This week (July 31-August 4)

Senate in, House out: The Senate is in session, but the House is out for the August recess. Senate Majority Leader McConnell stated that the next vote will be on Monday, July 31, and will be a cloture vote on a judicial nomination.

A House vote on the FY 2018 budget resolution may be held when the House returns in September. A vote was not held prior to the recess, and one impediment may have been shed in the Big Six statement saying they would set aside consideration of border adjustability, which some conservatives said must be ruled out as a condition of supporting the budget.

Housing hearing: The Senate Finance Committee will hold a hearing on Tuesday, August 1 (at 10 a.m.) entitled "America's Affordable Housing Crisis: Challenges and Solutions." The staff of the Joint Committee on Taxation prepared a document on tax incentives for rental housing.

Last week (July 24-28)

'Big Six' joint statement: The "Big Six" group of Administration and congressional negotiators July 27 issued a statement on tax reform that largely affirms previously stated goals for the effort but newly states that the group will not be considering the House border adjustability proposal. "While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform," said the joint statement by House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch (R-UT), and House Ways and Means Committee Chairman Kevin Brady (R-TX). The group, which has been holding regular weekly meetings, said they have always been in agreement that "tax relief for American families should be at the heart of our plan," which should also provide "a lower tax rate for small businesses so they can compete with larger ones, and lower rates for all American businesses so they can compete with foreign ones." The statement said the goal is a plan that reduces tax rates as much as possible, allows "unprecedented" capital expensing, places a priority on permanence, and encourages US companies to bring back jobs and profits from overseas. "And we are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base," the group said. The statement said "the time has arrived for the two tax-writing committees to develop and draft legislation that will result in the first comprehensive tax reform in a generation." They expect the legislation to move through the committees this fall, "under regular order, followed by consideration on the House and Senate floors."

Unlike the April 26 White House outline on tax reform, the statement did not identify any tax rate targets. It also did not directly address interest deductibility, which the 2016 House Republican Blueprint on tax reform proposed to eliminate in exchange for full expensing and which has reportedly been the subject of some disagreement within the Administration. Tax Notes reported Chairman Brady as saying unprecedented expensing means "that we recognize the growth aspects. We're pushing towards more than it is in the tax code today, and as far as we can, because that drives productivity, wages, and economic growth." The Big Six negotiators also did not signal the extent to which the tax reform plan should be paid for, and how.

While the statement expressed hope that "our friends on the other side of the aisle" would participate in tax reform, Democrats were skeptical. "Republicans are dripping tax ideas out like a leaky faucet with no specifics to back them up," said Finance Committee Ranking Member Ron Wyden (D-OR). "This is a far cry from the last time Congress overhauled our tax code in 1986." Ways and Means Committee Ranking Member Richard Neal (D-MA) said, "Tax reform needs to be built from the middle out, not the top down, and Democrats will be ready to work with Republicans to make this a reality — if they put aside the failed supply-side economics of the past."

Ryan on the way forward: Border adjustability remained the favored approach of House leaders, but Speaker Ryan said they were willing to set the proposal aside in the interest of getting to consensus on tax reform and with the confidence that their goals could be achieved without it. "If there's a way of doing tax reform that still gets what we are trying to get, which are low tax rates, expensing, things like a territorial system — the aspects of tax reform that we agree on. We wanted to make sure we can still achieve those things without having a cash flow tax or a border adjustment tax. Once we realized that that is viable, then we agreed we need to go on a common template," Ryan said in a Fox Business interview that aired July 28. "And now we are getting our tax writers, the Ways and Means Committee and the Senate Finance Committee — we have tasked them with taking on the task of writing the details of this tax bill within this template which we now agree to. So getting consensus between the White House, the Senate, and the House on a way forward on tax reform makes it that much more of a viable enterprise." Asked whether tax reform must be revenue neutral, Ryan said it must comply with budget reconciliation rules. He acknowledged that revenue must be found somewhere besides border adjustability, and said it should come from broadening the base, i.e. clearing out "loopholes and deductions" to lower tax rates.Ryan suggested that the effort to achieve consensus reflects a lesson from the health care debate. "We looked at health care and said, 'Let's make sure that we do tax reform better and differently,' so we have had exhausting meetings — not exhausting, we've exhausted these points between all three branches, all three decision makers: Senate, House, White House," he said.

Health care - 'Skinny repeal' of ACA fails in Senate: A "skinny" health reform repeal bill that was Republicans' best hope toward repealing the Affordable Care Act (ACA) was defeated in a dramatic 49-51 vote early July 28, with the deciding vote against the bill cast by Senator John McCain (R-AZ). McCain had returned to the Senate to provide a key vote in favor of proceeding to consideration of the bill July 25, and both the Senate version of ACA repeal and replace legislation and a more robust "clean" repeal bill were subsequently defeated. The next steps for Republican efforts to repeal the ACA are unclear, with the Senate planning to turn to other business and the House beginning the August recess. Repeal of ACA taxes became less of a focus as deliberations in the Senate wore on, though the "skinny" repeal bill, the Health Care Freedom Act, would have provided three years of additional relief from the medical device excise tax in addition to eliminating the individual and employer mandates. Also, Senator Dean Heller's (R-NV) amendment to repeal the "Cadillac Tax" was approved 52-48, though it was an amendment to the underlying House-passed bill, not part of the Health Care Freedom Act that was laid down subsequently. Speaker Ryan's Fox Business interview was taped before the overnight developments but, as when the House ACA bill was initially in peril, he signaled the intention to keep ACA taxes within the health debate so as not to harm the tax reform effort. "What we are going to do is cordon those taxes off to the side, make sure that those, those health care taxes stay with Obamacare and reform the rest of the tax code so we can keep our tax plans intact, to get rates down, to push expensing as far as we can go, to get to a territorial system and to clean up the code for families and workers, so that they have a simplified system where we can consolidate brackets and give people a code they can understand," he said.

