19 September 2017 Finance Committee holds business tax reform hearing The Senate Finance Committee hearing on business tax reform (held on September 19, 2017) was dominated by discussion of the effects of a large, deficit-financed tax cut that some Republicans want to facilitate through reconciliation instructions in the FY 2018 budget resolution. The hearing was held ahead of the release next week of a tax reform outline by the "Big Six" group of Administration and congressional Republican negotiators, which Chairman Orrin Hatch (R-UT) previously said would not dictate the Committee's work on tax reform. In the hearing, he said the Committee will consider tax reform through regular order, which applies to the drafting and reporting of any tax reform bills, and that he hopes the process will be bipartisan. There are many areas of business tax reform where thoughts and interests of both Democrats and Republicans overlap, Hatch said, and "There is fertile ground for bipartisan agreement on this." Hatch said the US statutory and effective tax rates are high relative to other nations. "According to a recent analysis by Ernst and Young, when you integrate corporate-level taxes and investor-level taxes such as those on dividends and capital gains, U.S. tax rates are the second highest among developed countries," he said. "That last one is important, given that the United States taxes most corporate earnings that are distributed to shareholders twice — both at the corporate and shareholder levels." As he did during a hearing last week, Ranking Member Ron Wyden (D-OR) focused his opening remarks on the potential for abuse under a reduced tax rate for pass-through entities expected under a Republican tax reform bill. "The centerpiece could very well be a 2 trillion dollar loophole having to do with what's called passthrough status," Wyden said. "Passthrough status is supposed to be about helping small businesses … but any tax change that allows tax cheats to abuse passthrough status by 'self-declaring' to avoid paying their fair share and dodge Social Security taxes would be worse than what's on the books today." — Donald B. Marron, Institute Fellow, Urban Institute & Urban-Brookings Tax Policy Center (TPC), 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 Hodge listed four priorities for business tax reform: full expensing; a competitive corporate tax rate such as 20%; moving to a territorial system; and making all such changes permanent. Marron said because "the boost to near-term growth may be modest," dynamic scoring by the Joint Committee on Taxation will "play only a small role in paying for tax reform." Lewis recommended codifying traditional definitions of "reasonable compensation" to address the distinction between profits of the business and compensation of owner-operators under a lower pass-through rate. DeBoer said the deductibility of business interest should not be repealed or limited, and that expensing should not apply to buildings. Under questioning from Senator Tom Carper (D-DE) about the effects of a deficit-financed tax cut, Marron said the Congressional Budget Office forecast of a $10 trillion cumulative deficit and an increase in debt held by the public to roughly 90% of GDP over the 10-year budget window would only be exacerbated if deficit-financed tax cuts added another $1 trillion-$2 trillion over the decade. Senator Pat Toomey (R-PA), a Budget Committee member who has been pushing for a $2 trillion tax cut under the FY 2018 budget resolution and believes resulting economic growth will generate some offsetting revenue, asserted that economic growth and output is affected by incentives and penalties in the tax code, thus better incentives will result in more growth. Senator Ben Cardin (D-MD) said one of the worst things Congress could do is to add to the deficit through tax reform, and again expressed concern about "Rothification" of retirement accounts by making them after-tax. He further questioned how to lower rates without new revenue, and discussed his progressive consumption tax. Senator Mark Warner (D-VA) questioned the effect of a deficit-financed tax cut when the nation already has $20 trillion in debt. Marron said expanding deficits through an unfinanced tax cut means resources must come from somewhere and would either crowd out private investment or attract overseas investment, both of which would result in a significant economic drag. Ranking Member Wyden also expressed concerns about the deficit. "It seems to me retroactive, debt-financed tax cuts, particularly temporary ones, is a prescription for more trouble in the American economy in the long term," he said. Chairman Hatch asked whether limiting the deductibility of business interest expense would bring the tax treatment of debt and equity more in sync. Lewis said equity financing is not available for many small and midsize businesses, meaning they rely on debt financing and should continue to benefit from the deductibility of interest expense. Senator John Thune (R-SD) asked DeBoer whether, though he is against full expensing for real estate, he would support shortening the recovery periods for commercial buildings and rental housing. DeBoer said his group strongly supports shortening recovery periods and doesn't disagree about the power of expensing, but is concerned about sustainability. "It will incent our industry to build, but we see no benefit to building buildings that are ahead of the demand in the economy," he said.
Document ID: 2017-1524 | |||||
