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This week (May 22-26)

Congress in: The House and Senate are in session.

Ways & Means border adjustability/international hearing: Border adjustability and international tax reform will be discussed during a Ways and Means hearing on Tuesday, May 23 (at 10:00 a.m.), "Increasing U.S. Competitiveness and Preventing American Jobs from Moving Overseas." A notice said it "will focus on border adjustment and international tax modernization as a core element of comprehensive tax reform and the implications of these policies for increasing jobs, investment, and economic growth in the United States."

Trump budget: President Trump's FY 2018 budget will be submitted to Congress on May 23. Secretary Mnuchin indicated the budget will not include additional details on Administration plans for tax reform, which were outlined on April 26. "Not necessarily on Tuesday. We've still got more work to do," Mnuchin said, Tax Notes reported. "There won't be more detail on tax reform in the budget on Tuesday." The Secretary will testify about the budget at the Ways and Means Committee on Wednesday, May 24 (at 2:00 p.m.), and at the Finance Committee on Thursday, May 25 (at 10 a.m.).

CBO health care estimate: The Congressional Budget Office (CBO) anticipates a cost estimate for the House-passed American Health Care Act will be released on Wednesday, May 24.

Last week (May 15-19)

GOP leaders remain focused on policy agenda: As news reports concerning the FBI Director and sharing of classified information threatened to distract from other business in Washington, Republican leaders and the White House tried to keep the focus on the policy agenda. House Speaker Paul Ryan (R-WI) said May 17, "I want the American people to know that we're busy, hard at work fixing their problems," including reforming the tax system. "We're going to keep doing our jobs. We're going to keep passing our bills," Speaker Ryan said during a news conference. "We're going to keep advancing our reforms that we were elected to advance while we do all these other things that are within our responsibility." Ways and Means Committee Chairman Kevin Brady (R-TX) accompanied Ryan and called for ending "special interest loopholes" and "cutting the sky-high tax rate on businesses so that American headquarters and American jobs no longer move overseas for a better deal." On May 18, Ryan said "there's a lot in the media these days, [but] that doesn't seize up Congress." He said drama is "not helpful in getting things done, but we're still getting things done. And that's the important point." Ryan said the goal is still to complete tax reform in 2017.

Senate Majority Leader Mitch McConnell (R-KY) said May 16, "I think we could do with a little less drama from the White House on a lot of things. So that we could focus on our agenda, which is deregulation, tax reform, and repealing and replacing Obamacare." He suggested the timeline for tax reform could slip, saying, "we certainly want to try to complete it this Congress" — not this year — but he would not put a timeline on the issue. Senator McConnell also made his strongest comments to date on the House border adjustability proposal, saying "it probably wouldn't pass the Senate." He acknowledged that he, Speaker Ryan, and the Administration "are trying to reach an agreement on a proposal that we can all agree to start with" and it remains to be seen what that will entail, but said, "Border adjustability is a pretty controversial thing in the Senate." McConnell also asserted that tax reform must be revenue neutral, and not a tax cut, because, "We have a $21 trillion debt."

The Administration also remains determined, with Treasury Secretary Steven Mnuchin telling a U.S. Chamber of Commerce conference May 18, "I am still very hopeful that we'll get tax reform done this year," Reuters reported. Vice President Pence told the same conference, "If you take nothing else from what I say today, know this: President Donald Trump is committed to signing the most significant and consequential tax relief in American history, releasing the boundless potential of the American economy." President Trump delivered that message in a May 17 Coast Guard Academy commencement speech: "We're working on major tax cuts for all. We are going to give you the largest tax cut in the history of our country, if we get it the way we want it. And we're going to give you major tax reform."

Administration listening sessions: Administration officials, including Mnuchin and National Economic Council Director Gary Cohn, have been holding tax reform meetings on Capitol Hill, including with Senate Finance Committee members from both parties and Speaker Ryan. "We told you we were going to have listening sessions, when we laid out the tax plan — we're having listening sessions. We're taking feedback from both senators and House members, and we're taking their input as we said we would, and it's a very constructive conversation," Cohn said May 17, as reported by Politico. "We are having outreach to lots of different people," Mnuchin said in Tax Notes, "and we expect in the near term to have something with a lot more details in it" regarding tax reform. He also said he expects the White House tax reform plan to receive three scores: static and dynamic scores from the Joint Committee on Taxation, and a separate score developed by Treasury that will reflect expected growth and revenue.

Senate Banking hearing: Asked during a May 18 Senate Banking Committee hearing about how the Administration's tax reform proposal would treat pass-through entities, Secretary Mnuchin said, "We want to make sure rich people don't use pass-throughs as a way to pay a lower rate, so not every doctor or lawyer sets up a pass-through to get around the system." Senator Elizabeth Warren (D-MA) cited a recent Tax Policy Center analysis that found the proposal's changes to pass-throughs "would put over $1 trillion in the pockets of the top 1% of Americans, while the bottom would receive zero in benefits …," and asked, "Why is this administration giving the ultra-wealthy this massive tax cut?" Mnuchin said, "I can assure you we will not allow all pass-throughs to get that rate … We will put procedures in place to make sure people who pay the top rate don't use pass-throughs to arbitrage the system … There will be a box you have to check that says, 'I'm eligible for the business tax,' which is 15%, and there will be qualifications around that … People who are making lots of money will not be able to use pass-throughs … It will not be available to everyone." When Warren followed up, Mnuchin reaffirmed that the 15% pass-through rate would be available only to "small and medium-sized businesses."

