This week (July 24-28)

Congress in: The House and Senate are in session. The Senate could take at least a procedural vote related to the health care debate.

Last week (July 17-21)

Senate health bill in flux: The health care debate remained in flux, with Senate Majority Leader Mitch McConnell (R-KY) insisting there will be a procedural vote next week amid Republican defections from the effort to proceed to consideration of the second iteration of the plan to repeal and replace the Affordable Care Act (ACA), or a repeal-only bill. The challenge remains balancing the interests of conservative and moderate members. "It is tough. It's a very narrow path, winding this way," President Trump said in a July 19 New York Times interview. "You think you have it, and then you lose four on the other side because you gave. It is a brutal process." The developments spawned observations that tax reform is now more essential as a legislative accomplishment for Republicans, could be roiled by similar internal divisions, or is a different kind of issue that the party can more easily rally around. "Health care is the high-profile issue. And right now we're stalled out on that. I suppose people can get impressions about, at least at this point, our inability to complete that part of the agenda," said third-ranking Senate Republican John Thune (R-SD) in Politico. "I don't think it puts [us at] risk or in jeopardy in other elements of the agenda." Senator Rob Portman (R-OH) said on Fox News July 20 that he had met with House Speaker Paul Ryan (R-WI) on tax reform and, "I think we are a lot closer on this than health care, as an example, because Republicans pretty much agree we ought to have a lower tax rate, have some tax relief, tax cuts, particularly for middle-class families, and that we've got to do something that is just so sensible on the international side, where it's crazy. We're losing jobs and investment overseas." Ryan July 20 said Republicans are "wired the same way" on tax reform and he is "far more confident" in succeeding on that than any other agenda item. "Obviously you can see in the Senate there are differences of opinion on how to do health care reform. We are so much more unified on tax reform, on what it looks like and how to do it and the need to do it," he said.

House budget resolution: To proceed with tax reform legislation under the budget reconciliation process that allows Senate passage with 51 votes rather than the 60 necessary to overcome a filibuster, Republicans must dispense with health care legislation that utilizes the FY 2017 budget resolution and agree to a modified or new budget resolution. The House Budget Committee July 19 approved by a 22-14 vote an FY 2018 budget with reconciliation instructions for both tax reform and mandatory spending cuts, but passage in the full House is uncertain. Chairman Diane Black (R-TN) said the budget "specifically paves the way for pro-growth tax reform that will be deficit neutral and independent of reconciliation instructions for mandatory savings and reforms." The reconciliation instructions in the budget text, however, don't specify deficit neutrality or other parameters for tax reform legislation. They simply call on 11 committees to, by October 6, 2017, submit their recommendations on changes in laws within their jurisdictions to achieve at least $203 billion in mandatory savings over 10 years, including $52 billion from Ways and Means. Conservatives wanted deeper cuts and more details on tax reform. Near the close of the Budget markup, more than 12 hours after it began, Rep. Mark Sanford (R-SC) raised the prospect of an anti-border adjustability amendment, saying the proposal in the 2016 House Republican Blueprint would impose a new $1.2 trillion tax on consumers. Black said the amendment violated an agreement set for consideration of the budget. Sanford said he is concerned that border adjustability will be tapped to pay for full expensing or, given the uncertainty surrounding health care legislation, repeal of ACA taxes under tax reform. Other Republicans are wary of mandatory spending cuts that may include cuts to welfare and Medicaid, with the budget calling for new work requirements in both areas. Amid questions about the interaction between the tax and savings instructions, Ways and Means Committee Chairman Kevin Brady (R-TX) asserted that "separate from tax reform, the budget resolution also allows us to make federal programs in our jurisdiction more efficient." There are also questions about the budget assuming a current law, versus current policy, baseline.

'Made in America' week: Both Black and Brady stressed the importance of the budget for providing tax reform reconciliation instructions. On Fox News July 18, Brady said the "budget gives us the green light, the vehicle to deliver tax reform this year," and that the timing was perfect given that the President "is pushing very hard on more made in America products here in the United States. Tax reform delivers on that." President Trump July 17 kicked off "Made in America" week with remarks at the White House, saying "for our nation to really prosper, we must lower the tax on business, one of the highest in the world, and we must repeal job-killing Obamacare. We have to do that." Press Secretary Sean Spicer said July 17 that outreach on tax reform will continue along with discussions with House and Senate leadership and the committees of relevant jurisdiction. "I expect there will be some activity in August and then into September, but we're still on track to do that," he said, following reports that the Administration would start pitching the effort in mid-August. (Spicer has since resigned.) "Big Six" negotiations continue between National Economic Council Director Gary Cohn, Treasury Secretary Steven Mnuchin, Senator McConnell, Senate Finance Committee Chairman Orrin Hatch (R-UT), Speaker Ryan, and Chairman Brady. Cohn said they want a proposal to present to Congress in September, and other officials said they want agreement sooner than that. Politico reported Brady as telling reporters July 20, "We don't need any final plan to make the point that the current tax code isn't defensible," adding that members need to engage and build support with constituents.