Trump focused on middle class: In a July 25 interview with the Wall Street Journal, President Trump suggested tax reform, his next priority, should take care of "job producers" and middle-income people, and did not rule out raising taxes on those with high incomes. "The truth is the people I care most about are the middle-income people in this country who have gotten screwed," he said. "And if there's upward revision it's going to be on high-income people." Regarding the notion that tax reform that takes from the wealthy to give to the middle class should attract Democratic support, Trump said, "Yeah, except they're obstructionists. If they weren't obstructionists, I would normally get Democratic support. So we don't anticipate that." Asked to explain the "upward revision" comment, White House Press Secretary Sarah Huckabee Sanders July 26 said, "You know, when we get ready to walk through the full details of the plan, I'm happy to do that at that time. But right now, we're focused on the three big priorities of the tax reform: a simple, fairer tax code; middle-class relief; and creating jobs. That's where we are right now. We're continuing to work through that process and we'll make announcements as we have specifics." Following on similar previous reporting, Bloomberg reported July 27 that White House Chief Strategist Steve Bannon supports a 44% statutory income tax rate on those with annual incomes over $5 million. The Washington Post July 26 reported that the White House may be entertaining the idea of a "sharp, short-term tax cut" in the event that broader tax reform plans falter.

IRS delays Section 385 documentation requirements: The Internal Revenue Service July 28 issued Notice 2017-36, delaying the application of the Documentation Regulations under final and temporary regulations (T.D. 9790) under Section 385 by 12 months. "In response to the concern that taxpayers have continued to raise with the application of the Documentation Regulations to interests issued on or after January 1, 2018, and in light of further actions concerning the final and temporary regulations under section 385 in connection with the review of those regulations, the Treasury Department and the IRS have determined that these concerns warrant a delay in the application of the Documentation Regulations by 12 months," the Notice stated. "Accordingly, the Treasury Department and the IRS intend to amend the Documentation Regulations to apply only to interests issued or deemed issued on or after January 1, 2019." The Notice requested comments by September 1.

Mnuchin testifies in Congress: Appearing before the Senate Appropriations Financial Services and General Government Subcommittee July 26, Secretary Mnuchin said that with regard to the corporate tax system, the Administration's "main priority is to change that system to a territorial system so trillions of dollars come back, can be invested here, and will benefit workers." He was responding to Senate Democratic Whip Dick Durbin (D-IL), who said reducing corporate taxes and increasing "corporate profits and CEO salaries is no guarantee that the average working family in America will feel this growth." Durbin questioned the presumed eventual weakening of the Section 385 regulations in light of the July 7 Notice 2017-38 on tax regulatory burdens, especially considering President Trump's past statements regarding companies leaving the United States. Mnuchin was also asked about the likelihood that the Administration will support full expensing of capital investments, and the Secretary said it is something they are having active discussions on and that no decisions have been made. Asked about online sales taxes and the Marketplace Fairness Act, Mnuchin said, "This is an issue that we've been looking at very carefully within the Administration, and we expect to come out with a position shortly." Testifying the following day before the House Financial Services Committee, Mnuchin was asked by Rep. John Delaney (D-MD) whether, if broader tax reform fails, he would support pairing international-only tax reform with infrastructure investment, as Delaney has proposed. Mnuchin said the Administration plans to come out with an infrastructure plan shortly, "but my own opinion is putting things together only makes the issues more complicated."

Ways and Means '31 Days' calendar: The Ways and Means Committee majority staff has provided members with a "31 Days of Tax Reform" calendar for August, with arguments in favor of the effort for each day. "Throughout the 31 days of August, here's how you can seize each day to the make the case for why we need bold, pro-growth tax reform in 2017," it says. Arguments in favor of tax reform reflected in the calendar include providing certainty for families and small businesses, and increasing economic growth.

Listening to, working with outside groups: The Administration continues to meet with outside groups on tax reform. On July 25, Secretary Mnuchin hosted agricultural industry leaders at the White House for a listening session on tax reform. A blog post said business leaders expressed their concerns over multiple issues including fluctuating income and interest deductibility, and inquired about provisions that would allow for cost recovery. Interest deductibility and cost recovery for the agriculture industry have been topics of discussion in congressional hearings. Politico reported that White House officials met with conservative groups including Americans for Prosperity, Americans for Tax Reform, Freedom Partners, FreedomWorks, and the Heritage Foundation July 25 on messaging for the tax reform effort, and there have been other reports of expected advertising on the issue.

Quote of the Week

"We are all united in the belief that the single most important action we can take to grow our economy and help the middle class get ahead is to fix our broken tax code for families, small business, and American job creators competing at home and around the globe. Our shared commitment to fixing America's broken tax code represents a once-in-a-generation opportunity, and so for three months we have been meeting regularly to develop a shared template for tax reform." — Joint Statement on Tax Reform, July 27

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