This week (October 9-13)

Congress: The House is in session but the Senate is out until Monday, October 16.

Ryan speech: House Speaker Paul Ryan (R-WI) will deliver a major speech titled "The Historic Choice on Tax Reform" on Thursday, October 12 (at 8:45 a.m.) at The Heritage Foundation.

Last week (October 2-6)

Budget resolutions advance: On October 5, the House approvedan FY 2018 budget resolution (H. Con. Res. 71) and the Senate Budget Committee approved its own version, taking steps toward unlocking reconciliation instructions for tax reform that will be provided if the House and Senate agree to the same resolution, likely later this month or in early November. The reconciliation process will allow a tax bill to pass the Senate by a simple majority, with the votes of as few as 50 senators (with the Vice President breaking the tie). The House resolution's reconciliation instructions provide for deficit-neutral tax reform. The House resolution also puts the budget on a glide path to balance in 10 years, in part by calling for $203 billion in mandatory savings over 10 years from 11 House committees, including $52 billion from Ways and Means, under reconciliation. The Senate resolution's reconciliation instructions provide for a net tax cut of $1.5 trillion over 10 years, seen as accommodating revenue from dynamic scoring and use of a current policy baseline that may not count for parliamentary purposes. The Senate instructions do not call for mandatory savings in the same way as the House resolution, but the Senate budget does envision a balanced budget over the 10-year window, with surpluses in 2026 and 2027, through $5.1 trillion in unspecified spending cuts ($4.3 trillion of which would be from mandatory spending) and $1.2 trillion in additional economic growth. The two chambers will need to resolve their differences after a full Senate vote on the Committee-passed resolution, which is expected to occur the week of October 16. "We did have a budget that represents a vision of the House of Representatives and now we'll be combining that with what the vision is that comes out of the Senate. We still don't have a plan for them definitively yet," House Budget Committee Chairman Diane Black (R-TN) said on Bloomberg Television October 5. "And we'll see what that is and then we'll go to conference and see what we can do about combining these two bills."

The House vote was 219-206, with 18 Republicans voting against the resolution. Some cited the proposed elimination of the state and local tax deduction under the GOP tax reform framework. The Senate Budget Committee vote was 12-11 along party lines. The Committee adopted a general amendment intended to protect middle-income taxpayers under tax reform. Another approved amendment, by Senator Tim Kaine (D-VA), is intended to "prevent Medicare, Medicaid, and Social Security from being cut in exchange for deficit-increasing tax cuts," which seemed to be shaping up as a main Democratic criticism. "If I were a House candidate running against Republican congressmen, I'd salivate at the fact that they voted for this, salivate," Senate Democratic Leader Chuck Schumer (D-NY) said October 5. "Cutting Medicare and Medicaid to help the wealthy get a tax break? I wouldn't do that, if I were them. And I wouldn't do it here, if I were Republican senators." During the markup, Senator Bob Corker (R-TN) said he won't back tax legislation that adds to the deficit, with dynamic scoring taken into account, and subsequently said he is asking for hearings on what type of dynamic models would be permissible and whether estimators other than the Joint Committee on Taxation could weigh in.

Ways & Means tax bill by Halloween: House Speaker Paul Ryan (R-WI) said October 3 that the House Ways and Means Committee in "two to three weeks will be putting out a bill, probably three weeks," and "before Halloween." In a Facebook Live session on tax reform, Speaker Ryan said the Ways and Means Committee and the Senate Finance Committee will fill in the details within the "Unified Framework for Fixing Our Broken Tax Code" released September 27. "The Senate will have their own process in place," Ryan said. "The Senate will take that House bill, take it up, make whatever changes they want to. That's the legislative process. Then we go to a conference committee. We reconcile the differences between whatever the Senate passes and whatever the House passes." Tax Notes reported Ways and Means Tax Policy Subcommittee Chairman Peter Roskam (R-IL) as saying that a Committee markup could be held in October, and Ways and Means Committee Chairman Kevin Brady (R-TX) as saying there are still disagreements but Republicans are "farther along and settled on a great number" of issues and, "We're in those key weeks right now."

Middle-class tax cut: Speaker Ryan and other Republicans have continued to face questions about how the middle class would fare under the plan relative to wealthy Americans. On CBS's "Face the Nation" October 1, Ryan said "the whole purpose of this to get a middle-class tax cut," and that the average blue-collar worker will benefit from a doubling of the standard deduction and bigger child tax credit, as well as the lower corporate tax rate, more competitive system, and expensing that will allow businesses to hire more workers and raise wages. Like some Administration officials, Ryan would not guarantee that every middle-class American would get a tax cut under the plan, saying "I don't know every single person's little small problem or their issue." Host John Dickerson said exemptions will be eliminated in conjunction with doubling the standard deduction and the child tax credit numbers haven't been figured out yet, and observed: "If I'm looking at this, and I'm a middle-class person, I'm thinking, 'The estate tax people are taken care of, the Alternative Minimum Tax, which will help the wealthy, that's getting taken care of, but the things that will help me, those aren't until later." Speaker Ryan said the purpose of the tax bill is to help workers keep more of their money. Roll Call reported that Ryan was asked during an October 5 event in Chestertown, MD how cutting business taxes would benefit employees, and he responded by citing global competition and saying lower taxes would keep businesses in the United States and allow them to keep hiring workers. Still, he said, "There is more I obviously plan on doing, we all plan on doing," to explain the benefits of the plan for individuals.

