Tax Extenders Time is Here (December 11)

Update 318 — Tax Extenders Time is Here;
Perennial Policy Debate is Itself Debated

No holiday season on the Hill is complete without a tax extenders bill to re-up the temporary tax breaks expiring that given year.  A policy perennial, the annual debate can be seen as a natural way to review and renew breaks not ready to be codified.

But the argument is vitiated when these same breaks come up year after year and when the breaks become an occasion to fill the campaign coffers of members on the tax committees.  

More on the ecology of the extenders and an effort to end them below.  

Best,

Dana

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When Temporary Becomes, Well, Permanent

The set of tax breaks known as “extenders” is the temporary tax reductions, deferrals, and exemptions for individuals and businesses expiring in a given calendar year. They are used to achieve policy objectives or to promote or benefit certain investments. Their temporary status comes into question upon expiration.

In February this year, the Bipartisan Budget Act retroactively extended 32 provisions for tax year 2017. 28 of these 32 provisions are due to expire at the end of this year and Congress will likely vote to extend them yet again.

The Price of Permanent Indecision

The tax extenders saga has persisted for decades, as the number and scope of the tax extenders become narrower and narrower. Most valuable provisions have already been made permanent. What remains is a hodgepodge of provisions that fit into three buckets:

  • Special-interest provisions: These extenders give unfair tax advantages to disparate special interests, ranging from mortgage insurance premium deductions to tax credits for business activity in American Samoa. They are by far the largest category of provisions. 
  • Duplicative cost of capital provisions: Seven of the remaining extenders provide more amenable depreciation schedules for various industries. Provisions in the Tax Cuts and Jobs Act (TCJA) render some of these efforts redundant and inherently unfair, as they distort investment decisions to favor particular industries over another. 
  • Provisions that could be made permanent: Two of the remaining extenders offer an incentive for railroad maintenance and a credit toward mine rescue training costs. They are not as noxious as the rest and could be made permanent, either through law or through the appropriations process rather than by this perennial cycle of extension.

The nominal amount of the tax extenders is relatively small — around $90 billion if they were all continued permanently. However, the extenders set a bad policy precedent and fuel an annual breeding ground on K Street for quid pro quo negotiations between lobbyists and lawmakers.

There are other reasons why implementing tax policy by way of extenders is bad practice:

  • Retroactively authorizing tax provisions creates uncertainty and undermines any incentives that may be behind the provisions. Many tax extenders are provisions designed to create an incentive for a particular behavior by an individual or a business. The process of retroactively applying these tax breaks creates unnecessary uncertainty and undermines the original intent of some tax policy meant to incentivize behaviors. 
  • Many tax extenders are pure giveaways to special interests. Examples of these niche provisions that give a break to special interests include tax write-offs for racehorses and special depreciation schedules for “motorsports entertainment complexes.” These extenders clearly give special favors to certain industries. 
  • Tax extenders distort budget projections. Budget baselines assume that tax extenders expire at the end of their current extension. Their perennial renewal means that these supposedly temporary provisions are not adequately projected in budget forecasts, making their impact under-the-radar and not fully accounted for in the budget process.

Eliminating Extenders: A Signal Reform

There is a growing consensus across the political spectrum that tax extenders are not good policy. Organizations have individually expressed opposition in the past, but recently, a broad coalition released a letter rejecting tax extenders. This coalition includes a number of groups that don’t often agree on the correct course of action:

  • Committee for a Responsible Federal Budget
  • Economic Policy Institute
  • Freedom Partners
  • U.S. PIRG
  • Heritage Action for America
  • Institute on Taxation and Economic Policy (ITEP)
  • Americans for Prosperity

The reasoning behind the coalition’s opposition to tax extenders is simple: tax policy should not be changed from year to year. The use of tax extenders often results in retroactive policy and special interest tax giveaways, as opposed to long-term, meaningful tax reform. Although current Senate Finance Chair Orrin Hatch promised to end the practice by 2015, it has continued to be a widely used policy option in Congress.

Congressional Support

Senator Ron Wyden, Ranking Member of the Senate Finance Committee, is another vocal opponent of the year-by-year tax extenders process.  Wyden was a supporter of the PATH Act of 2015, a bill intended to curtail the repeated tax extenders exercise by permanently renewing some of the extenders. The bill was an important first step, but did not end the practice in its entirety.

On the House side, the incoming Ways and Means Committee Chair Richard Neal has expressed frustration about the consistent lapsing of tax provisions, but has not taken a position on tax extenders as a whole, instead focusing on specific extenders as they lapse.

