September 25, 2017 EY Center for Tax Policy: This Week in Tax Reform for September 22 This week (September 25-29) Congress: The House and Senate are in session. Tax reform unified framework: A tax reform outline reflecting a "unified consensus" between the Administration and congressional Republicans will be released, likely on Wednesday, September 27. Health care vote: Senate Majority Leader Mitch McConnell's (R-KY)office announced that a vote on the Graham-Cassidy ACA repeal legislation is planned for next week. The bill would repeal the ACA's individual and employer mandates, medical device excise tax, tax on over-the-counter medications, and tax on Health Savings Accounts, but leave other ACA taxes in place. "Well you all understand that we would have to deal with this before September the 30th," McConnell said September 19, referencing the expiration date of the FY 2017 budget resolution's reconciliation instructions. FAA extension/hurricane tax relief: The House is expected to vote on the "Disaster Tax Relief and Airport and Airway Extension Act of 2017," which combines a six-month extension of the Federal Aviation Administration authorization and taxes with temporary tax relief to the victims of Hurricanes Harvey, Irma, and Maria. "My bill specifically helps hurricane victims keep more of their paycheck, deduct more of the cost of their expensive property damage, and have more affordable and immediate access to money they have saved for their retirement. The legislation will also encourage even more Americans to donate generously to help those in need," Chairman Brady said in announcing the bill. "Taken together, these tax relief measures will help more people be able to bear the tremendous expense of recovering from these destructive hurricanes." Last week (September 18-22) Senate budget resolution: The Senate Budget Committee is poised to consider as soon as next week an FY 2018 resolution with reconciliation instructions to provide for tax reform legislation that results in a net tax cut of $1.5 trillion over a 10-year period. That figure was widely cited but not included in a September 20 deal announced by Senators Bob Corker (R-TN) and Pat Toomey (R-PA), the two Republican Committee members who had the most divergent views on the matter. The Committee has a 12-11 party ratio, essentially requiring the votes of all Republican members in order to report out a resolution with reconciliation instructions allowing a tax bill to pass with the votes of as few as 50 senators (with the Vice President breaking the tie). Both senators said the agreement would provide the "headroom" for a pro-growth tax plan. The deficit-conscious Corker said he hopes the tax plan "does not worsen but hopefully improves our fiscal situation," and Toomey expressed confidence that tax reform "causes the economy to surge, and ultimately results in reduced federal budget deficits." The argument that economic growth from tax cuts increases federal revenue is backed by other Budget Committee members including Ron Johnson (R-WI), who said in the New York Times, "Just going from 2 to 3% growth adds about $14 trillion of economic activity over a decade, $2 to $3 trillion of revenue to the federal government." The $1.5 trillion figure is seen as accommodating the fact that dynamic scoring as well as use of a current policy baseline that assumes extension of temporary tax provisions like bonus depreciation — both of which Corker has expressed openness to — may not be counted in official revenue estimates for a tax reconciliation bill. 'Unified framework' release September 27: Speculation continued regarding the tax reform release by Administration and congressional Republican negotiators planned for next week, likely on September 27. On Fox News' "Sunday Morning Futures" September 17, Ways and Means Committee Chairman Kevin Brady (R-TX) said the release will be a "unified framework" with "all of the core elements of tax reform," including "details about our business and individual rates that we propose going forward on tax reform." He again cautioned: "there won't be details on every aspect of the tax code. Obviously, the Ways and Means Committee and Finance Committees will do that, but I think you're going to see some key details and clearly, unified consensus document about how we move forward on tax reform." Asked about the expensing debate, Brady said, "We want to drive our business rates for every size business as low as we can and you'll see this. And then we want to drive the incentives for investment up as high as we can. You'll see that as well." In a September 21 Fox interview, Brady signaled that negotiators will likely propose eliminating the State and local tax deduction. Other tax reform-related events next week include: — September 24-25: Ways and Means Committee Republicans will discuss tax reform; Finance Committee hearing: The budget resolution deal clearing the way for a $1.5 trillion tax cut dominated a Senate Finance Committee hearing on business tax reform September 19. Toomey, who is a member of both committees, asserted that economic growth and output is affected by incentives and penalties in the tax code, thus better incentives will result in more growth. Chairman Orrin Hatch (R-UT) said there is "fertile ground for bipartisan agreement," but Democrats continued to say they expect to be shut out of the process because of plans to use reconciliation, and also expressed doubt