June 24, 2018
EY Center for Tax Policy: This Week in Tax Policy News for June 22
This week (June 25-29)
Congress: The House and Senate are in session. The Senate plans to complete consideration of the House-passed appropriations "minibus" package comprised of the Energy and Water, Legislative Branch, and Military Construction and Veterans Affairs appropriations bills, then turn to the Farm Bill. On June 21, the House narrowly approved its Farm Bill (H.R. 2), which includes work requirements for the Supplemental Nutrition Assistance Program, or food stamps, that are seen as likely to be rejected by the Senate. House Republican leaders are planning a vote on a compromise immigration bill and are still discussing changes to the measure.
Postcard 1040: Treasury Secretary Steven Mnuchin expects to unveil the new Form 1040. "Next week, we will be unveiling the new 1040, and it will be a postcard as we've promised, and hardworking taxpayers won't have to spend nearly as much time filling out their taxes," he said at an event marking the six-month TCJA anniversary, according to The Hill.
Finance Rettig hearing: The Senate Finance Committee has scheduled a June 28 (at 10:00 a.m.) hearing to consider the nomination of Charles Rettig to be IRS Commissioner.
EY state sales taxes webcast: On Monday, June 25 (at 2:00 p.m.), EY will hold a Webcast titled, "South Dakota v. Wayfair: U.S. Supreme Court kills Quill physical presence standard. What now?" The program will cover the specifics of the Court's opinion, the likely long-term impact on taxpayers, preparation for any changes to the current nexus standard, and many of the state-specific initiatives targeting in-state affiliates and referrers, marketplace providers, and ecommerce focused companies.
Last week (June 18-22)
Quill overturned: The Supreme Court June 21 released its opinion in the South Dakota v. Wayfair case regarding state collection of sales taxes from remote sellers, holding that, "Because the physical presence rule of Quill is unsound and incorrect, Quill Corp. v. North Dakota, 504 U. S. 298, and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753, are overruled." As a result of the Court's decision, states may now begin requiring all remote sellers to register, collect and remit sales and use taxes on transactions with in-state customers regardless of the seller's physical presence, provided that they do so in a manner that does not otherwise violate the Commerce Clause by discriminating against or imposing undue burdens on interstate commerce. "Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill," the opinion stated. In a 5-4 ruling, the majority held that a physical presence standard is not a "necessary interpretation of the requirement that a state tax must be 'applied to an activity with a substantial nexus with the taxing State.'" The South Dakota law requiring collection of sales taxes applies only to sellers that, on an annual basis, deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions for the delivery of goods or services into the State.
Congressional response: Politico reported lawmakers, including Senate Finance Committee member John Thune (R-SD), as saying legislation may now be necessary to aid retailers facing tax laws in states and localities. "We're still digesting the court decision, but it looks like even though it was favorable that maybe Congress may need now to act," Thune said. "I think it's probably coming. It's just a question of when." Bloomberg Tax reported Senator Dick Durbin (D-IL) as saying the Marketplace Fairness Act he sponsored "would have taken care of the administration of this" and that he wants to determine whether Congress should build on the Court's decision with "enabling legislation." Senate Finance Committee Ranking Member Ron Wyden (D-OR) warned that online retailers "will now be extorted by a litany of software providers and their allies in state governments. They'll need to pay multinational corporations a pretty penny to comply with an endless web of new tax jurisdictions." Oregon has no state sales tax. "I'll do everything I can as the top Democrat on the Finance Committee to protect Oregonians — and small business everywhere — from being harmed by this catastrophic decision," Wyden said.