Last Hurrah

In the dog days of this lame-duck, outgoing House Ways and Means Chair Kevin Brady is pushing for a sweeping tax bill that is unlikely to get to the Senate for a full vote, even if it were to pass the House. The original package contained provisions that would renew the tax extenders, but these provisions were not included in the latest version. Extenders may therefore move separately through Congress, making them more likely to pass before the end of the year.

There is a swath of bipartisan support in Congress for perpetuating the tax extenders, but calls for their removal from both the left and the right are growing. There may be some benefit in trialing certain incentives on a small scale for a temporary period, but the tax extenders process essentially turns what are meant to be temporary measures into de facto permanent provisions. Tax extenders ultimately lead to undesirable outcomes, and their practice should be ended.

Taxing Times at the IRS (June 29)

Update 283 — Taxing Times at the IRS: Administrative Agency in Deep with Trump

On Thursday, Senate Finance held a confirmation hearing for Charles “Chuck” Rettig to be IRS commissioner. Rettig, a tax attorney, spent 35 years at a Beverly Hills law firm helping Hollywood stars fight the IRS. Rettig is poised to take the helm as the IRS faces the immense challenge of carrying out the Tax Cuts and Jobs Act.

Below is a closer look at Rettig and the myriad problems facing the Service, occupying one of the nether regions of the deep administrative state, no doubt.

Good weekends, all.

Best,

Dana

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Recent revelations that Chuck Rettig owns properties at the Trump International Hotel Waikiki Tower and failed to disclose their locations caused consternation among Senate Democrats during the hearing. Given that Rettig will now technically oversee the ongoing audit of President Trump’s tax returns, this discovery raises questions about the nominee’s integrity. Despite his insistence that he will run the agency free of the president’s influence, Rettig’s failure to disclose his Trump properties will do little to allay these fears.

Death by a Thousand Budget Cuts

In yesterday’s hearing, Rettig committed to be open, honest, and unbiased in his communications with Congress about how much money the IRS will need to administer the country’s tax laws. We’ve heard this promise from other Trump nominees before only to be disappointed, but holding Rettig to his word will be particularly important given the agency’s recent funding history.

Over the last decade, the IRS has undergone significant budget cuts, seeing its operating budget decline from $13.9 billion in 2010 (adjusted for inflation) to $11.4 billion in February’s Omnibus appropriation. This near-decade of austerity has had drastic effects on the the agency’s workforce, which has jettisoned 14,000 employees and nearly a quarter of it’s enforcement personnel. These personnel issues will likely soon be compounded as the agency’s relatively older workforce reaches retirement en masse.

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On top of this, the IRS’s aging IT infrastructure appears to be at the point of complete failure after repeated requests for funding to update it have gone unheeded. Last April’s Tax Day had to be extended by a day after a system crash knocked out the agency’s online filing functions for more than 12 hours. Wait times on IRS phone lines have also increased substantially, a source of frustration for taxpayers that Rettig promised to address upon confirmation.

The agency’s functionality has ground to a halt, and IRS employees are privately concerned that next year’s filing season might fail outright. In 2017, audit levels dropped to historic lows as a mere 0.6 percent of taxpayers were audited (for context, budget-watchers 20 years ago considered a 2.0 percent audit rate to be unacceptably low). This same year, the IRS audited just 331 large companies, down 100 from the previous year, and spent nearly half as much time conducting these audits. Widespread dysfunction at the agency tasked with revenue collection means leaving significant money on the table and out of government coffers.

Big Tax Cut, Bigger Headaches

Last December’s Tax Cuts and Jobs Act (TCJA) is putting immense pressure on the already underfunded and overstretched agency. The IRS will now have to grapple with over 100 new tax provisions codified in the tax law; a task which includes writing or revising nearly 450 documents and publications and the reprogramming of around 140 systems. With these new burdens, the agency will be even further challenged to meet its obligations as an enforcement agency just as organizations and tax professionals begin searching for ways to exploit new loopholes in the tax code.

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Takeaway: Vigilance Now, Funding Soon

Revenue collection is one the most fundamental aspects of any functional government. Given Trump appointees’ record of handicapping agencies from within, dysfunction at an underfunded Rettig-led IRS is of grave concern.

Senate Democrats are well aware of the risks associated with dysfunction at the IRS, and they repeatedly pressed Rettig on how he would handle the challenges facing the organization. While Rettig was quick to promise that he would work with the Senate Finance Committee to address the obstacles in front of the agency, he should be watched closely.

