Tax News Update    Email this document    Print this document  

This week (May 29-June 2)

Congress out: The House and Senate are out of session for the Memorial Day recess.

Last week (May 22-26)

Border adjustability: The border adjustability proposal that is a pillar of the House Republican Blueprint on comprehensive tax reform faced additional scrutiny this week from the Administration, GOP members of the Ways and Means Committee, and CEOs. House Speaker Paul Ryan (R-WI) said changes to the proposal, and possibly dropping it, are being considered in the context of high level discussions with the White House and the Senate over a more unified tax reform framework. Asked during a May 24 Axios interview whether he could envision the House passing tax reform without border adjustability, Ryan said, "Of course, that's the kind of conversation we're having." In light of Treasury Secretary Steven Mnuchin opposing the proposal in its current form, Speaker Ryan said: "I've long been saying we don't want to precipitate a 25% currency appreciation overnight … The intention of the Blueprint was not to say, 'We are going to require a 25% currency appreciation tomorrow.' We know that there are import-sensitive industries, retailers that could be severely disrupted if this is done the wrong way." Secretary Mnuchin said at the Peter G. Peterson Fiscal Policy Summit May 23: "One of the problems with the border adjustment tax is that it doesn't create a level playing field. It has very different impacts on different companies. It has the potential to pass on significant costs to the consumer. It has the potential of moving the currencies. We want to make sure that we create a level playing field." During a Ways and Means Committee hearing on the FY 2018 Budget May 24, Mnuchin said his understanding is that Chairman Kevin Brady (R-TX) is going to look at changes. "I don't think it's our job to fix it," Mnuchin said.

Testifying at a May 23rd Ways and Means Committee hearing focused on border adjustment and other international tax issues, Target CEO Brian Cornell advocated abandoning the House border adjustability proposal that he said would raise prices on everyday items — back-to-school clothes, groceries, medicine, gas — and more than double the tax rate for Target, to 75%. At the same hearing, several Republican Members of the Ways and Means Committee made their opposition or concern known, including, most directly, Rep. Erik Paulsen (R-MN), who previously had expressed support for border adjustability but said he could not support the proposal as it is described in the Blueprint. Rep. Jim Renacci (R-OH) said he has been skeptical of border adjustability, and cited concerns from businesses in his district. While not directly critical of border adjustability, Rep. Mike Kelly (R-PA) said he is concerned about the effect on consumer prices and, as a car dealer, the complexity of taxing component parts. Rep. Kristi Noem (R-SD) said she too is concerned about small retailers, and said that farmers and ranchers are worried that the benefits from border adjustability would not flow down to them. During the Committee's hearing on the President's Budget May 24, Rep. Pat Tiberi (R-OH) said he wanted to associate himself with other members' concerns with the border adjustment proposal and its impact on consumers and workers.

In contrast, Tax Policy Subcommittee Chairman Peter Roskam (R-IL) continued to champion border adjustability as an anti-base erosion mechanism, and said the Committee and the previous Administration struggled with alternative approaches. "The attractive thing about border adjustment is that it works," Roskam said. "So if all we are doing is lowering the corporate rate and flipping to a territorial system, it's a huge incentive to put IP out of the country."

Administration's plans for tax reform: Given Secretary Mnuchin's criticism of border adjustability and the lack of detail in the President's FY 2018 Budget and April tax reform outline, he was asked repeatedly this week about how the Administration would pay for the tax reform that he said should be revenue-neutral through base broadening and accounting for economic growth. The Trump Administration Budget released on May 23 did not offer any additional detail on plans for tax reform, generally advocating business and individual rate reduction and base broadening, plus a move to a territorial system and one-time repatriation tax on US companies' accumulated foreign earnings. During the May 24 hearing, Secretary Mnuchin declined to say whether the Administration might release additional tax reform details in the near future. "I can assure you, Chairman Brady, Chairman Hatch, myself, Gary Cohn at the White House — we are all working as fast as we can possibly be," he said. "This is our highest priority."

Regarding the lack of detail in the Budget, Mnuchin said at the Peterson summit May 23, "We felt it was premature to put in any changes to the budget as a result of taxes, since we're not far enough along to estimate what that impact will be." He said he wanted to be careful about identifying specific targets for tax revenue before announcing a complete plan, but that "on the personal side, one of the biggest deductions that rich people take are state and local taxes, and we've said we think we should get the federal government out of the job of subsidizing the states on taxes."

During a May 25 Senate Finance Committee hearing, Secretary Mnuchin was pressed about the Administration's ideas for how to pay for tax reform and said the Administration is looking closely at different alternatives. He repeated previous comments that the preference is to retain interest deductibility under any tax reform, and said the Administration is not looking to raise revenue through slowing depreciation. Senator Sherrod Brown (D-OH) told Mnuchin "you're not at all specific on taxes yet" given that the Administration's tax outline is "a single page of bullet points." He asked if the Administration is planning to propose changes in several specific tax areas, and Secretary Mnuchin's answers are provided in the following list:

— Earned Income Tax Credit and the child tax credit? "It's not a focus of ours at the moment."

— Deductibility of mortgage interest? "No, we are not considering that."

— Like-kind exchanges? "That is one of the many different things that could be looked at, but we've made no decision on it."

