax reform bill with a corporate tax rate of 20% but we don't think 15 gets there. I would love to do 15%; if we could do 15%, we'll do 15%. But the bill has to be revenue neutral for us to avoid a filibuster." Under reconciliation rules that afford Senate passage with 51 votes, legislation can't lose revenue beyond the budget window unless it includes a "sunset" after 10 years, like the Bush tax cuts. Asked about the border adjustability proposal in the House Blueprint, Ryan stated that the proposal, "gets you a trillion dollars of base broadening from outside the domestic tax base; if you don't border adjust then you have to get that trillion dollars from within the US domestic business tax base." Asked whether provisions under tax reform would be retroactive to January 2017, he said, "This bill hasn't been written yet so it's way too premature to say. Let me put it to you this way, we want to do that." During a March 17 National Review event, Speaker Ryan said tax reform in his view means getting manufacturing going again. He said the destination-based cash flow tax proposed by House Republicans is "another way of saying a consumption tax, but as conservatives we don't want to have a VAT tax, we don't want to have the kind of consumption tax that's sneaky with respect to the size of government." Asked whether President Trump will back border adjustability, the Speaker said, "This whole thing is a long conversation about how do we get to the 'sweet spot' where we all agree." Trump's campaign plan was similar to the House Blueprint with some notable detail differences that they are still working on, he said: "We are getting closer and closer and closer." Border adjustability scrutiny: The House border adjustability proposal continues to raise concerns in the Senate. During a March 14 Finance Committee hearing on the nomination of Robert Lighthizer to be the United States Trade Representative, Senator Ben Cardin (D-MD) said past efforts to neutralize border adjustments in the context of trade legislation have been made difficult because the United States has "not harmonized with the international community in the use of a consumption tax." Appearing to reference the House border adjustability tax proposal, Senator Cardin, who has advocated a progressive consumption tax, said it is difficult to see the United States winning too many cases in the WTO with something that is an income tax but that we call a consumption tax. Bloomberg BNA March 16 quoted Senator Cardin as saying his tax plan has been attracting interest recently, and as expressing confidence that negotiations could resolve differences between his plan and that of Rep. Jim Renacci (R-OH). Renacci noted similarities with Cardin's bill last summer when he outlined his proposal to eliminate the corporate income tax in favor of a consumption tax in the form of a 7% business activity tax. Both plans are similar to a credit-invoice value-added tax. There has also been some attention paid to a proposal by Alan Viard of the American Enterprise Institute and Eric Toder of the Urban Institute to replace the corporate income tax with taxation at ordinary income rates of dividends and net accrued capital gains of American shareholders. Murkowski concerned: Senate Energy and Natural Resources Committee Chairman Lisa Murkowski (R-AK) has joined the group of Senate Republicans with concerns about border adjustability. "I'm not interested in anything that is going to increase the price of gasoline in Alaska. I think [a border tax] is something we need to look at very, very critically," she told a conference in Houston March 10, Politico reported. White House 'skinny' budget: The White House March 16 submitted to Congress a "skinny budget" for FY2018 that provided details only on discretionary funding proposals, including cuts to federal agencies and a $54 billion increase in defense spending. It does not address tax proposals. "The full Budget that will be released later this spring will include our specific mandatory and tax proposals, as well as a full fiscal path," the budget document stated. The level of detail on tax and other proposals that will be provided in the full Budget, expected in May, is not yet clear. Administration officials have continued to say that they are working on a tax plan. "The Administration will provide more budgetary, tax, and legislative details in the coming months," the document stated. Administration focused on reciprocal policies: During a joint news conference with German Chancellor Angela Merkel March 17, President Trump said they would be discussing the economic partnership between the two nations. "We must work together towards fair and reciprocal trade policies that benefit both of our peoples," the President said. "Millions of hard-working US citizens have been left behind by international commerce, and together, we can shape a future where all of our citizens have a path to financial security." Treasury Secretary Steven Mnuchin's participation in the G20 finance meeting in Baden-Baden, Germany beginning March 17 focused some attention on President Trump's "America First" views on trade and taxes. A March 16 Reuters story cited German Finance Minister Wolfgang Schaeuble as saying he would ask Mnuchin about any plans for tax reform and a border adjustment tax. "The president is interested in making sure that our agreements are reciprocal, they're fair and reflective of making sure that the American worker is at least on the same playing field and can compete, whether it's in the business tax side" or trade agreements, Mnuchin said at a joint news conference, according to a Bloomberg report. He also stated, "It is not our desire to get into trade wars." Debt limit: The federal debt limit suspension ended March 15, though the Congressional Budget Office has said extraordinary measures can allow Treasury to meet financial obligations through sometime in the fall. A March 16 letter from Secretary Mnuchin notified Congress of extraordinary measures being utilized, and followed a similar March 8 letter urging lawmakers to raise the debt limit. JCT on tax system: On March 15, the Joint Committee on Taxation issued an annual report, Overview of the Federal Tax System as in Effect for 2017 (JCX-17-17). House Ag. Hearing: The March 15 House Agriculture Committee hearing, "Agriculture and Tax Reform: Opportunities for Rural America," was postponed and has not been rescheduled. Quote of the Week "We know what our competitors are doing in China, Europe, Mexico, Canada, and so the goal is to make sure we leapfrog back into that lead pack of the most pro-growth tax codes on the planet. To do that, rates alone aren't enough — they can help, but they're not enough because our competitors are driving much newer, faster models of tax codes. That's why we have to stop taxing worldwide. That's why we have to border adjust our taxes so that we can get into a competition and win worldwide." — House Ways and Means Committee Chairman Kevin Brady (R-TX), March 17 ———————————————
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