18 September 2017 EY Center for Tax Policy: This Week in Tax Reform for September 15 Senate in, House out: The Senate is in session but the House is not. The Senate is expected to be out of session on Thursday and Friday. Regulatory review: A final report recommending "specific actions to mitigate the burden imposed by" regulations identified in IRS Notice 2017-38 as among significant tax regulations that are unduly burdensome or complex is due by September 18. Finance Committee: The Senate Finance Committee has scheduled a hearing on Tuesday, September 19 (at 10 a.m.)to "examine ways to improve the U.S. tax code's business provisions and create a healthier economic environment that will encourage job creators to invest in the United States and increase their competitiveness in the global market." Witnesses for the hearing are: — Donald B. Marron, Institute Fellow, Urban Institute & Urban-Brookings Tax Policy Center, Washington, DC — Troy K. Lewis, CPA, CGMA, Tax Executive Committee Immediate Past Chair, American Institute of CPAs, Provo, UT — Jeffrey D. DeBoer, President and Chief Executive Officer, The Real Estate Roundtable, Washington, DC Tax reform outline to be released week of September 25:The announcement that a tax reform outline reflecting a consensus between the Administration and congressional Republicans will be released the week of September 25 was quickly followed by questions about the level of detail it will include and whether negotiators are on the same page. The outline will be a "basic template" that the tax committees will then work from in filling out details, Speaker Paul Ryan (R-WI) said at a September 13 news conference after Ways and Means Committee Chairman Kevin Brady (R-TX) announced the rollout to Republican House members. "The whole point of all of this is the House, the Senate, and the White House are starting from the same page and the same outline, and then the tax-writers are going to take it from there on the details," Ryan said in a later AP interview. During a Politico event September 14, Brady said when the House, which is out of session next week, returns the week of September 25, President Trump and the House and Senate tax writers will unveil consensus core elements — probably later in the week rather than earlier. From there, the focus will be on the budget resolution that the House and Senate must agree to in order to provide reconciliation instructions and reconciliation protections on the Senate floor for tax reform legislation. After that is done, Brady said he will lay out a Chairman's Mark and begin the process of Committee consideration. Asked whether the release will include a projected corporate rate and target individual rates, and identify deductions that must be eliminated to achieve those rates, he said, "Probably not to that specificity." Brady said he expects the outline to reflect "clear approaches" on the direction negotiators want to go on those issues, and to include "core elements" that will allow members of the Ways and Means Committee and Senate Finance Committee to "weigh in and do their work." Treasury Secretary Steven Mnuchin later suggested the release will specify a corporate tax rate and other details. On how the week-of-September 25 release will differ from previous releases that called for a territorial system and lower corporate rate, Brady said, "You'll see, I think, greater detail in those areas but it won't answer every question that everyone who is so focused on tax reform will want to ask. That's got to be left to the committees." Clearing budget part of 'aggressive' timeline: Speaker Ryan said the outline's release will be followed by getting feedback on details from rank-and-file members and tax-writing committees working on drafting legislation "while we also work on our budget resolution" that is necessary to pass tax reform under reconciliation. Both chambers must approve the same resolution to provide reconciliation instructions that will allow Senate passage with the votes of 50 senators (and the Vice President breaking the tie). "So the whole point here is an aggressive timeline to make sure that we get tax reform done this year," he said. The House Freedom Caucus has withheld support for the FY 2018 budget resolution reported out of the House Budget Committee in July, citing insufficient information about the tax reform legislation the budget would facilitate, and Chairman Mark Meadows (R-NC) said that hadn't changed following the September 13 briefing from Brady. "We will guarantee that we have enough information before we vote for the budget," he said. Meadows wants to know more about plans for a territorial system for foreign earnings, as well as details on rates also sought by other members. "We need it like now, ASAP. They've been promising that to us for like four or five months, 'we're going to get you the bullet points, we're going to get you the details,' and we're not talking details," Rep. Dave Brat (R-VA) said, as reported by Bloomberg BNA. House Budget Committee Chairman Diane Black (R-TN) said the tax reform outline may aid efforts to advance the resolution that, when it was approved in Committee, she said allows for "tax reform that will be deficit neutral and independent of reconciliation instructions for mandatory savings and reforms." The actual instructions don't specifically address tax reform, but just call for about $200 billion in mandatory savings over 10 years from House committees in order to achieve a balanced budget at the end of the 10-year budget window. However, the savings numbers are of concern to moderate Republican members. A work-around through a "shell" budget that provides reconciliation instructions but no revenue or savings targets is also opposed by Freedom Caucus members. Striking a balance among Republicans on these issues is the primary challenge faced by the White House and Republican congressional leaders. Black has been pushing the message delivered by Brady to members September 13: "No budget, no tax reform." On the Senate side, Secretary Mnuchin and National Economic Council Director Gary Cohn met with Senate Majority Leader Mitch McConnell (R-KY) and Budget Committee Republicans September 12 to emphasize the need to act on an FY 2018 budget resolution to provide reconciliation