Ways & Means hearing: The House Ways and Means Committee kicked off its tax reform hearings May 18, and business witnesses assured Chairman Brady that full expensing of capital investments would help businesses create jobs and keep jobs in the United States. Brady has been defending full expensing, which the House Republican Blueprint proposed along with the denial of deductibility of "net" interest expense; that trade-off has its skeptics in the Trump administration and the Senate. Corporate witnesses, including from AT&T Inc. and Emerson Electric Co., also advocated reducing the corporate tax rate. A small business representative advocated border adjustability, citing its use by many countries through VATs or otherwise, but the issue was not debated at length; it is set to be discussed during a May 23 hearing. Committee Democrats recognized the need for tax reform but expressed concern that a Republican-only tax reform plan will increase the deficit and do little to help the middle class. Ranking Member Richard Neal (D-MA) said despite talk of dynamic scoring, "tax cuts do not pay for themselves." But Tax Policy Subcommittee Chairman Peter Roskam (R-IL) argued that a "perfect tax code" should not be the enemy of a good tax code, and said one of the elements that must be litigated is the value of permanence. Reps. Neal and Ron Kind (D-WI) raised the prospect combining tax reform with infrastructure investment, which was also advocated in a letter to the President by the New Democrat Coalition. Rep. Earl Blumenauer (D-OR) advocated a gas tax increase. Emerson Chairman and CEO David Farr did not endorse that approach but supported finding money for infrastructure investment, which he said is critical. "You will find very few CEOs of companies in the United States that would not say, 'Find the money to invest in infrastructure,'" he said.

Thune cost recovery bill: Senate Finance Committee member John Thune (R-SD) May 17 introduced a bill (S. 1144), for possible inclusion in a broader tax reform package, to make permanent 50% bonus depreciation and increase small business expensing limits to $2 million annually. The bill is noteworthy as a proposal by a senior Senate tax-writer that is a departure from the House Republican Blueprint on tax reform, which proposed 100% expensing of all capital expenditures for tangible and intangible assets (including buildings but not land) and eliminating deductibility of net interest expense. The Wall Street Journal reported that Senator Thune is looking at limits on the deduction for interest costs but opposes full repeal out of concerns about the effects on the agriculture sector. A House Agriculture Committee hearing last month aired concerns about eliminating the deductibility of net interest expense because agriculture is heavily debt-financed. Senator Thune's Investment in New Ventures and Economic Success Today (INVEST) Act would allow new businesses to deduct up to $50,000 of their startup costs within the first year, up from $5,000. It would increase to $15 million the threshold for small corporations and partnerships with a corporate partner to qualify for the cash method of accounting, and includes other accounting method changes. Thune described the bill on Fox News May 17 and said, "What we do beyond that is an open question. But I'm interested in doing anything that will generate greater growth in the economy, because that solves so many problems. That gets higher wages, better-paying jobs and obviously generates more government revenue at the same time."

Brady on interest deductibility: Chairman Brady remained optimistic about the prospects for tax reform during a series of appearances timed with the start of tax reform hearings. During a May 17 Politico event, Brady said the focus remains on enacting tax reform during 2017 and that dropping border adjustability would be a blow to the economic growth potential of a final tax reform plan. Asked about interest deductibility on Bloomberg TV May 15, Brady said the tax code favors borrowing and House Republicans propose to "take the tax preference for the source of funds and apply it to the use of funds, which is full and unlimited expensing and here is why: we know that when businesses invest in buildings, equipment, software, and technology, it drives productivity, it drives Main Street job growth in a major way."

Hatch not set on revenue neutrality: Apparently contradicting Senator McConnell, Senate Finance Committee Chairman Orrin Hatch (R-UT) said May 17 he is "not as caught up in revenue neutrality as some of the other people are. I would rather have this country go forward and take a chance than just sit back and not get anything done." He said on Bloomberg TV that the House border adjustability proposal does not have "much of a chance of going through, but I'm open to looking to some way at finding a proposal that really people can come behind in a bipartisan way." Politico reported that Chairman Hatch has tapped Sens. Rob Portman (R-OH), Tim Scott (R-SC), and Pat Toomey (R-PA) to seek input on tax reform. A May 19 Hatch release said "Republicans are unified in advancing a comprehensive tax overhaul."

Quote of the Week

"I was in the '86 discussions and not yet as a member of the committee, I joined in the next year but I sat in on a number of the '86 discussions. They were very bipartisan. These today especially in the House are not. The Republicans continue to think that tax cuts pay for themselves. Recently 35 economists, conservative and liberal, said that's not true. They also adopt supply-side economics, help the wealthy, and it will trickle down and that isn't true either, and so far from what we've seen of their tax proposal because we don't have all the details, it helps the very wealthy much more than it does the middle class. Also, they're very divided. Speaker Ryan said the planets were aligned. The Republican planets seem to be going in different directions." — House Ways and Means Committee member Sander Levin (D-MI), May 16 Bloomberg TV interview

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