that economic growth would make up revenue from tax cuts. Democratic Senators including Tom Carper (D-DE) and Ben Cardin (D-MD) expressed reservations about a deficit-financed tax bill, and Senator Mark Warner (D-VA) questioned the wisdom of such legislation when the nation already has $20 trillion in debt. Ranking Member Ron Wyden (D-OR) warned that "retroactive, debt-financed tax cuts, particularly temporary ones, is a prescription for more trouble in the American economy in the long term." Witness Donald Marron of the Urban Institute & Urban-Brookings Tax Policy Center (TPC) 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, and that deficit-financed tax cuts would be a drag on the economy. Republicans have made the case that more jobs and higher wages will result from lowering corporate taxes, which Hatch said are high compared 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. Hatch also said he remains interested in corporate integration. BRT cross-border analysis: A globally competitive U.S. statutory corporate income tax rate of 20% would have kept 4,700 companies under U.S. ownership from 2004 to 2016, according to a September 19 Business Roundtable study on cross-border mergers and acquisitions (M&A). The report, prepared for the BRT by EY, also said that with a 20% statutory corporate income tax rate, U.S. companies would have acquired, on net, $1,205 billion in cross-border assets during 2004-2016 instead of losing $510 billion in assets to foreign buyers during that time period. The analysis further reported that the rate of foreign acquisitions of U.S. companies has accelerated over the past three years. "The U.S. tax system continues to represent a serious disadvantage to U.S.-based companies and this country's economy," said Mark A. Weinberger, Global Chairman and CEO of EY and Chair of the Business Roundtable Tax and Fiscal Policy Committee. He also said, "The United States is losing business headquarters along with good-paying jobs, assets and innovation because of its outdated, anti-competitive tax code. Cross-border transactions are not inherently bad, and capital should flow to the highest returns regardless of country borders. However, a country's tax system should not drive investment outside its borders. This study is more compelling evidence that Congress and the Administration must enact tax reform to keep and attract companies, jobs and investment." The BRT also held a series of discussions and media interviews this week, including a September 20 forum in which CEOs called for a competitive low corporate tax rate and territorial system. "Every one of these CEOs -and I'm looking around at all of them here — said, unlike in past debates, they are willing to put on the table current deductions, incentives, and credits that are in the code to get this rate down and get a competitive territorial system," Mr. Weinberger said. "That is not easy to do, because that means we are looking at the overall supply of goods and services going up, but in the short term we may have some negative consequences on the tax side for individual companies. That's a big deal." JPMorgan Chase CEO Jamie Dimon and IBM chief executive Ginni Rometty were asked during a CBS interview broadcast September 20 about the effect of a corporate tax rate cut. Rometty said it would result in economic growth and jobs: "When you do your own budget at home, you plan your budget on your after-tax dollar. You decide, 'what kind of house I can buy, what am I going to do on a vacation?' You do all that with your after-tax money. Same is true with a business." Dimon, who is Chairman of the Business Roundtable, said, "We are going to give everything we can to get real reform because modest tax cuts won't make the difference." Higher incomes and tax reform: The Washington Post reported September 19 that Republicans are considering scaling back plans to cut taxes on higher incomes and retaining the 39.6% top individual tax rate, possibly in a bid to attract support from Democrats. The paper also reported that the Administration is considering abandoning plans for estate tax repeal, and also that the situation is fluid and changes to both the top tax rate and the estate tax could be proposed after all. The report follows President Trump's comments that high-income Americans will not benefit from a tax plan that will be focused on the middle class and job creation. Some view a reduced rate on pass-through businesses likely to be included in a Republican tax reform plan as offering the largest potential benefit for the wealthy. Senate Finance Ranking Member Wyden again focused his opening remarks on the issue at the September 19 hearing. "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." Also during the hearing, Marron cited TPC estimates that the top 1% receive more than half of pass-through business income, meaning "The benefits from a maximum tax rate on pass-through business income thus skew enormously to people with high incomes." A September 21 New York Times editorial entitled "Tax Cuts for the Rich by Another Name" said, "Republican advocates of this proposed sleight-of-hand like to sell it as a benefit for small businesses, freelancers and moonlighters — the middle class. But pass-through income from nearly 70% of small businesses already is taxed at top rates of 15% or less, because those businesses are, in fact, small, and their owners' income is modest." House Freedom Caucus