Tax Policy Tealeaves (Dec.8)

Today the House passed the FY17 CR to extend the budget through until April 28.   The 114th Congress is almost in the books, pending only the Senate vote on final passage of the CR, itself pending only the outcome of legislative negotiations regarding a mine worker protection provision sought by Sens. Manchin, Brown, et al.
We’ll cover the final CR once it has been signed — best guess now is late tomorrow, although Sen. Manchin said this afternoon, I want to close ‘er down. Meaning the USG.  Watch this space.
Meanwhile, holiday office party policy palaver seem to circle around this year to tax policy.  We have mostly tealeaves and side comments to guide us, but here’s what will most likely emerge in major tax legislation next year.
Best,
Dana
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Based on what we have seen from Trump’s campaign, transition team, nominees, and surrogates regarding tax reform, as well as on the Ryan-Brady blueprint published in June, here’s a best guess on the possible elements of and timeframe for this legislation.
 
The House (aka Ryan) Plan 
While the Trump team has released little by the way of detailed plans, the House leadership has been very clear and released a Blue Print drafted by Paul Ryan and Ways and Means Committee Chairman Kevin Brady. This blueprint will almost undoubtedly serve as a base for any reform legislation that will emerge next year. The Bluepring has several key aspects:
•   Lower top individual tax rate to 33 percent, top corporate tax rate to 20 percent and pass through corporations to 25 percent
•   Allow full expensing of capital investments and remove deducibility of net interest to shift preference to equity funded financing from debt financing
•  Impose “border adjustments” to tax imports and exempt exports, a contentious provisions.  Not only is it questionable under international trade law and US trade agreements (and could perhaps lead to retaliatory tariffs from trading partners anyway).  But some key sectors stand to lose.  Retailers say will force the prices of goods they sell up, forcing them to raise prices and hurt consumers, among others
The Tax Foundation and Tax Policy Center have both said the House plan would encourage growth.  But this week, an independent analysis from Goldman Sachs was less sanguine, finding it would actually constrain growth in the long run, due to changes in capital investment incentives and net interest deductions.  Goldman also said it a 20 percent corporate tax would be fiscally infeasible.
 
Trump/Mnuchin:  Outlines of Tax Policy
Consider statements made by Steve Mnuchin within days of his nomination to be Treasury Secretary as about as reliable as any state my regarding Trump policy.  Take those coming out of his campaign with a yuge grain of salt.  Trump’s plans haven’t stopped constantly changing. Plans isn’t the word. Even his most detailed plans are missing big pieces.
Mnuchin has addressed tax policy straightforwardly in recent statements to the effect that:
—  there will be no “absolute” (probably meaning net) tax cut for the wealthy
—  the scale? Expect the “largest tax cuts since Reagan”
Because Mnuchin must face Senate Banking to be confirmed, and he may be vulnerable for his compensation in the FDIC IndyMac deal, he is at some pains to be more comprehensive and detailed about his tax policy goals.
 
The Infrastructure Angle
One provision of the Trump campaign tax plan that has gotten attention is the one to create $137 billion dollars in tax credits for businesses investing in infrastructure projects, leading to $1 trillion dollars in private infrastructure spending.
Many have criticized this idea of using taxation to encourage private spending on infrastructure.  Some oppose it from right and left as corporate welfare.  The plan lends itself only to certain sectors or projects such as private and toll roads that may be paid for by but not benefit the public. Some question if the tax break will actually generate new infrastructure, or if companies already planning improvements will simply take the tax cut.
 
Where’s the Overlap?
These plans, however, are not featured in Ryan’s plan and no one is quite sure of how he views the Trump tax approach yet.  Ryan has shown receptivity to Trump’s views and their tax plans have several similarities:
•  Ryan and Brady have said they are open to lower their plan’s corporate tax to 15 percent to match Trump’s plan
•  both sides have cut the number of individual tax brackets to three
•  both plans also plan to tax repatriated funds coming back from overseas
•  both are estimated to add $3 trillion to the deficit over ten years
 
 A Matter of Timing 
A major legislative strategic decision for both Congress and the new administration revolves around the timing of tax legislation.  The GOP sees this election as a mandate to pass reforms and one of the biggest target is the current tax system.  The two chambers reveal  characteristically different attitudes toward the incoming administration.
The House is keen to put the tax issue on the forefront from the first days of the administration.  Ways and Means Chair Brady has talked about getting reform started in the first 100 days of Trump’s presidency and expects Trump to play an active role in the tax reform, rallying support for it from the Bully Pulpit.  House Republicans have expressed hope at having a bill ready to be voted on as early as this summer.
The Senate is proceeding in a much slower and more methodical fashion. Orrin Hatch, Senate Finance Chair, has said that the process must be done in a bipartisan way if there is any hope of lasting changes.  The Senate has not said what kind of timetable it is looking at, but it will be occupied with Trump’s nominations for most of 2017, and the must-pass budgets for 2017 and 2018.

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