March 5, 2018 EY Center for Tax Policy: This Week in Tax Policy News for March 2 This week (March 5-9) Congress: The House and Senate are in session. The Senate may vote on legislation (S. 2155) to provide relief from Dodd-Frank regulations for community banks, credit unions, midsize banks, and regional banks. Last week (February 26-March 2) TCJA effects: The debate over who is benefiting from the Tax Cuts and Jobs Act (TCJA) has heated up in the wake of numerous company announcements of share buybacks, which Senate Democrats said have exceeded $200 billion among major US companies since the law was enacted. In a speech at the U.S. Chamber of Commerce February 27, Senate Finance Committee Chairman Orrin Hatch (R-UT) pushed back at claims that the corporate rate reduction under the TCJA only benefits corporations, their CEOs, and wealthy shareholders through stock buybacks. "[N]early four out of every ten dollars invested in stock ownership is currently held in retirement plan accounts. That is the largest owner category of overall stock ownership in the United States," Hatch said. "Those stock buybacks decried so loudly by some of my friends on the other side have increased the value of those holdings, meaning the biggest group of beneficiaries are people with pensions, IRAs, and 401(k)s." Hatch also said the TCJA's international tax changes ended "the days where complex transfer pricing, foreign tax credits, and competing patent-box regimes drove companies, investment, and business activity out of the United States." The pressure for companies to invert or be taken over or to otherwise move investments offshore has, to a large extent, been relieved, he said, and the disincentives for companies to invest in the United States largely eliminated. He made similar comments at an American Enterprise Institute event March 1. The Wall Street Journal reported Treasury Secretary Steven Mnuchin as saying at the Chamber event, "Even if people buy back stock, that is money that goes back into the economy that lets investors take that money and allocate it to other things. It's a complete system." Countering these arguments, Finance Ranking Member Ron Wyden (D-OR) said on the floor February 28 the wealthiest 10% of earners own 84% of all the stock held by Americans and, "when you talk about tax cuts producing massive stock buybacks, you're talking sending huge amounts of cash overseas straight into the pockets of wealthy foreigners." Trier's departure: There has been significant attention on the departure of Deputy Assistant Secretary for Tax Policy Dana Trier from the Treasury Department, which Trier attributed to fallout from his comments at a San Diego ABA conference suggesting the TCJA is rife with technical glitches and planning opportunities. In a Politico interview published February 27, Trier, who worked at Treasury following the 1986 Act, said the number of issues that have emerged with the law is typical with major tax legislation. He cited the difficulty in developing regulations for international tax changes, including the transition tax, and said rules for the new base erosion and anti-abuse tax (BEAT) and global intangible low-tax income (GILTI) won't be ready before the fall. Finance Committee Chairman Hatch said February 27 he was not worried that Trier leaving would hamper TCJA implementation. "I think it'll be implemented," he said. "I don't have any problem with that." Democratic approach to TCJA: The Associated Press this week reported on a lack of consensus among Democrats over the scope of their opposition to the TCJA, with some calling for full repeal — mirroring the Republican approach to the Affordable Care Act — and others a reevaluation of only portions of the law. Senator Bernie Sanders (I-VT) said tax benefits for the middle class and small businesses must be evaluated, and those for the wealthy and corporations repealed completely. Senator Joe Manchin (D-WV), up for re-election in a state President Trump won in 2016, said, "I think there's a lot of good things in the tax bill. I just think they went a little too far on some things." Manchin wants the statutory corporate income tax rate set at 25%. In a bill introduced February 27, House Ways and Means Tax Policy Subcommittee Ranking Member Rep. Lloyd Doggett (D-TX) and Senator Sheldon Whitehouse (D-RI), a new member of the Finance Committee, targeted TCJA provisions they say create incentives to outsource jobs and shift profits offshore. The No Tax Breaks for Outsourcing Act (H.R. 5108/S. 2459) would eliminate deductions for GILTI and foreign-derived intangible income (FDII). It also includes a provision to treat foreign corporations managed and controlled primarily in the United States as domestic corporations for tax purposes. Extenders, technical corrections: The House Ways and Means Tax Policy Subcommittee announced a March 14 hearing on "Post Tax Reform Evaluation of Recently Expired Tax Provisions." Full Committee Chairman Kevin Brady (R-TX) said of the hearing: "The Ways and Means Committee will apply a rigorous test to these temporary tax provisions. We want to know which provisions are redundant or unnecessary after tax reform, which amplify the growth and competitiveness delivered by our new tax code, and what other provisions stakeholders are willing to give up to preserve a particular provision of interest." The February 9 budget bill extended tax extender provisions for 2017, and there are efforts to extend them through 2018. Tax Notes reported Chairman Brady as saying at the February 23 International Fiscal Association conference in Houston there will likely be a series of smaller TCJA technical corrections to address minor drafting issues, followed by a larger technical corrections bill after stakeholders have reviewed the new code and submitted comments to Treasury and Congress. Brady said changes to international provisions likely won't happen soon, as members and Treasury need time to evaluate issues that are raised. Carried interest guidance: IRS March 1 issued Notice 2018-18, saying forthcoming regulations will clarify that taxpayers will not be able to circumvent the TCJA's three-year holding period with respect to certain carried interests by using S corporations. Secretary Mnuchin announced the guidance to the Finance Committee February 14, following reports that the holding period