budget demands: The House Budget Committee passed an FY 2018 budget resolution in July but it hasn't gotten a full House vote and its reconciliation instructions do not provide for a tax cut like the one envisioned in the Senate. Chairman Diane Black (R-TN) said the resolution allows for "tax reform that will be deficit neutral," but the actual instructions don't address tax reform; they just call for about $200 billion in mandatory savings over 10 years from House committees, including $52 billion from Ways and Means. The House Freedom Caucus has withheld support for the FY 2018 budget resolution citing insufficient information about the tax reform legislation it would facilitate, though Republican leaders hope next week's "Big Six" tax reform framework release can move the process along. Chairman Brady said after the release the focus will be on the budget resolution, which needs to be completed by mid-October, and when that is complete he will lay out a Chairman's Mark of tax legislation. He said, "if Republicans don't unite and move this budget so that we can move tax reform," the President will look for other partners. Freedom Caucus Chairman Mark Meadows (R-NC) and Rep. Jim Jordan (R-OH), chairman emeritus, laid out their concerns and demands clearly in a September 20 Wall Street Journal op-ed, saying they will vote for a budget when they have answers about rates and how small businesses will be treated. The pair said they did not want to repeat the secrecy and rigidity with which leaders handled ACA repeal legislation after the reconciliation process was authorized, and asked why there is a reluctance to make tax reform details public. "Is the plan being hidden away only to be rolled out at the last minute when members will be told again to take it or leave it, it's a binary choice?" they asked. Pence speech: On September 22, Vice President Pence delivered a speech on tax reform in Anderson, Indiana. In addition to being Pence's home state, the choice of Indiana follows similar visits by President Trump to states that he won in 2016 and who have a Democratic senator — in this case, Joe Donnelly (D-IN) — up for re-election in 2018. Donnelly — one of only three Democratic senators 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 — attended the speech, in addition to Reps. Todd Rokita (R-IN) and Luke Messer (R-IN), both of whom have announced their intention to seek the Republican nomination for Donnelly's seat. "Our tax code has given foreign companies an enormous competitive edge over American businesses and those days are over," the Vice President said. He said President Trump will sign before the end of the year "a tax cut that will put American workers and the American economy first." He also called on Senator Donnelly to help in the effort. CBO says inversions provide companies average $45 million first-year tax benefit: For companies that inverted from 1994 through 2014 and reported positive income in the financial year before and after the inversion, the amount of worldwide corporate tax expense reported on their financial reports fell, on average, by $45 million in the financial year after the inversion, the Congressional Budget Office said September 18. CBO's "An Analysis of Corporate Inversions" focuses on two strategies — the relocation of profits to lower-tax jurisdictions and corporate inversions — that multinationals can use to reduce their tax liability. It cited two major benefits from inversion: the future foreign profits of the new corporation will not be taxed by the United States; and an increase in "the benefit of using certain accounting or legal strategies to move profits earned in the United States to other countries with lower corporate tax rates, because foreign earnings will no longer be subject to the U.S. corporate income tax." Additionally, "the existence of a new foreign parent company after an inversion may facilitate profit shifting through intercompany debt," CBO said. The analysis described how the size of corporations proposing inversions in 2014 contributed to increased scrutiny of the issue and a Treasury Notice issued in September of that year. The Notice made it more difficult for an inverted corporation to meet the U.S. ownership thresholds and to access existing foreign profits without paying U.S. taxes, as well as announcing that Treasury was considering action to limit corporations' ability to use interest payments to shift profits earned in the United States to lower-tax jurisdictions (which came in 2016). CBO said Treasury's actions and press scrutiny contributed to a slowdown in inversion activity but did not halt corporations' actions to reduce the amount of taxes they owed: some companies that called off inversions found other ways to reduce their overall tax liability. Quote of the Week "We have a once-in-a-generation opportunity to reform our tax code and pave the way to unprecedented prosperity. By doing what we're doing, we will see results like you've never seen before. It will be the largest tax cut in our country's history. I am asking members in both parties to come together, to put aside partisan differences, and to pass historic tax reform and tax cuts for the great citizens of our nation. That's how we will all succeed and thrive together — as one team, one people, and one American Family." — President Trump, weekly address, September 22 ———————————————
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