instructions for tax reform. Hatch makes clear Finance will not 'rubber stamp' House bill: Senate Finance Committee Chairman Orrin Hatch (R-UT) said the House "has the right attitude" in trying to complete tax reform in 2017 and he wants that too, but, on the prospect of it slipping into 2018, "if it does, it does." In a September 15 CNBC interview, Hatch said Committee approval will take a great deal of cooperation among members, then, "When you go to the floor it's another matter … You have doubling and tripling of ideas for people who have been waiting a long time for a true tax bill so that they can put their own ideas and imprint on it." Negotiators are on the same page, Hatch said, but "the Senate Committee on Finance is going to do this bill the way it wants to do it and I think the Ways and Means Committee in the House will do a bill the way they want to do it and we'll get together in conference and reconcile the differences." The Chairman said it is difficult to predict the end result. "We've got a lot of really heavyweight senators on the Finance Committee," he said. Hatch was more direct in opening a hearing on individual tax reform September 14, saying the work of the "Big Six" — Ryan, Brady, Mnuchin, Cohn, McConnell, and Hatch — "will not dictate the direction we take in this committee" on the issue. "Any forthcoming documents may be viewed as guidance or potential signposts for drafting legislation … ," Hatch said. "Anyone with any experience with the Senate Finance Committee knows that we are not anyone's rubber stamp." Expensing: Whether full expensing of capital investments or a less generous approach like extending or making permanent bonus depreciation will be pursued has become a greater focus as tax reform efforts accelerate. Chairman Brady said September 14 the debate between lower rates versus expensing is "foolish," because both are incredibly pro-growth, albeit expensive. He said negotiations with the White House and Senate have focused on how to get the greatest bang for their buck on expensing, at the most affordable price, and how to use provisions being moved aside to lower rates. "We're making progress," he said. Freedom Caucus Chairman Meadows has said full expensing is too expensive and wants another approach, perhaps making permanent 50% bonus depreciation. This has been proposed by Senate Finance Committee member John Thune (R-SD). A September 13 Karl Rove commentary in the Wall Street Journal said the Freedom Caucus is withholding support for the budget resolution over the issue. Bloomberg BNA reported Meadows as saying Brady is pursuing accelerated depreciation that is short of expensing. The cost of expensing has also drawn opposition from the influential Koch network and companies who want the money spent on lowering the corporate rate. At a Christian Science Monitor press event September 12, White House Legislative Affairs Director Marc Short said, "We do not think that expensing should be prioritized at the expense of rates. So we are more interested in prioritizing lower rates … " Expensing does have a supporter in Senator Ted Cruz (R-TX), who called for it during an event September 13. "We will have those incentives in the package whether we go with what Senator Cruz has suggested or other alternatives. We will make sure that companies have incentives to invest that money," Secretary Mnuchin said on Fox News September 13. Interest deductibility: The 2016 House Republican Blueprint on tax reform proposed 100% expensing of all capital expenditures for tangible and intangible assets (including buildings but not land) and described it as a trade-off for eliminating the deductibility of net interest expense. Asked whether the outline will propose eliminating or changing interest deductibility to create revenue for rate reduction, Brady said, "That will be left to some of the details generally when we release it in two weeks and then beyond as the Ways and Means Committee really finalizes all that." He acknowledged that it would be a major change, and said that businesses want to grandfather existing debts and arrangements. Brady also said policymakers want to make sure small businesses and agriculture have exemptions, and to address issues like land. "We will continue to work toward some changes but in a way that creates certainty and helps us grow the economy," he said. Pass-throughs: The potential for anti-abuse provisions for a reduced tax rate on pass-through businesses was also a focus, given statements by Mnuchin and complaints from Senate Finance Committee Ranking Member Ron Wyden (D-OR) that the Administration has been promising an approach for months but has yet to spell it out. "If you're an accountant firm and that's clearly income, you'll be taxed [at] an income rate, you won't be taxed [at] a pass-through rate," Mnuchin said at a CNBC conference September 12. "If you're a business that's creating manufacturing jobs, you're going to get the benefit of that rate because that's going to be passed through to help create jobs and better wages." During the September 14 Finance Committee hearing, Wyden said while President Trump has declared his plan would not provide tax breaks to the wealthy, his previous proposals would create a "loophole for the wealthy allowing them to abuse pass-through status." He said pass-through status is supposed to be about helping small businesses, "but the Trump plan turns it into a scheme for the wealthy to dodge paying their fair share." State and local tax deduction: Also during the hearing, the potential for a proposal to eliminate the deductibility of State and local taxes was addressed by both Hatch and Wyden. Hatch noted testimony that the State and local deduction for real property taxes is mostly a benefit for the middle class, and cited a Joint Committee on Taxation analysis suggesting the vast majority of the benefit of the State and local tax deduction for income taxes goes to those with incomes of more than $200,000 annually. "So it appears that there's a real difference between who benefits from the deduction for real property taxes and who benefits from the deduction for State and local income taxes," he said. Wyden said repealing the deduction would not just harm those "from blue states. There are middle class families