This week (October 2-6)

Congress: The House and Senate are in session. The Senate Budget Committee will consider its FY 2018 budget resolution, and the full House is set to consider its version as Republicans work toward agreeing to a resolution that will allow tax reform legislation to be considered under the reconciliation process.

Last week (September 25-29)

'Unified Framework' released: The Trump administration and congressional Republican leaders on September 27 released a "Unified Framework for Fixing Our Broken Tax Code" that would reduce the statutory corporate tax rate to 20% and move toward a territorial system of taxing foreign earnings. It would also limit the tax rate applied to the business income of pass-through businesses to 25%, and contemplates that committees will adopt anti-abuse measures to ensure personal income is not characterized as business income. Individual tax rates would be set at 12%, 25%, and 35% — though the framework said "an additional top rate may apply to the highest-income taxpayers" — and the standard deduction would be roughly doubled to $12,000 for individuals and $24,000 for married couples. The consensus on a framework for tax reform follows months of negotiations between Administration officials and Republican leaders in the House and Senate. Many of the details related to the framework will be left to the congressional tax-writing committees to decide, and some tax issues are not addressed in the document, including carried interest and tax rates on investment income. "This unified framework serves as a template for the tax-writing committees that will develop legislation through a transparent and inclusive committee process," the document said.

For businesses, the framework explicitly preserves the R&D tax credit and Low-Income Housing Tax Credit, and "envisions repeal of other business credits," with the caveat that tax-writing committees may decide to retain some to the extent permitted under budgetary limitations. The Section 199 domestic production deduction will no longer be necessary, the framework stated. In addition to the 20% statutory corporate tax rate, the framework "aims to eliminate" the corporate Alternative Minimum Tax (AMT), and said committees also may consider methods to reduce the double taxation of corporate earnings, which appears to refer to Senate Finance Committee Chairman Orrin Hatch's (R-UT) interest in corporate integration. Immediate expensing would be allowed "for the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least five years," though the committees are invited to further enhance expensing. Under the framework, the "deduction for net interest expense incurred by C corporations will be partially limited," with tax-writing committees instructed to consider the appropriate treatment of interest paid by non-corporate taxpayers. It also said: "Special tax regimes exist to govern the tax treatment of certain industries and sectors. The framework will modernize these rules to ensure that the tax code better reflects economic reality and that such rules provide little opportunity for tax avoidance."

The territorial system under the framework would provide a 100% exemption for dividends from foreign subsidiaries (in which the US parent owns at least a 10% stake). The transition to such a system includes treating accumulated foreign earnings as repatriated and subject to a mandatory tax to be paid "over several years." Earnings held in illiquid assets will be subject to a lower rate than earnings held in cash or cash equivalents, though neither rate is specified. "To prevent companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations," the document stated. It also stated: "The committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies."

For individuals, the framework eliminates most itemized deductions, including the State and local tax deduction, but tax incentives for home mortgage interest and charitable contributions would be retained. Tax benefits that encourage work, higher education, and retirement security are retained, but tax-writing committees are encouraged to simplify such benefits. The framework also envisions the repeal of many of the other exemptions, deductions, and credits for individuals. The framework also calls for repealing the AMT for individuals and the estate tax. The Child Tax Credit would be significantly increased, and committees are instructed to work on additional measures to "meaningfully reduce the tax burden on the middle-class."

Budget process moving: Plans to process an FY 2018 budget resolution — which the House and Senate must agree on in order for the reconciliation process to allow a tax bill to pass the Senate with the votes of as few as 50 senators (with the Vice President breaking the tie) — moved swiftly following the framework's release. The House Freedom Caucus, which had withheld support for the FY 2018 budget resolution over insufficient information about the tax reform legislation it would facilitate, released a statement September 27 saying it will support the budget and "looks forward to sending a final bill based on this framework to President Trump's desk as soon as possible."

The Senate Budget Committee September 29 released an FY 2018 budget resolution that provides reconciliation instructions for the Finance Committee to write tax reform legislation that results in a net tax cut of $1.5 trillion over a 10-year period. The Budget Committee will mark up the resolution October 4-5. The $1.5 trillion tax cut figure that was previously agreed to by key Republicans on the Budget Committee is seen as accommodating revenue from dynamic scoring and use of a current policy baseline (which assumes extension of temporary tax provisions like bonus depreciation) that may not be counted in official revenue estimates for purposes of the reconciliation process. The budget resolution directs the Congressional Budget Office and the Joint Committee on Taxation to incorporate the budgetary effects of macroeconomic variables when each produces estimates of major legislation, in order to "guide" the Senate. Like the pending House budget, it follows a current law, rather than current policy, baseline. The resolution sets a November 13 target for the Finance Committee to report out a tax bill, though there is no penalty for missing a reconciliation deadline.