Corporate rate may be near 20%: Speaker Ryan told reporters after speaking at a New Balance shoe factory in Massachusetts July 20 that a 20% statutory corporate tax rate is "very realistic" and that "there are other ways of getting to that rate than" the House Blueprint on tax reform. "We have to make the decisions and the tradeoffs that get you there … that will be made ultimately by the tax-writing committees, Ways and Means and Finance," Ryan said. The New York Times and Politico both reported that the Administration may now be looking to arrive at a corporate tax rate somewhere close to 20% or in the low 20s. President Trump's April tax reform outline continued to call for a 15% rate. Tax Notes cited a senior White House official as saying the Administration believes a 15% corporate tax rate would by itself prevent base erosion but is working on anti-base erosion rules that would be necessary in conjunction with a rate in the 20-25% range.

Finance approves Kautter nomination: The Senate Finance Committee July 20 voted unanimously to advance the nomination of David Kautter, a former Director of National Tax at EY, to serve as the United States Treasury Assistant Secretary for Tax Policy. As Kautter noted in his testimony before the Committee, he is currently the Partner in Charge of the accounting firm RSM's Washington National Tax Office, previously ran the American University Kogod Tax Center, and was former Senator John Danforth's tax counsel for over three years. Following the vote, Chairman Hatch said: "The Treasury Assistant Secretary for Tax Policy is a critical role as Congress and the administration work to overhaul the nation's tax system. David Kautter's experience and knowledge will serve the nation well as we work to unite on comprehensive tax reform. I am hopeful the full Senate will put politics aside and swiftly confirm his nomination." During the July 18 hearing, Kautter agreed with Senator John Thune (R-SD) that lowering tax rates for corporations and pass-through entities and allowing businesses to recover the costs of investments quickly would have a favorable effect on the economy. He said trying to strike the right balance between the two is "an imprecise science" but must be a focus of tax reform.

Mnuchin on 'complicated' system: Secretary Mnuchin said in remarks at a reception hosted by the U.S. Chamber Of Commerce, the U.S.-China Business Council, and the China General Chamber Of Commerce July 18 that his top priority is economic growth and tax reform is a central component of that effort. "On the business side, we have one of the most complicated systems in the world. We tax on worldwide income with our system of deferral," he said. "It is not surprising that trillions of dollars are left overseas. We want to bring back those profits with a lower business rate so that companies can invest in America."

Finance hearing with former Assistant Secretaries: Concerns about the worldwide system, the high US statutory corporate tax rate relative to other nations, and the resulting "lock-out" effect on foreign earnings were expressed during a July 18 Senate Finance Committee hearing by witnesses who have previously served as Treasury Assistant Secretary for Tax Policy. There was also discussion of unresolved issues under tax reform, including the taxation of pass-through entities. Ranking Member Ron Wyden (D-OR) expressed concern about proposals for a reduced tax rate for pass-throughs, and Senator Thune said the issue raises a number of challenging questions, including: how to treat pass-through owners who are active members of a business; and whether the pass-through tax rate of active owners should be based on the return of the capital they invest in the business or the compensation they pay themselves. EY Co-Director of National Tax Eric Solomon, a witness at the hearing, said the biggest challenge is figuring out what the compensation element is. It may require a certain formula to treat a certain percentage as compensation income, or determining the capital contribution the owner has made and applying the lower rate to that amount, he said. Also during the hearing, Senator Mark Warner (D-VA) expressed skepticism about reducing the statutory corporate tax rate even to 25% by going after tax expenditures, given the rule-of-thumb that each percentage point reduction costs $100 billion over 10 years and the willingness of businesses to defend the expenditures that benefit them. Senator Ben Cardin (D-MD) advocated his proposal for a progressive consumption tax.

The Senate health care debate was an undercurrent of that hearing and the nomination hearing that followed, with Democratic members raising questions about the merits of a partisan approach that utilizes the budget reconciliation process and the lack of hearings, as opposed to a more open deliberation. Senator Claire McCaskill (D-MO) asked whether the Committee would hold a hearing on a tax reform proposal when it is developed, to which Chairman Hatch replied, "I'd like to, I don't know as of right now." Senator McCaskill implored Hatch to use his influence on Senator McConnell to allow such a hearing to take place.

Hatch speech: Chairman Hatch gave the second in a series of Senate floor speeches on tax reform July 20, focusing on the need to reform an international tax system that, combined with a high corporate rate, diminishes the ability of US multinationals to compete. "Simply put, the lock-out effect refers to the incentives US companies have to hold foreign earnings and make investments offshore in order to avoid the punitive US corporate tax," he said.

Ways and Means hearing: The House Ways and Means Tax Policy Subcommittee hearing July 19 on the benefits of tax reform for individuals included discussion of permanence and proposals related to retirement security. Former Chairman Bill Archer focused his testimony on the importance of permanent tax policy, and said as members pursue tax reform they will be up against constituencies defending current provisions. "I don't have a magic answer for you. I wish I did," he said of tax reform. "I think it's extremely complicated." He said a failing in the 1986 Act was the fact that major changes were retroactive, which undermined the value of real estate and brought about the demise of savings and loans, and cautioned members not to include retroactive provisions in tax reform.

Quote of the Week

"I am a new member and I had this idea that I was coming to this committee to actually consider important items of finance to our government and there is no more important item of finance to our government than the structure of our tax code. There is nothing that is more impactful on our economy or on businesses and job creation in this country than the tax code. If we cannot have a hearing in the United States Senate on the Committee on Finance on tax code reform, then I don't know why we have this committee. It doesn't make sense to me." — Senator Claire McCaskill (D-MO), July 18

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