This week (February 19-23)

Congress: The House and Senate are out of session for the President's Day work period.

Last week (February 12-16)

TCJA fixes and implementation: House Ways and Means Committee Chairman Kevin Brady (R-TX) this week said lawmakers have a responsibility to "provide real, workable solutions" to problems that arise with the Tax Cuts and Jobs Act (TCJA) enacted in December. Senate Finance Committee Chairman Orrin Hatch (R-UT) put a finer point on the issue, stating that TCJA provisions will not have their intended effects if they are not properly implemented and he will pressure the Administration to respect the fact that "the best place to get an explanation of Congress's intent is Congress itself." Their comments came during separate committee hearings on the President's FY 2019 Budget with Treasury Secretary Steven Mnuchin. Following the whirlwind process of enacting the bill last year, Treasury and IRS have updated their Priority Guidance Plan with a long list of TCJA projects, and taxpayers are looking for answers in a number of areas. Brady said February 15 the Committee and the Treasury Department "have a shared responsibility to ensure this new tax law is working on behalf of all Americans." Prior to his Committee's hearing, Brady told the Tax Council Policy Institute (TCPI) conference, "We expect to develop a punch list of provisions that need to be addressed either administratively or through changes in the code itself," but did not indicate when members may be able to act on a technical corrections bill. Bloomberg Tax reported Ways and Means Ranking Member Richard Neal (D-MA) as saying he wants hearings on proposed corrections and for any bill to also include Democratic priorities, such as addressing multiemployer pension plans. "If they're going to open this up, we have a series of provisions we'd like to include for the discussion too," Neal said. The recent Bipartisan Budget Act established a Joint Select Committee on Solvency of Multiemployer Pension Plans that is required to report a bill by the end of November.

At his February 14 hearing, Hatch said, "Where things are potentially unclear in the law, Congress should be the one to determine and explain what was intended" and provide a timely fix if necessary. In a February 13 letter to Mnuchin, Hatch stressed the importance of carrying out legislative intent, including with respect to the "structural reform of taxation of inbound and outbound international transactions," and the goals of removing burdens, anti-competitive features, and base erosion in the former system.

Section 199A: Chairmen Brady and Hatch both expressed support for addressing concerns with the Section 199A 20% deduction for pass-through business income, particularly focusing on a provision that treats sales by farmers to cooperatives more favorably than sales to other buyers. "The urgent objective is to make sure that all our farmers and ranchers can reap the benefits of tax reform — and we are committed to taking action on a solution as soon as possible," Brady said, adding that he is committed to working with the Senate and Administration on the issue. Chairman Hatch said, "Though the aim of that provision, in part, was to preserve benefits previously available to agricultural cooperatives and their patrons for income attributable to domestic production activities, the current statutory language does not maintain the previous competitive balance between cooperatives, other agricultural businesses, and the farmers who sell their crops to them, which existed prior to enactment of the tax reform bill." He said Senators Chuck Grassley (R-IA), Pat Roberts (R-KS), and John Thune (R-SD) are identifying a solution and his goal is to produce a legislative fix as soon as possible.

Carried interest, other TCJA issues: Also during the Finance Committee hearing, Ranking Member Ron Wyden (D-OR) highlighted a Bloomberg article suggesting the three-year holding period requirement enacted under the TCJA can be avoided through an exemption for carried interest paid to a corporation rather than an individual. Mnuchin said he met with the IRS and Office of Tax Policy as a result of that article and, "The IRS and Tax Policy intends to send out, within the next two weeks, guidance that we do believe that taxpayers will not be able to get that loophole by going through subchapter S, and that's something that we believe we have the authority to do under the existing code that left us certain discretion … "

Regarding other issues, Senator Bill Cassidy (R-LA) said one of the provisions of the TCJA was to provide fair treatment for taxpayers in a loss position under deemed repatriation under Section 965; pre-repatriation losses are ring-fenced, but there is a question regarding losses in 2017 that he wants to discuss with Treasury. At Ways and Means, Rep. Jim Renacci (R-OH) highlighted what he said was a drafting error that assigns "qualified improvement property" a 39-year recovery period rather than a 15-year period as intended. Mnuchin said Treasury is aware of the issue and looking into whether something can be done.

Cohn wants permanent individual cuts: At the TCPI conference, National Economic Council Director Gary Cohn said the Administration will push to make permanent the TCJA individual tax cuts, which expire after 2025. Making them temporary under the bill "haunts me to this day" and is "something we have to fix at the first possible moment," Cohn said, as reported by Tax Notes. Cohn said he is not surprised that some European officials consider the deduction for foreign-derived intangible income (FDII) an export subsidy in violation of WTO rules, but the international changes should be viewed as a whole and, "We are very confident that they abide by all the rules and all the regulations and all the laws when you look at them in their entirety." Bloomberg Tax reported that EU finance ministers plan to begin work February 20 on a strategy to address TCJA provisions such as the base erosion and anti-abuse tax (BEAT) and global intangible low-taxed income (GILTI), which some believe violate WTO rules.