Six-month TCJA anniversary: While the main focus in Washington this week was immigration, Republicans marked the six-month anniversary of enactment of the Tax Cuts and Jobs Act (TCJA) with press events and op-eds, as well as two House committee hearings. Their message was consistent: the TCJA has grown the economy, business investment, and worker paychecks, and Democrats want to take all of that away. Ways and Means Committee Chairman Kevin Brady (R-TX) participated in a June 20 House GOP leadership press conference to assert that "there's only one party looking out for the pocketbooks and the hopes and the paychecks of middle class America and that's the Republican Party. Period." He struck a similar tone in a June 21 Wall Street Journal op-ed, saying: "The scary thing is that Democrats want to take all of this progress away. They think Washington should keep more of families' hard-earned money. Critics like House Minority Leader Nancy Pelosi continue to deny that tax reform has had any positive effects, and they have actually pledged to raise taxes. Clearly, Democrats are interested in seeing only doom and gloom." Speaker Paul Ryan (R-WI) said at the June 20 press conference that tax reform was a "big start," and that, "We are going to continue working to strengthen this economy even more so that working families can prosper." In a speech on the Senate floor June 20, Finance Committee Chairman Orrin Hatch (R-UT) said, "As business investment and productivity pick up due to higher expected after-tax returns from investment, wage growth, too, will continue to pick up … More than ever before, Americans can expect things to be better tomorrow than they are today."
Opportunity Zones: In a June 20 CNBC commentary titled "Tax reform has improved American lives in just six months," Speaker Ryan said, "For more than 8,000 of the country's more distressed neighborhoods, transformative economic development could be on the horizon," because of the Treasury Department's announcement last week of approval of the final round of opportunity zones established under the TCJA. "This designation allows areas in need of revitalization to offer tax incentives, tapping into more than $6 trillion in unrealized gains and bringing investment and growth to those communities." IRS June 20 issued Notice 2018-48, which lists the population census tracts designated as qualified opportunity zones.
E&C hearing: The June 20 House Energy & Commerce Subcommittee on Energy hearing on "The Benefits of Tax Reform on the Energy Sector and Consumers" featured testimony from business representatives and proceeded in a manner similar to two recent Ways and Means Committee hearings assessing the TCJA. Republicans celebrated the new tax law for increasing business investment, and Democrats maintained it is unpopular with the public and primarily benefits the wealthy and corporations. Chairman Fred Upton (R-MI) said tax reform has reduced utility costs and helped spur economic growth and investment for the US manufacturing sector. Rep. Jerry McNerney (D-CA) said it was "clearly a political hearing" meant to mask the true intent of the TCJA, and Rep. Mike Doyle (D-PA) quipped that witness requests regarding interpretation of the law were futile given that the Committee has no jurisdiction over tax policy. Witness Sam McCammon, President of Anamet Electrical Inc., said electrical manufacturers are concerned about what qualifies as a "base erosion payment" for purposes of the Base Erosion Anti-Abuse Tax (BEAT) and are asking for Treasury guidance interpreting the provisions as narrowly as possible to serve as an anti-abuse provision and not an additional tax on legitimate cross-border commerce. He also said there are concerns about the effects of Global Intangible Low-Taxed Income (GILTI) provisions on US multinational corporations without US intellectual property located in a low tax rate foreign country, which seem unrelated to the congressional intent to prevent corporations from avoiding US tax on intangible income shifted to low-taxed jurisdictions. "Congress should contact Treasury to reaffirm the intent of these provisions," he said.
Financial Services hearing: A June 20 House Financial Services Committee hearing, titled "Empowering a Pro-Growth Economy by Cutting Taxes and Regulatory Red Tape," included similar partisan debate about the merits of the TCJA. "Tomorrow marks the six month anniversary of the Tax Cuts & Jobs Act, and throughout the economy we have seen incredible good news that has made a great difference in the lives of our constituents," Chairman Jeb Hensarling (R-TX) said. Ranking Member Maxine Waters (D-CA) said, "The tax scam contains massive giveaways to the nation's largest banks" and "also provides huge benefits to hedge funds and other Wall Street firms through a 20% deduction for pass-through businesses."