The House Budget Committee passed an FY 2018 budget resolution in July with reconciliation instructions that provide for deficit-neutral tax reform. A House vote is planned for Thursday, October 5, and Majority Leader Kevin McCarthy (R-CA) said that changes to the resolution could be made at the Rules Committee prior to the vote. Ways and Means Committee Chairman Kevin Brady (R-TX) said September 28 that writing tax legislation based on the framework "can't begin seriously without first having a budget."

Cohn says eliminating State and local tax deduction negotiable: In fielding questions about the framework after its release, National Economic Council Director Gary Cohn said on Bloomberg TV September 29 the elimination of the State and local tax deduction "is not a red line for us" and the Administration is "willing to work with the tax writers on the other dials that we have in the system." During the White House press briefing September 28, Cohn said the plan is based on lowering rates and expanding the base by getting rid of "loopholes" used to pay less tax. "So, we have designed a plan where you're going to pay a lower rate, but you're going to pay it on more of your income," he said. Cohn said the plan is "aimed at making sure we give middle-class Americans a tax cut," and asked that it be looked at in its entirety without too much focus on any one element. There is already resistance to eliminating the State and local deduction, which would provide significant revenue toward the tax plan, among Republicans representing states that would be affected. The Wall Street Journal September 29 reported Ways and Means Tax Policy Subcommittee Chairman Peter Roskam (R-IL) as saying the concerns of members must be addressed, and "you can imagine a soft landing on this that creative people are putting much time and energy into." The report also cited Senator Bob Corker (R-TN), a key vote on the Budget Committee who is not running for re-election next year, as supporting elimination of the deduction but noting the lack of specifics on what other provisions would be cut. "They're throwing sugar out on the table," he said. "You haven't even begun to deal with the spinach part. Not even a little leaf of spinach was thrown out on the table." The September 29 New York Times quoted Senate Finance Committee Chairman Hatch as saying of the State and local tax deduction, "That's been a long-heralded and expected set of tax rules, and it's really, really tough to change that."

Trump says 20% corporate rate non-negotiable: President Trump September 27 said the 20% statutory corporate tax rate included in the framework is non-negotiable and is the "perfect number." During a press gaggle before departing for a tax reform speech in Indianapolis, Indiana, President Trump said the 15% corporate rate he had been calling for "was so low we didn't take in the revenue. But I wanted 15, so we got 20 — 20 is my number. So I'm not negotiating that number. I really — I am not going to negotiate. That's the number I wanted to get to." During his speech in Indianapolis, President Trump again made comments insisting upon the rate included in the framework, saying, "We will reduce the corporate tax rate to no higher than 20%." He described the unified framework and said, "Over the next few months, the House and Senate will build on this framework and produce legislation that will deliver more jobs, higher pay, and lower taxes for middle-class families, for the working man and woman and for businesses of all sizes." The President said the current tax system makes the United States one of the few developed nations to punish domestic companies when they bring wealth earned overseas back into the country, resulting in corporations holding trillions of dollars in foreign countries, and many incorporating abroad. "We're going to let them bring the money back home. Our framework will stop punishing companies for keeping their headquarters in the United States," he said. The event followed 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 attended the speech and the President made clear voters will hold him responsible if he does not cooperate in the tax reform effort. "And I have to say just before coming here, we released some of the details of the tax and the tax reform and the tax cuts. And it has really received tremendous, tremendous reviews," President Trump said. "And if Senator Donnelly doesn't approve it, because you know, he's on the other side, we will come here. We will campaign against him like you wouldn't believe."

During a September 29 speech to the National Association of Manufacturers, President Trump said, "For too long, our tax code has incentivized companies to leave our country in search of lower tax rates," and that his Administration supports growing American manufacturing and jobs and wages along with it. The President also said capping the tax rate for manufacturers that file taxes as pass-throughs at 25% will be "rocket fuel for our economy."

Interest deductibility: On the business side, the framework's statement that the "deduction for net interest expense incurred by C corporations will be partially limited" has raised the concerns of businesses that rely on debt financing and others. The Washington Post September 29 reported Ways and Means member Jim Renacci (R-OH) as saying interest deductibility is a "normal and necessary operating expense" and that he is anxious to see whether the small business exception to be included in the plan will be workable, citing concerns about how car dealers and farm equipment dealers will be treated.

Preliminary estimates: Despite the lack of complete details in the unified framework, there were still preliminary efforts by outside groups to determine how much the plan will cost and who will benefit. The Committee for a Responsible Federal Budget September 27 estimated that the plan calls for roughly $5.8 trillion of tax cuts and $3.6 trillion of base broadening, resulting in about $2.2 trillion of net tax cuts over 10 years. The Urban-Brookings Tax Policy Center September 29 said the proposals in the unified framework would reduce federal revenue by $2.4 trillion over 10 years and $3.2 trillion over the second decade (not including any dynamic feedback), and that in 2018 the benefit would be largest for taxpayers in the top 1% by income.

Quote of the Week

"If we want to make more products and say 'Made in America' — because that's what we want — 'Made in the USA' or 'Made in America' — then we have to reduce taxes on the businesses that produce in America. And with your help, that is exactly what we are going to do." - President Trump, remarks at NAM event, September 29

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