This week (May 1-5)

Congress in: The Senate and House are in session. With government funding now expiring after May 5, Congress will be focused on passing a bill extending funding through the remainder of FY2017. Passage of the longer measure will allow for a focus on the FY2018 budget resolution, which may include reconciliation instructions for tax reform legislation. "The day after we sign the bill that keeps the government open for the last five months of the fiscal year — our fiscal year ends the end of September — the discussions begin immediately for the larger budget for the full 2018 fiscal year," White House Budget Director Mulvaney said April 25.

Ways and Means retreat: House Ways and Means Republicans will be holding a tax reform retreat Sunday, April 30-Monday, May 1.

Last week (April 24-28)

Trump tax plan: The Trump administration April 26 outlined a tax reform plan that calls for a 15% business tax rate and a one-time tax on the repatriation of foreign earnings of US companies at an unspecified rate, which Treasury Secretary Steven Mnuchin said would be negotiated with Congress along with many of the other details. The Administration for the first time called for a switch to a territorial system of taxing foreign earnings. Trump had called for a worldwide system and elimination of deferral during the campaign, but had not addressed his preference on the issue for some time. The new plan, as presented by Secretary Mnuchin and National Economic Council Director Gary Cohn during a press briefing, does not address the House border adjustability proposal. At an event sponsored by The Hill newspaper prior to the rollout, Secretary Mnuchin repeated that the Administration likes elements of the border adjustability proposal and dislikes others, and said the Administration has told lawmakers they don't think it works in its current form but they hope to work with them on the issue. At another event, House Speaker Paul Ryan (R-WI) said he recognizes the border adjustability proposal must be modified to avoid disruptions, and that there is agreement with the White House on about 80% of tax reform.

The new plan restates many of the elements of the Trump campaign tax proposal, but pulls back on others. In addition to leaving the repatriation rate unspecified, the plan does not address expensing or interest deductibility. Trump had proposed during the campaign that "firms engaged in manufacturing in the US may elect to expense capital investment and lose the deductibility of corporate interest expense." The Wall Street Journal quoted Secretary Mnuchin as saying that "some level of expensing" is important and that the Administration is cognizant of the fact that "certain industries are very sensitive to interest deductibility, and we want to make sure that we don't do anything that creates uncertainty in the economy."

For individuals, income tax rates would be set at 10%, 25%, and 35%; these are different than Trump's campaign proposal rates of 12%, 25%, and 33%, which were aligned with those in the House Blueprint on tax reform. The plan calls for the repeal of all deductions for individuals aside from the mortgage interest and charitable contribution deductions, and also calls for repeal of the Alternative Minimum Tax (AMT) and the estate tax. "We are going to eliminate most of the tax breaks that are mainly benefits to high-income individuals," NEC Director Cohn said. "Homeownership, charitable giving and retirement savings will be protected, but other tax benefits will be eliminated." The plan calls for roughly doubling the standard deduction to $24,000 per couple. The top capital gains and dividends rate would remain at 20% and the 3.8% net investment income tax, enacted under the Affordable Care Act, would be repealed. The plan also calls for tax relief for child and dependent care expenses.

While some of the President's views and the exact process for enacting tax reform remain unclear, the Administration signaled it will continue its work with Congress and stakeholder outreach. "Throughout the month of May, the Trump Administration will hold listening sessions with stakeholders to receive their input and will continue working with the House and Senate to develop the details of a plan that provides massive tax relief, creates jobs, and makes America more competitive — and can pass both chambers," according to a fact sheet.

The Administration's actions have raised the profile of tax reform, which President Trump and Secretary Mnuchin have said should include the largest-ever US tax cut. On the eve of the new plan's release, Administration officials held a meeting with Republican congressional leaders. Mnuchin said the "commitment that came out of the group last night is we want to move this as fast as we can." Cohn said the Administration and congressional Republicans have agreed on many of the principles of tax reform and, "We look forward to working together with the House and the Senate very closely in the weeks ahead."

Reaction from the Hill: As evidence of continued collaboration, immediately following the White House announcement, Republican leaders in Congress — Speaker Ryan, Senate Majority Leader Mitch McConnell (R-KY), House Ways and Means Committee Chairman Kevin Brady (R-TX), and Senate Finance Committee Chairman Orrin Hatch (R-UT) — issued a joint statement saying Trump's principles "will serve as critical guideposts for Congress and the Administration as we work together" to improve the tax system for the middle class and businesses. "Getting tax rates down for American companies, big and small, will create new jobs and make the United States a more inviting place to do business," they said. "With an eye toward fairness and simplicity, we're confident we can rebuild our tax code in a way that will grow our economy, better promote savings and investment, provide our job creators with a competitive advantage, and bring prosperity to all Americans."

Skepticism about bipartisanship on tax reform remained following criticism from Democrats in Congress. Senate Finance Committee Ranking Member Ron Wyden (D-OR) issued a statement saying, "This is an unprincipled tax plan that will result in cuts for the one percent, conflicts for the President, crippling debt for America and crumbs for the working people. Instead of providing a real tax reform plan as promised, this administration is offering cakes to the fortunate few." Ways and Means Committee Ranking Member Richard Neal (D-MA) said, "This broad outline — which lacks any kind of real detail — is a rerun of the same failed tax policy that led to the Bush tax cuts in 2001 and 2003, which cost us trillions of dollars, did nothing to help working families, and, in part, contributed to the Great Recession."