across the country — taxpayers in deep blue areas that went for Clinton and scarlet red areas that went for Trump — that'll be taxed twice on the same income if the State and local deduction is eliminated." Rothification: A group of Finance Committee Democrats sent a letter to the Big Six September 14 warning "against funding corporate tax breaks by slapping new taxes on retirement savings for workers." The group, led by Senator Sherrod Brown (D-OH), expressed concern about proposals to "mandate the use of after-tax, Roth accounts." The letter said: "Tax reform should increase working families' take-home pay, encourage savings, grow jobs and the economy, reward companies that invest in American workers and their communities, and maintain sound fiscal policy. So-called 'Rothification' of retirement savings fails that test on all counts." It was signed by Senator Ben Cardin (D-MD), who raised the issue during the Finance hearing. More Trump speeches: President Trump is planning to continue taking tax reform on the road, with plans to visit as many as 13 states over the next seven weeks, Bloomberg reported September 12. He has already delivered major speeches on the issue in Missouri and North Dakota, both of which are states Trump won in 2016 and have Democratic senators up for re-election in 2018. He has based his remarks around four principles that he repeated during a bipartisan meeting of House members on tax reform September 13: "make the tax code simple and fair; cut taxes substantially, it'll be the largest tax decrease in the history of our country for the middle class; encourage companies to hire and grow in America, and by doing that, we're going to have to reduce the taxes for companies … ; and bring back trillions of dollars — we have trillions of dollars overseas that we'll bring back, and we'll bring them back quickly." At the start of the meeting, Trump also said high-income Americans will not benefit from the tax plan: "I think the wealthy will be pretty much where they are, pretty much where they are. We can do that, we'd like it. If they have to go higher, they'll go higher, frankly. We're looking at the middle class and we're looking at jobs." Prospects for bipartisanship: Mnuchin said at the CNBC conference the Administration remains open to bipartisan cooperation on tax reform legislation but if 60 Senate votes do not materialize, "we're prepared to use reconciliation to get it done." Speaker Ryan September 13 had essentially the same message, saying he would like to have Democratic support for tax reform legislation, and probably will get some, but Republicans will pursue the issue regardless. The President's efforts to attract Democratic support seemed to be focused on the three Senate Democrats — Heidi Heitkamp (D-ND), Joe Manchin (D-WV), and Joe Donnelly (D-IN) — who didn't sign on to an August letter demanding that tax reform be considered outside of reconciliation and neither burden the middle class, benefit the wealthiest, nor add to the deficit. President Trump hosted them for a bipartisan dinner to discuss tax reform September 12, following which Manchin said tax reform should not add to the deficit and that Trump provided assurance that the tax bill would mostly benefit the middle class, not the wealthy. "I think they're very aggressive on this. They want it done and they want it in a bipartisan way," he said. Wyden tweeted regarding the dinner, "As senior democrat on tax writing committee, my invite must've gotten lost in the mail," and said during the hearing that Republicans appear committed to a partisan approach and using "reconciliation to jam this tax plan through the Senate," a sentiment echoed by Brown. Ways and Means Committee Ranking Member Richard Neal (D-MA) said September 14 that there could be some collaboration because the Administration, for the moment, seems in tune with the middle-class goals Democrats would support. However, he recalled Director Cohn visiting him with a vow to go big on tax reform, to which Neal quipped that six prior Treasury Secretaries had told him the same thing. Debt limit won't be revisited until 2018: Senate Majority Leader McConnell September 12 confirmed that the deal that extended the debt limit and government funding through December 8 doesn't preclude Treasury from using extraordinary measures to cover obligations, meaning the debt limit will not need to be addressed until "sometime in 2018." When the deal was first struck between President Trump and Democratic leaders, over Republican calls for a longer debt limit extension, there was the sense that Democrats had gained leverage over year-end legislation. McConnell said Senate Democratic Leader Chuck Schumer (D-NY) had assumed a continued linkage between the debt limit and government spending, but because of the way the bill was crafted, "I can confidently predict that there will not be a connection between the debt ceiling and the spending decisions in December." Infrastructure mentioned: Politico September 14 reported Brady as saying he's "open" to the idea of providing revenue for infrastructure as part of a tax reform, but that is not his focus. "Infrastructure's sort of the satellite that continues to circle tax reform," and may at some point enter the discussions, he said. On Fox, Mnuchin said, "I think for now we are focused on taxes. We will leave it to Congress if they want to add infrastructure to this. But we've got both plans ready to go." He does not think repatriation will be tied to infrastructure; rather, "there will be a deemed tax as a one-time charge for the conversion and that will create the incentive for companies to bring it back and invest here." "We want pro-growth tax reform that will get the economy growing, that will get people back to work, that will get middle-income taxpayers a tax cut and that will put American businesses in a better competitive playing field, so that we keep American businesses in America. That is more important than anything else, because if we have tax reform that doesn't actually fix our problems, then we'll lose more and more businesses, and the deficit will go even higher. So it's really important that we fix the massive errors we have in our tax system." — House Speaker Paul Ryan (R-WI), September 13
Document ID: 2017-1502 | |||||
