Tax Bills on the Hill (Mar. 11)

Mike & Co. —

Yesterday, House Ways and Means chair Kevin Brady released a “budget savings package designed to cut taxes.”  Brady’s gambit reflects the growing buyers remorse regarding the omnibus agreement within the Freedom Caucus.  Hard liners have objected to the spending levels set in the Obama-Boehner deal; this package is meant to buy their cooperation in the larger negotiations between parties.

It’s one of a number of tax proposals getting attention and generating debate on the Hill.  A review of the tax issues on the table is below.

Good weekends all.  Don’t hesitate to let me know if there’s an issue you think should be covered in an upcoming update.

Best,

Dana

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Tax Legislation in 2016

Tax reform advocates entered 2016 with a great deal of fanfare – optimistic talk of comprehensive, bipartisan, pro-growth tax reform abounded.  What’s happened since New Year’s Day?  A lot of interesting proposals have come forward to fix critical but narrow issues, and the bold talk of comprehensive reform has remained just that – talk.

Given the developments since Paul Ryan and Kevin Brady called for comprehensive tax reform – Justice Scalia’s death, the rise of the Donald, and the stalled budget – it’s unlikely that sweeping legislation will take form.  More likely we’ll see smaller bills focused on particular issues.

International

President Obama, Senator Wyden, and Rep Brady, long ago hammered home the need for international tax reform.  Their proposals include finding a way to repatriate foreign-held profits of US-based multinationals, dealing with corporate inversions, and setting up a new international tax code.

The key to reaching an agreement on the proposals below likely lies in determining where revenue will go after foreign earning are brought back to the US.  Brady has said before that he wouldn’t support a proposal in which any tax is levied on foreign earnings, while Wyden says the opposite – revenue is a requirement.  There is so much pressure for this to happen it’s hard to believe they can’t compromise.

•   taxing foreign earnings:  Competing proposals exist between parties.  President Obama’s FY17 budget includes a 14 percent repatriation holiday with 19 percent tax thereafter on all foreign earnings.  Brady has said he’d rather these earnings come home with no tax attached, so that they can be used for investment.  Sen. Wyden proposes that the income be repatriated, taxed, and the revenue be used for infrastructure development.  A recent bill by Schumer and Brown (below) would tax the foreign income of any company that moves its headquarters overseas.

•  preventing inversions:   Sen. Wyden proposes making the ownership minimum for a corporate inversion 50% (current law is 15%).  Reps Levin and Van Hollen have announced legislation to prevent “earnings stripping” by reducing the tax preference for interest payments.

Sens. Schumer and Brown have announced they will introduce two pieces of legislation to tackle inversions – one to impose an exit tax on companies moving their address overseas, and another to limit earnings stripping.  The exit tax proposal enforces the full 35 percent tax rate on all foreign earnings for companies that move abroad; their earnings stripping legislation limits the tax-deducibility of interest payments to 25 oercent, down from the current 50 percent.

•  territorial system: Brady has mentioned repeatedly that the US must adopt a territorial system to remain competitive, whereby earnings from abroad are not taxed in the US.  It’s been a perennial favorite of Republicans but likely will remain a non-starter for Democrats.

Corporate Tax Reform

Many issues solved in international tax reform proposals would affect corporate tax reform efforts – often the two are considered indelibly linked.  Prominent policymakers agree that the corporate rate must be lowered, but the final size of the tax and how it is aimed differ.

Republican proposals generally have rates between 0 and 20 percent, with Democrats above those at 24 percent and 28 percent for Wyden and Obama respectively.  New rules on depreciations of assets – specifically replacing the Modified Accelerated Cost Recovery Systems with something less generous – are being floated as well.  Ending the tax-deductibility of debt is a dual-purpose proposal – useful for preventing inversions (see above) as well as encouraging businesses to fund themselves using equity rather than credit.

Earned Income Tax Credit

A favorite of both Democrats and Republicans – and notable of Paul Ryan and President Obama.  They were rumored to discuss the issue during their first meeting, this past February, after Ryan’s ascension to Speaker.

The EITC is a part of Obama’s budget proposal for this year; he suggests to expand the EITC for childless workers and create a $500 “second earner” tax credit. The total cost would be $150 billion. Ryan has proposed something that is very similar. In addition to that, there have been five recent congressional proposals (introduced by Senators Sherrod Brown and Richard Durbin, by Rep. Richard Neal, by Rep. Charles Rangel, by Rep. Danny Davis, and by Senators Patty Murray, Jack Reed, and Sherrod Brown) that would substantially strengthen the EITC for childless workers. All of them, including Ryan’s and Obama’s, would lower the eligibility age to 21, and all would raise the maximum credit — the Obama and Ryan proposals to about $1,000 and the other proposals to somewhat higher amounts.

The recent focus on the issue makes it likely that something will be done on it soon. If Ryan and Obama can work together on this, it will be a bipartisan light in the gridlocked darkness.

Carried Interest

Senator Tammy Baldwin has released a proposal to tax carried interest as a regular income rather than capital gains.  Historically this has been a particularly divisive issue, with lawmakers on the right refusing to entertain the idea.  However, recently Republicans have begun to soften on this position – perhaps after seeing the populist sentiment inspired by their presidential candidates’ own call to end the loophole.

Baldwin released her proposal in conjunction with Sander Levin, who released a version of the bill in the House as well.

The Bottom Line

Any piece of tax reform legislation put forward which reduces revenues would have to find a way to offset its costs.  In light of the Obama-Boehner deal on spending limits for 2016 this may be a particularly important issue – especially as GOP leaders try to keep their right flank in order as they tussle over the spending rules.  Conversely, any reform which raises revenue will face strong calls from Republicans to fund tax cuts, and from Democrats to fund infrastructure or other initiatives.

As the year drags on the prospects for comprehensive reform dwindle further – they were never that great to begin with, despite enthusiasm from party leaders.  Even the more modest proposals laid out here may be too divisive to survive, especially in a political environment like this one.  Senators can’t be blamed for focusing their efforts on Supreme Court nominees, the budget, their own party candidates, and more.

 

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