11 February 2020 Ways & Means holds hearing on fallout from corporate tax reform The House Ways and Means Committee's February 11 hearing on "The Disappearing Corporate Income Tax" continued the partisan relitigating of the merits of the Tax Cuts & Jobs Act (TCJA), with Democratic members asserting that it has not delivered promised economic benefits, and that taxpayer-favorable regulatory interpretations have further enriched corporations beyond what was in the enacted law, further reducing corporate tax collections. Republican members said the TCJA has improved the economy and defended the Treasury regulatory process as requiring interaction with affected taxpayers and producing necessary guidance on difficult issues under severe time constraints. In an opening statement, Chairman Richard Neal (D-MA) said the TCJA was a "massive giveaway to the wealthy and big corporations;" it has failed to unleash economic growth; corporate income tax falls short of what the country needs; and, at 21%, the corporate rate is lower than the 25% rate initially proposed by Committee Republicans and the 28% rate proposed by the Obama administration. "The law was jammed through Congress, leaving much to be done by regulation," Chairman Neal continued. "And, unfortunately, Treasury gave away the store by issuing regulations that give even more tax breaks to corporations, and that are likely to further increase the deficit." In his opening statement, Ranking Member Kevin Brady (R-TX) made some of the same points as President Trump in his State of the Union address, saying that as a result of the TCJA," we have more people working and higher wages in one of the most competitive economies on the planet," and "American manufacturing is back, and workers who were left behind in the Obama economy are coming off the sidelines and into good-paying jobs." Witnesses at the hearing were: Jason Furman, former chair of the Council of Economic Advisers under the Obama administration; Fordham law professor Rebecca Kysar; Chye-Ching Huang of the Center on Budget and Policy Priorities; and Douglas Holtz-Eakin of the American Action Forum. Furman noted the recent Congressional Budget Office (CBO) projection that the cost of the TCJA would be roughly $110 billion higher from 2020 to 2029 because of a reduction in the amount of income subject to tax under certain provisions related to international business activities, reflecting the implementation of the law changes in taxpayer behavior. He otherwise said the TCJA is a major reason why corporate tax collections are lower, while there is no evidence the TCJA has made a substantial contribution to investment or longer-term economic growth. (CBO Director Phill Swagel February 7 sought to address the reduction in projections for international provisions, saying they reflect many factors, including "more than two years following enactment, taxpayers have had time to better understand how the new tax rules interact and have more information about the implementation of the law," including IRS regulations. "Overall, the downward revision to our projections of corporate income tax revenues owing to the international provisions reflects an improved understanding of taxpayers' behavior that has been gained this year," he wrote.) Kysar acknowledged that given the complexity of the new TCJA regime, "its truncated legislative process was bound to create problems," with Treasury "left in the position of interpreting and implementing hastily drafted provisions that interacted with old law in sometimes unforeseen ways." However, she asserted that Treasury exceeded its statutory authority in proposing a global intangible low-taxed income (GILTI) high tax exception, albeit only for those taxpayers paying at least an 18.9% rate abroad who elect into the exception; and provided exceptions that have "no roots in statutory text" to the base erosion and anti-abuse tax (BEAT) for foreign banks, referring to guidance that exempts certain interest payments relating to so-called TLAC instruments from the BEAT. She also took issue with regulatory interpretations of other TCJA provisions. In discussing these regulatory provisions, Kysar's testimony largely is taken from a December 30 New York Times article, "How Big Companies Won New Tax Breaks from the Trump Administration." Holtz-Eakin asserted that the TCJA is imperfect but nonetheless addressed the most important threats to the competitiveness of US-based multinational corporations and improved growth incentives. He called attention to a Tax Notes article published January 13 suggesting that the haste with which the TCJA was enacted left little time to coordinate key international tax provisions and presented Treasury with the "monumental challenge" of writing interpretive regulations, a process that requires "balancing the scope of their authority, congressional intent, taxpayer comments, and administrability concerns." Huang focused her remarks on underfunding of IRS enforcement