JCT projects 'nonnegligible' out-year loss for short corporate rate cut: In an April 25 letter to Speaker Ryan, the chief of staff of the Joint Committee on Taxation (JCT) projected that the revenue loss for a three-year cut in the corporate tax rate to 20% would be significant and that there would be "nonnegligible" losses in the tax years immediately following the 10-year budget window. The letter suggests that even "sunsetting" a 20% corporate rate after such a short period of time will create problems under the Senate's budget reconciliation rules that could subject a bill containing such a provision to a 60-vote point of order. Any provision of a reconciliation bill that increases net outlays or decreases revenues during a fiscal year after the years covered by the budget window would be subject to a point of order, and that point of order could only be waived with 60 votes. That out-year revenue loss could be offset by other provisions in the same title of the reconciliation bill, but the letter highlights the balancing act tax policymakers will have to undertake to adhere to reconciliation rules and allow tax reform legislation to pass the Senate with a simple majority vote. JCT's letter also highlights how the out-year effects are different for a corporate versus an individual tax rate cut. In 2001, Congress passed and President Bush signed a significant individual tax rate cut that complied with the Senate budget reconciliation rules by sunsetting the tax cuts after 10 years. JCT's letter to Ryan said the out-year revenue effects of sunsetting the three-year corporate rate cut were more complicated and involved increased carryforward of the credits for years beyond 2020 and lowering of the repatriation baseline from the temporary increase in repatriation of foreign earnings of US companies during the period of reduced tax. The letter, which said a corporate tax rate reduction to 20% for 2018-2020 would cost $490 billion over 10 years, followed April 20 comments by George Callas, Speaker Ryan's senior tax counsel, that "you could not do a straight-up, un-offset three-year corporate rate cut in reconciliation. The rules prohibit it. You might be able to do two years."

Mulvaney on PBS: Asked on PBS NewsHour April 25 about the prospect of a border tax, White House Budget Director Mick Mulvaney said the Administration's tax plan "is the first round of discussions: It's not a pre-cooked bill, it's not prepackaged. This is sort of our principles, so just because it's not in this first round of principles" does not mean it won't ultimately be included. "The President is interested in trying to figure out a way to tax imports, especially from countries that tax our exports," Mulvaney said. Regarding the revenue loss under the President's plan, he said the corporate income tax generates about $300 billion per year, "so you can do a fairly good bit within the corporate tax, and not cost a lot of revenue." Mulvaney repeated the Administration goal of returning the United States to the historic average of 3% GDP growth. "For the last decade, we have been growing at less than 2%," he said. That goal of 3% growth was also expressed by Secretary Mnuchin April 26, and is shared in Congress. Senate Finance Committee member John Thune (R-SD) said during a Bloomberg TV interview April 28: "The key is we need to get rates down, we've got to allow companies to recover their costs more quickly and we got to get growth back in the economy. We get growth back up to 3% or north of there, it means better paying jobs, higher wages and higher standard of living for people in this country." However, Doug Elmendorf, former director of the Congressional Budget Office, was quoted in the Washington Post as saying, "The evidence shows clearly that no feasible tax reform in this country will raise economic growth to 3% on a sustained basis, given our current demographics."

Reconciliation skepticism: Some in Congress suggested the tax plan prescribed by the Trump administration may be difficult to enact under budget reconciliation and therefore will require Democratic votes. "If we are to stick with the President's plan, it to me may infer the need for Democrat support, which then suggests a broader conversation that would include infrastructure at some point," Senate Finance Committee member Tim Scott (R-SC) said, according to an April 28 Tax Notes report. "I've at least begun to ask those questions of folks in the administration, and they have responded to those questions, so I think that if we're looking at a 60-vote threshold, which I think we would be because the numbers that we're talking about, you can't use reconciliation for those numbers. So having Democratic support would require something on the table that is not there as of yet." Finance Ranking Member Wyden said attracting Democratic support for tax reform would require a plan more beneficial to workers. Ways and Means Ranking Member Neal said it would be difficult to pass the Trump plan in reconciliation. "I think that one of the things that reconciliation does invite is accurate scoring, and accurate scoring frequently then determines sunset," Neal said.

Ways and Means Tax Policy Subcommittee Chairman Peter Roskam (R-IL) said during an April 27 Bloomberg TV interview that "ultimately what we're looking for is a permanent plan, and the pathway to getting a permanent plan is that it's got to be revenue neutral." He said the House Blueprint proposes tax reform on a revenue-neutral basis, scored dynamically not statically, and with primary proposals being border adjustment and the non-deductibility of net interest expense. During an April 26 event, Roskam continued to say border adjustability is more attractive than other anti-base erosion options.

Quote of the Week

"We have a once-in-a-generation opportunity to do something really big. President Trump has made tax reform a priority, and we have a Republican Congress that wants to get it done. And this is something that, quite honestly, I hope the Democrats would support, too, because it's good for the American people. The President is going to seize this opportunity by leading the most significant tax reform legislation since 1986, and one of the biggest tax cuts in American history. We've been working on this for a long time." - National Economic Council Director Gary Cohn, April 26

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