requirement could be avoided. "We worked expeditiously to take this first step to clarify that S corporations are subject to the three year holding period for carried interest," Mnuchin said March 1. "Treasury and the IRS stand ready to implement the Tax Cuts and Jobs Act as Congress intended and provide the appropriate taxpayer guidance on how the law will be implemented." Senate members of joint select committees: Senate leaders this week announced members of the Joint Select Committee on Solvency of Multiemployer Pension Plans and the Joint Select Committee on Budget and Appropriations Process Reform. The committees, established by the Bipartisan Budget Act of 2018, each include eight Senators and eight House members, divided between Republicans and Democrats; House members were announced previously. By the end of November, the multiemployer committee must report a bill and the budget process committee must vote on a report with recommendations and proposed legislative language to carry them out. Both committees are required to hold public hearings. Senators on the Joint Select Committee on Solvency of Multiemployer Pension Plans are: — Senate Finance Committee Chairman Orrin Hatch (R-UT) — co-chair Senators on the Joint Select Committee on Budget and Appropriations Process Reform are: — Senator Roy Blunt (R-MO) House Budget Committee Chairman Steve Womack (R-AR) and Appropriations Committee Ranking Member Nita Lowey (D-NY) are co-chairs of the budget process committee. Lowered expectations on infrastructure: Top lawmakers expressed lowered expectations about acting on infrastructure legislation this year, weeks after President Trump released an infrastructure framework without identifying a funding source. Second-ranking Senate Republican John Cornyn (R-TX) told reporters February 27 that action on infrastructure this year will be difficult given other demands on Congress. Third-ranking Republican John Thune (R-SD) — who is Commerce, Science, & Transportation Committee chairman and, like Cornyn, a Finance Committee member — suggested that the lack of a funding source is problematic, and also cited a crowded agenda. However, House Transportation and Infrastructure Committee Chairman Bill Shuster (R-PA) was incredulous over comments that the Senate will be too busy to address the issue. He said February 28 that an infrastructure package that includes a gas tax increase may need to wait for a lame-duck session following the midterm elections, Bloomberg Tax reported. He has also said Republicans could face election consequences for not acting to fund infrastructure projects. EPW hearing: The skepticism over action on infrastructure came as the Senate Committee on Environment and Public Works (EPW) held the first congressional hearing on the Trump plan. Chairman John Barrasso (R-WY) expressed his belief that "we can work in a bipartisan way" on infrastructure legislation, while Ranking Member Tom Carper (D-DE) expressed significant policy concerns with the Administration's proposal, including its "sweeping rollbacks" of environmental protections and failure to identify "pay-fors." Transportation Secretary Elaine Chao, a witness, stated that the "guiding principles" of the plan included using $200 billion as "seed money" to incentivize $1.5 trillion in infrastructure investment. She declined to comment on whether the President supports a gas tax increase. Senator Carper said, "several of us were in the meeting with the President last month when he repeatedly declared his strong support for a 25 cent per gallon increase in the federal gas tax on gasoline and diesel fuel. That could become one important additional source of funds to help us pay for the improvements we need." Further, he opined that "if the President is serious" there would be bipartisan support for generating additional revenue and "we can do a deal." The Finance Committee, of which Carper is a member, has jurisdiction over federal fuels taxes and Tax Notes reported Chairman Hatch as saying he will hold hearings on the President's infrastructure plan. Steel, aluminum tariffs: President Trump announced March 1 that he will impose tariffs of 25% on steel imports and 10% on aluminum, and the EU, Canada, Germany, and other nations have threatened to retaliate. There was uncertainty within the White House over whether the President would make the announcement and, after he did, over the specifics. The move was opposed by some Administration officials as well as some of Trump's closest congressional allies in the tax reform effort, including Senate Finance Committee Chairman Hatch, who said, "Tariffs on steel and aluminum are a tax hike the American people don't need and can't afford." The President focused several tweets on trade, including saying March 2: "When a country Taxes our products coming in at, say, 50%, and we Tax the same product coming into our country at ZERO, not fair or smart. We will soon be starting RECIPROCAL TAXES so that we will charge the same thing as they charge us. $800 Billion Trade Deficit-have no choice!" Trump announces intent to nominate Desmond IRS Chief Counsel: President Trump March 2 announced his intent to nominate Michael J. Desmond to be Chief Counsel for the Internal Revenue Service and Assistant General Counsel in the Department of the Treasury. CBO Outlook on April 9: The Congressional Budget Office (CBO) announced it will release its annual Budget and Economic Outlook on April 9, after Congress returns from its spring recess. CBO previously announced the release of this year's report was delayed to incorporate the effects of recently enacted major legislation. Quote of the Week "Let's get a few facts straight. First, just a few hours ago, corporations crossed the $200 billion mark in stock buybacks this year. Stock buybacks are windfalls that drive up the value of investment portfolios for CEOs and high-flyers. And they're coming in at a rate 30 times greater than worker bonuses — 30 to one! They're on pace to double the amount from the first quarter of last year. Now there was a whole lot of happy talk about this Republican tax plan last winter, but nobody said anything about why Congress ought to pass a Stock Buyback Stimulus Act." — Senate Finance Committee Ranking Member Ron Wyden (D-OR), February 28 ———————————————
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