— New Markets Tax Credit? "At the current time we are not."

— Treatment of cash accounting? "Again, I would just say, we are in the process of developing the overall plan so we haven't gone through all of these."

— Last in, first out (LIFO) accounting? "Again, it's not something we're considering at the moment."

— Taxation of life insurance companies? "Again, as I've said, we're developing the overall plan so we're looking at many, many different ways of broadening the base. So that specific one I haven't seen but, again, I just want to emphasize, we are looking at things across the board."

— Treatment of state and local bonds? "Again, I have said our preference is strongly to keep the interest deductibility of state and local bonds."

— Low-Income Housing Tax Credit? "Again, at the moment that's not something that I've seen."

Prospects for bipartisanship in Senate: In an opening statement at the May 25 Senate Finance Committee hearing, Chairman Orrin Hatch (R-UT) said he thinks demands that Republicans abandon the use of budget reconciliation for tax reform are odd given that most major tax bills that have moved through reconciliation have had bipartisan support. Foreclosing the use of reconciliation "would be to ensure that the minority would be able to more easily block any bill from passing," he said. Ranking Member Ron Wyden (D-OR) said reconciliation is "inherently a partisan process," and lamented that the Administration has offered only a "one-page tax cut proposal that is shorter than the typical drug store receipt" and "is dusting off the old disproven idea that tax cuts completely pay for themselves." Senator Wyden referenced his own previous tax reform bills and said Democrats agree "that the current system is a mess" and want to work in a bipartisan way on changes to create more well-paying jobs. "And I made it clear this morning that I would work very closely with my friend Chairman Hatch because he believes that we also will try to work in a bipartisan way, but you're going to have to speed this up in terms of getting specifics," he said.

Freedom Caucus: The conservative House Freedom Caucus, which influenced the House health care bill, is now looking to produce a set of tax principles as early as June, Bloomberg BNA reported May 25. Rep. Dave Brat (R-VA), a member of the group, said there should be a whip count on border adjustability in the House Republican Caucus given the amount of time being devoted to the proposal and the potential need to look for other sources of revenue. "We can't be waiting several more weeks and have that piece collapse and then you got a trillion dollar problem on your hands," Brat said. Politico reported May 23 that Freedom Caucus members want to tie tax reform to welfare reform in the FY 2018 budget resolution and subsequently in a reconciliation bill. "We want to write the instructions as broadly as they can [be]," said Chairman Mark Meadows (R-NC). "We want to have it broader so that if we have things that actually add revenue or … substantially affect the budget that it can go not just with those committees of jurisdiction but go broader than that."

Debt limit: In response to a question from Chairman Brady at the May 24 hearing, Secretary Mnuchin asked Congress to raise the debt limit prior to the August congressional recess, and said there is a preference for a clean increase, without addressing other issues. The statement was supported by Committee Democrats, including Rep. John Larson (D-CT), who said Congress cannot leave in August with the issue uncertain. OMB Director Mick Mulvaney told the House Budget Committee during a hearing that tax receipts are coming in slower than expected, which could require a debt limit increase sooner than previously anticipated. On May 25, Speaker Ryan said he is talking to members about how to address the debt limit and expressed confidence the issue will get resolved. "The timing is what I think is the newsworthy thing here," he said. "Receipts aren't quite what people thought they were and that's why Secretary Mnuchin is moving the timetable up. So we're looking at that new timetable." The Freedom Caucus is looking to influence this issue, as well, and to win concessions in exchange for their support. "There's a lot of discussion among Freedom Caucus members to push for a debt ceiling [increase] as long as it addresses some of the other structural reforms that conservatives have long called for," Rep. Meadows said in a May 24 Politico report. "If that is coupled with a debt-ceiling increase that has a definite dollar amount — not a time-specific amount — then they would find a lot of support among conservatives."

Budget window: Both Mulvaney and Mnuchin May 24 also expressed openness to the possible use of a budget period of longer than 10 years, which some have raised as a possible way to accommodate a corporate tax rate cut and satisfy the rules of budget reconciliation. Asked about the issue during the Budget Committee hearing, Mulvaney said he agrees Congress should consider a longer budget window "and my understanding is that you can do that without legislative change … We are exploring the possibility of also looking a little further out." In an April 25 letter to Speaker Ryan, the chief of staff of the Joint Committee on Taxation 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 suggested 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. Senator Pat Toomey (R-PA) has suggested the use of a "longer horizon" to navigate obstacles under reconciliation that are related to the budget window. However, others have observed that extending the budget window also would bring into the window the longer term fiscal imbalances and increases in entitlement spending that would make it nearly impossible to achieve the Republican objective of a balanced budget without increasing revenues or reforming entitlements, including Social Security and Medicare which the President pledged during the campaign not to touch.

Quote of the Week

"As opposed to the Administration coming out with its own proposal, our intent is we are working with the House and Senate, that we will come up with a combined proposal that can pass the House and Senate and be signed by the President. And I've said before, when we come out with all the details, we will obviously have all the distribution and people will be able to make whatever comments and whatever changes as it goes through the legislative process." — Treasury Secretary Steven Mnuchin, May 25

———————————————

Contact Information For additional information concerning this Alert, please contact:   Washington Council Ernst & Young    • Any member of the group, at (202) 293-7474.