House budget resolution: The House Budget Committee June 21 approved by a 21-13 vote a fiscal year 2019 budget resolution that calls for $8.1 trillion in deficit reduction over 10 years, including $5.4 trillion in mandatory program cuts over 10 years, $302 billion of which would be processed through budget reconciliation. The resolution includes a reserve fund for extending the "pro-growth tax policies" of the TCJA without identifying specific provisions, though House Republican leaders have elsewhere said they want to make permanent individual tax cuts that expire in 2025 and full expensing, which is phased down after 2022. The FY2019 budget resolution is not guaranteed a vote in the full House, and Senate Republicans have signaled they are unlikely to pursue a budget resolution this year. Congress set spending levels for FY 2019 in the February Bipartisan Budget Act of 2018 and appropriators have already begun writing bills to those numbers, meaning the House budget resolution may amount only to a messaging document. It is conceivable that the reconciliation instructions in the resolution, if agreed to by both chambers, could be tapped for tax legislation, but Republican leaders have announced no plans to strive for a bicameral budget agreement that is required to unlock the reconciliation process. The resolution also leaves an opening for repealing and replacing the Affordable Care Act (ACA) through the reconciliation process. The Ways and Means Committee is charged under the resolution with recommending $150 billion in deficit reduction over 10 years from various safety net programs, including Medicare and Medicaid, along with other assistance programs such as the Temporary Assistance for Needy Families program and Supplemental Security Income. Ten other House committees are also required to achieve certain amounts of savings. Last year's House FY 2018 budget resolution similarly called on 11 committees to recommend $203 billion in mandatory spending cuts.
Ways & Means approves tax bills: The House Ways and Means Committee June 21 approved by voice vote a batch of bills on various topics, including the "Ensuring Integrity in the IRS Workforce Act of 2017" (H.R. 3500), which would prohibit IRS from rehiring any employee removed for misconduct or whose employment was terminated for cause, and the "Water and Agriculture Tax Reform Act of 2017" (H.R. 519).
Trade: President Trump June 18 directed the United States Trade Representative to identify $200 billion worth of Chinese goods for additional tariffs at a rate of 10%, saying the move was in response to retaliatory tariffs announced by China June 15. "After the legal process is complete, these tariffs will go into effect if China refuses to change its practices, and also if it insists on going forward with the new tariffs that it has recently announced," the President said. Senate Finance Committee members used a June 20 hearing to air concerns to Commerce Secretary Wilbur Ross about the use of Section 232 (regarding impairment to national security) to impose steel and aluminum tariffs. "It should come as no surprise that many of us on the committee have concerns about the process, effects, and strategy behind these investigations and resulting actions," Chairman Hatch said. An editorial in the June 20 Wall Street Journal chided Republicans for failing to push back against the President's trade moves, including blocking consideration of Senator Bob Corker's (R-TN) proposal to require congressional approval of Section 232 tariffs, and suggested the situation would be different if the word "taxes" was used. "Would Republicans in Congress stay mute if a President imposed income or sales taxes on U.S. industries on an arbitrary whim? We doubt it, so it's dispiriting to see Senate Republicans let Donald Trump impose tens of billions of dollars in border taxes without so much as a vote of protest," the editorial said.
New group plans carbon tax lobbying effort: A coalition of prominent former governmental leaders has formed a 501(c)(4) organization to promote legislation to impose taxes aimed at reducing greenhouse gas emissions. Americans for Carbon Dividends (AFCD), co-chaired by former Senators Trent Lott (R-MS) and John Breaux (D-LA), will seek to foster Congressional enactment of the Baker-Shultz Carbon Dividends Plan. That plan, initially proposed by the Climate Leadership Council in February 2017 under the auspices of former Secretaries of State James Baker and George Shultz, would seek market-driven alternatives to EPA regulatory actions, specifically by setting an initial tax of $40 per ton of carbon dioxide produced. Core elements of the plan include: a gradual rise in carbon tax rates; a revenue "dividend" to be distributed to all Americans; a border adjustment fee; and, a phase out of EPA regulatory authority coupled with a limitation on legal liability for emitters. The Climate Leadership Council's "Founding Members" include former Federal Reserve Chairs Janet Yellen and Ben Bernanke.
Quote of the Week
"We have an open investment environment in the United States, and we intend to keep it that way. We must also protect our national security." — Treasury Secretary Steven Mnuchin, in a speech at the SelectUSA Investment Summit June 21, as reported by Politico