On "Meet the Press" October 1, Treasury Secretary Steven Mnuchin said it was "not fair" for host Chuck Todd to say "it would be like Houdini trying to do this," for Republicans to satisfy claims that the tax plan will not increase the deficit and will provide a tax cut for everybody but the wealthy won't benefit. Mnuchin said low- and middle-income Americans would "absolutely" get a tax cut and that the objective is not to give an income tax cut to the wealthy, but he recognized a distinction between the income tax system and the estate tax, which the framework proposes to repeal. Asked whether anyone will pay more in tax under the plan, Mnuchin said eliminating the state and local tax deduction "will have different impacts to people in different states, and we're sensitive to that."

Estate tax, state and local deduction: Repeal of the estate tax and elimination of the state and local tax deduction are primary topics of discussion as leaders work to secure sufficient support for the still-developing tax plan in the House and the Senate, where Republicans hold 52 seats and can lose the votes of only two of their members to pass a tax bill under reconciliation. The October 6 Wall Street Journal reported Senators Mike Rounds (R-SD) and Susan Collins (R-ME) as expressing objections to fully repealing the estate tax, which Rounds suggested is avoided by the wealthy and Collins said currently doesn't hit the majority of family businesses and ranchers. The estate tax exemption could be increased as an alternative to full repeal. There is also continued 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. Chairman Brady said this week that tax-writers are listening to members in high-tax states, some of whom reported receiving assurances from leadership that full repeal would not be pursued. Asked on Fox Business News October 6 whether the Administration would negotiate on eliminating the deduction, National Economic Council Director Gary Cohn said, "We are going to be practical," and the only areas where they won't negotiate are the middle-income tax cut and corporate tax rate. Alternatives to repeal include providing a choice between the state and local deduction for property taxes or the mortgage interest deduction, or capping the state and local deduction either for high-value property or high incomes. There was also talk this week about possibly converting the mortgage interest deduction to a credit that would also cover state and local property taxes.

Reaction to TPC report: Some of the scrutiny over how the middle class would fare under the framework resulted from a September 29 Urban-Brookings Tax Policy Center report saying that, under the plan, in 2018 the benefit would be largest for the top 1% by income, and that by 2027 80% of the benefit would accrue to taxpayers in the top 1% and taxes would rise for nearly 30% of those with incomes between about $50,000 and $150,000 annually. Republican congressional leaders who negotiated the framework worked to discredit the report, which Chairman Brady said is "misleading, unfounded, and biased," and "a work of fiction that Stephen King would've been proud of." Speaker Ryan said the group was "making up details, assuming what Congress will do, in order to come up with these kinds of results." During an October 3 international tax reform hearing, Senate Finance Committee Chairman Orrin Hatch (R-UT) said the framework does not include sufficient information to produce a credible analysis, "let alone a detailed estimate of revenue and the distribution of tax burden," and suggested that the TPC report oddly excluded names of specific authors but nonetheless said it represented only the views of those authors, not the TPC. Senator Rand Paul (R-KY), however, seized on the report, saying in an October 2 tweet, "This is a GOP tax plan? Possibly 30% of middle class gets a tax hike? I hope the final details are better than this." Senator Paul subsequently said he is not trying to dictate details of a tax plan, but it shouldn't raise taxes on anyone.

Finance international hearing: An October 3 Senate Finance Committee international tax reform hearing focused on how Congress may design anti-base erosion provisions to fulfill the statement in the unified framework: "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 committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies." Chairman Hatch said the international portion of the framework is short on details "because these problems can't be solved in a nine-page framework document — that will require the work and effort of this committee." Hatch asked whether foreign-based multinational companies have significant planning opportunities, such as earnings stripping, that US-based multinational companies do not, and some witnesses said that is the case because US-based companies are subject to subpart F while foreign-based companies face few penalties for eroding the US tax base. Georgetown's Itai Grinberg, a witness, said that allows foreign-based multinationals "a significant financial advantage because it allows them to reduce their US tax liability effectively through self-dealing," with the link to jobs being that it makes foreign acquisitions of US firms more common than vice versa. He recommended an inbound corporate minimum tax. Another witness, Bret Wells of the University of Houston, suggested "a comprehensively applied base protecting surtax" that eliminates the tax benefits associated with earnings stripping transactions and levels the playing field between US-based and foreign-based multinationals. Under the proposal, a related party payer of a "base erosion shifting payment," representing earnings transferred to a foreign affiliate, would be subject to the surtax "in an amount equal to the amount that would have been collected had those earnings instead been distributed as a partially deductible dividend." The proposal incorporates a rebuttable presumption that the payment in its entirety is a transfer of residual profits. The US payer could seek a refund of the tax from the IRS if it could demonstrate that it utilized a correct application of a profit split transfer pricing methodology. Also during the hearing, Senator Rob Portman (R-OH) cited an EY study saying "there would be 4,700 companies that would be American companies today just in the last 13 years if we had a 20% rate and a territorial system," and said foreign acquisitions are an even bigger problem than inversions.

Treasury regulatory review: In an October 4 report on planned actions regarding tax regulations earlier identified as burdensome, the Treasury Department said the distribution portion of Final and Temporary Regulations under Section 385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness will be retained pending enactment of tax reform. A news release said Treasury is hopeful that tax reform efforts between the Administration and Congress will "address base erosion and earnings stripping while removing tax incentives for foreign takeovers of U.S. companies or for U.S. companies to invert." The report said "Treasury believes that proposing to revoke the existing distribution regulations before the enactment of fundamental tax reform, could make existing problems worse." The Department is, however, considering a proposal to revoke the Section 385 documentation regulations and to develop revised documentation rules that would be substantially simplified and streamlined. The report discussed seven other regulations that Treasury intends to withdraw, partially revoke, or substantially revise.

Quote of the Week

"I do know that it takes $4 trillion of loophole closing to execute what they want to execute. I'm all for the most draconian loophole closing that can possibly take place, but I haven't seen Congress do those sort of things." — Senator Bob Corker (R-TN), October 2 Washington Post

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