efforts, which some Democrats on the Committee said at the hearing means that the IRS is bringing in less revenue than it should from audits of wealthy individuals and corporations. In response to Ranking Member Brady, who inquired about what would happen if provisions of the TCJA were repealed, Holtz-Eakin said the result would be similar to the pre-TCJA world in which US companies were moving their headquarters offshore; the foreign earnings of companies that stay headquartered in the United States would begin, again, to stockpile offshore rather than be reinvested in the United States; and US companies would be at a tax disadvantage internationally compared to their foreign competitors. Ranking Member Brady said, in response to criticism of the Treasury Department, that when you rewrite the tax code, it is a major undertaking. "We completely rewrote the international tax code, moving to a territorial system, ending businesses' practices of importing their deductions and exporting their income to lower their rates … we started to restrain interest deductibility … So, isn't it normal for stakeholders to interact with Treasury as these rules and regulations are drafted?" he asked. Holtz-Eakin said it is very normal, and that the government has an obligation to listen to the public. It would be underestimating Treasury staff to suggest they can't make up their own minds and just take meetings to be told what to do, he said. Rep. Adrian Smith (R-NE) said he is surprised that the same rhetorical exchanges between the parties leading up to the enactment of tax reform are still ongoing. Regarding questions about the CBO latest baseline numbers relating to the TCJA's international tax changes from Rep. Smith, Holtz-Eakin said regulations are not scored, baseline updates are routine, and the switch from a worldwide to territorial tax system was certain to produce enormous uncertainty, including on timing, so it is not surprising that there would be deviation from the initial JCT score. Under questioning from Chairman Neal, Furman suggested that some of the initial goals of tax reform were not met, including that it be revenue neutral. He also said the claims that the deemed repatriation transition to the new international tax system resulted in billions of corporate profits being repatriated to the United States was misleading because the funds were not actually held overseas but, rather, were mostly invested in US Treasury bonds and other US instruments. Rep. Lloyd Doggett (D-TX) asked Kysar whether her testimony was suggesting that, as if the TCJA did not have enough "giveaways," Treasury regulations expanded those benefits. Kysar said she believes that to be true. She also explained that the TCJA can provide benefits to a US corporation establishing a facility overseas because GILTI allows an exemption for a deemed return on assets held abroad, so the more assets a corporation has abroad the less GILTI tax it pays. Doggett also asked how the deduction for foreign-derived intangible income (FDII) provides an incentive to keep physical assets overseas. Kysar said the deduction is reduced by the amount of tangible assets in the United States, creating a further incentive for US companies to invest in tangible assets outside the United States. Doggett asked whether provisions that benefit multinationals should be scaled back or repealed under his No Tax Breaks for Outsourcing Act, which would tax GILTI at the full 21% corporate rate, apply GILTI on a jurisdictional basis, and treat foreign corporations managed and controlled in the United States as domestic corporations. Kysar agreed. Rep. Mike Thomson (D-CA) asked how corporations can use strategic tax planning to lower taxes more than expected. Kysar said corporations were able to accelerate deductions to the 2017 tax year when the corporate tax rate was higher, while delaying recognition of income to the 2018 tax year when it was lower. She said the Joint Committee on Taxation staff report prepared in advance of the hearing suggests that deductions, including for employee benefits, were accelerated from 2018 to 2017. Rep. Suzan DelBene (D-WA) noted Furman's testimony that there are numerous corporate tax provisions that phase down or tax increases that phase in as a function of Republicans keeping the total cost of the bill within $1.5 trillion, under the budget resolution that paved the way for development of the TCJA. Furman noted the TCJA's planned amortization of R&D that begins in 2022, changes in definitions for purposes of the limitation on interest expense deductions, raising the tax rate on GILTI, and the phase down of expensing benefits. Any of those changes that are cancelled would raise the total cost of the bill, he pointed out. Several Democratic members seized on Holtz-Eakin's view that tax cuts don't pay for themselves, which runs counter to an argument made by some Republicans in the run-up to and since enactment of the TCJA.
Document ID: 2020-0348 | ||||