President's Budget: The Mnuchin hearings in the tax-writing committees were focused on the President's FY 2019 Budget that was released on February 12, though, on the heels of the TCJA, it contains little in the way of new tax proposals and was not accompanied by a Treasury Greenbook. The $4.4 trillion Budget does not foresee bringing the federal budget into balance within the 10-year budget window, even with proposed deep cuts to mandatory programs such as Medicare and Medicaid. The Budget projects a return to near-$1 trillion annual deficits in FY 2019 and federal debt held by the public above 80% of GDP. OMB Director Mick Mulvaney told reporters the Budget is a "messaging document," and enactment days earlier of the Bipartisan Budget Act to set discretionary spending levels for FY 2019 increased that perception and raised questions about whether Congress should spend time on a budget resolution. Nevertheless, new House Budget Committee Chairman Steve Womack (R-AR) said the budget deal "in no way precludes us from passing a budget resolution with reconciliation instructions," which could focus on mandatory spending cuts. Roll Call reported that the Senate is not expected to pursue a budget resolution because Republicans have no plans to use reconciliation to advance priorities with a simple majority vote.

Democratic reaction: Democrats were eager to juxtapose the cost of the tax bill with spending cuts proposed in the President's Budget. Senate Minority Leader Chuck Schumer (D-NY) said in a statement, "If Americans want a picture of who President Trump works for, the combination of the tax bill and this budget make it crystal clear. He's for the rich and powerful at the expense of the middle class." During the Finance Committee Mnuchin hearing, Senator Wyden dismissed the notion that corporate tax cuts under the law would immediately benefit workers, saying 20 times more money has been spent on stock buybacks than on worker bonuses over the last few months. "And then, of course, there was the promise that the tax bill would not lead to cuts to Social Security, Medicare or Medicaid. Well, on Monday, our worst fears were confirmed," Wyden said. "The Trump budget admits the tax cuts don't pay for themselves, so it hits those programs with massive cuts." At Ways and Means, Rep. Neal said the TCJA primarily benefited wealthy individuals and corporations while adding significantly to the nation's deficit and debt, which the Trump Budget proposes to make up with spending cuts to programs vital to ordinary citizens like Medicare, Medicaid, and food stamps.

Infrastructure framework: On February 12, President Trump submitted his "Legislative Outline for Rebuilding Infrastructure in America," which asks Congress to provide $200 billion in federal funds over 10 years to spur "at least" $1.5 trillion in infrastructure investment with partners at the state, local, and private level. The funds would be primarily allocated to a combination of new incentive programs and enhancements of existing federal infrastructure financing and bond programs designed to encourage non-federal infrastructure investments. The plan seeks $6 billion to create flexibility and broaden eligibility for private activity bonds (PABs). It would require "public attributes" for infrastructure projects, broaden the categories of eligible facilities, eliminate the alternative minimum tax preference for PABs, and remove state volume caps on PABs. The House version of the TCJA proposed repealing the exclusion from gross income for interest on PABs but the provision was not included in the final version of the bill, and Politico reported Ways and Means Chairman Brady as saying February 13 that he sees a major expansion of PABs as unlikely. The President's plan does not resolve the issue of how to pay for the infrastructure initiatives, and raising federal fuels taxes has always faced an uphill climb in Congress. President Trump reportedly told lawmakers February 14 that he would back a 25-cent gas tax increase for infrastructure investment, though Senator James Inhofe (R-OK) said it was presented as just one idea on the table in recognition that some funding source will be necessary. The Wall Street Journal reported second-ranking Republican Senator John Cornyn (R-TX) as saying the plan is to "introduce several smaller bills" related to infrastructure and potentially package them, and that "the biggest question is: How do you pay for it?" Some Democrats criticized Trump's plan, arguing its reliance on private and state/local investment means new tolls. "Drive more than a few miles to work? Get ready for more tolls. Rushing to school in the morning? Don't forget cash for the tollbooth. Heading to the grocery store or the mall to do some shopping? Better remember to budget tolls into your trip," Senator Wyden said February 14.

Kautter at Finance: The Senate Finance Committee held a second budget hearing February 14, with Assistant Treasury Secretary for Tax Policy and Acting IRS Commissioner David Kautter testifying on IRS funding. Chairman Hatch said the Administration's proposal for additional cuts to IRS funding is a mistake because "directly after passage of a major overhaul of the tax system is not a great time to further reduce the taxpayer services budget of the agency that will do most of the work in implementing the updated tax code." Senator Wyden was also critical of "giving short shrift to … the agency that actually has to implement those changes and provide service to American families and businesses based on the new rules." He asked when Treasury/IRS would issue guidance on the pass-through deduction under the TCJA, and Kautter said guidance on the new pass-through rules is a top priority and will be released as soon as possible, though no date has been set. Responding to Senator Rob Portman's (R-OH) question about whether the agency is due for an overhaul, Kautter said he thinks it is time to take a look at how the IRS operates given that it has been 20 years since the IRS Restructuring and Reform Act of 1998, and there isn't a private business remaining that hasn't been revamped in the past 20 years. However, he told reporters after the hearing that a broad restructuring may not make sense while IRS is implementing the TCJA, which will "consume a lot of energy and effort" at the agency.

Transition tax guidance: On February 13, IRS released Revenue Procedure 2018-17, to prevent changes to the annual accounting periods of certain foreign corporations in 2017 under either the existing automatic or general procedures if such change could result in the avoidance, reduction, or delay of the Section 965 transition tax under the TCJA.

Quote of the Week

"Of course, with any major tax reform bill, none of the important provisions we have written will have their intended effects if they are not properly implemented. That's why we will keep pressure on the administration to implement the law as Congress intended. I'm going to keep working to ensure that everyone recognizes and respects Congress' role in this process and the fact that the best place to get an explanation of Congress's intent is Congress itself. Where things are potentially unclear in the law, Congress should be the one to determine and explain what was intended, and, if need be, such as with section 199A, provide a timely fix." — Senate Finance Committee Chairman Orrin Hatch (R-UT), February 14

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