Indications are that the funding shortfall at the IRS will not be addressed any time in the near future. The Senate Appropriations Committee’s 2019 budget for the IRS is only $11.3 billion, lower than the 2018 level and a full 18 percent below 2010 levels when adjusted for inflation. While the House Appropriations Committee provided slightly more funding, it too fell below the 2018 inflation-adjusted level.

Regardless of who is at the helm, any government agency will struggle to fulfil its mandate if starved of resources. Returning the IRS to full funding should be a top priority for future Democratic majorities.

State of Play of Leading Tax Proposal (Dec. 22)

At the heart of the GOP economic legislative agenda for 2017 is tax reform.  Both the incoming Trump administration and leaders on the Hill have signaled its centrality.  Treasury Secretary-designate Steve Mnuchin has said that tax reform will be introduced within 90 days of inauguration.  Speaker Paul Ryan, former chair of House Ways and Means, has sought comprehensive tax reform for years and Committee’s current chair Kevin Brady has said that the Trump administration presents the best chance  for tax reform in the last 30 years.

Congressional leadership has set an ambitious timetable for tax reform this spring and discussions on various aspects of reform are being actively discussed and debated in private staff meetings as well as in the public domain.

Below we provide an analysis of the most prominent tax plans in play and preview some of the competing visions and interests, trade-offs and compromises  awaiting in the year ahead in tax policy.

Happy holidays and best wishes for 2017!

Dana

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House Tax Plan:  Blueprint

The major plan from House Republicans Congress — the “Better Way” Blueprint — was first put forward by Ryan and Brady this past June.  It promises tax cuts for every America while remaining revenue neutral and not being rigged for the rich.

  •  Rate vs. Deductions

The largest promise of the Republican proposal is tax cuts across the board.  The plan reduces the number of individual tax brackets from the current seven to three — 12, 25, and 33 percent. The corporate tax rate would drop to 20 percent from the current 35 percent and pass throughs will be taxed at a maximum   25 percent rate.  Capital gains would be taxed at half the individual rate – 6, 12.5, and 16.5 percent.  To pay for these tax cuts, Republicans plan to reduce the number of deductions on personal and business taxes.

The House GOP Blueprint identifies a few tax breaks it would keep — the deductions for mortgage interest and charitable contributions — and would specifically eliminate the deduction for businesses’ net interest expenses and the deduction for state and local taxes.

Republicans will also restructure the way that deductions are accounted.  Capital investment will be fully deductible, while deductions for interest payments will be eliminated to incentivize businesses to transition from debt financing to equity financing models.

  • International Tax Overhaul

The main innovation called for in the  Blueprint is an overhaul of the current taxation of overseas earnings by U.S. firms, replacing the regime with a “border adjustable” policy under which profits from imports are taxed and those from exports are exempt.  The policy, a pet project of Chair Brady, seeks to promote exports and discourage imports, boosting revenues and close the trade deficit.

There is considerable debate about whether this approach would lead to trade conflicts in the World Trade Organization and if it is even legal under international trade rules against discriminatory subsidies.

Many experts believe that any benefits in the trade deficit this create would be negated by an appreciation of American currency, making out goods on the international market more expensive and imported goods relatively cheap.

Senate:  Hatching Tax Plans

While the Senate has remained quieter on the subject of tax reforms, some members have released mostly piecemeal ideas that suggest a less ambitious  Senate outlook.  But the plans currently lack the comprehensive vision or details of the House Blueprint.

Orrin Hatch, chair of Senate Finance, has made some important statements recently about his initial plans.  Hatch spent much of this year developing a narrower tax proposal known as “corporate integration” to eliminate double taxation of corporate earnings.

Hatch had originally been advocate of the integration of corporate rates, however has since stepped back from this and opened himself up for more comprehensive tax returns. He has said that he still  wantscorporate integration, but now within the context of broader tax reform.

Hatch aside, it’s not clear that GOP senators will go along with a House plan.  Sen. Pat Roberts has suggested it might be better for Congress to do a bill that’s narrower than comprehensive tax reform.  Sen. Rand Paul said in an op-ed for Breitbart that tax reform should not be revenue-neutral and everyone should get a tax cut.

Ranking Finance member Ron Wyden has also put forward plans to streamline energy taxes and simplify capital depreciation rules.

Trump:  Tax Policy “Proposals”

 

Trump has repeatedly signaled that he will let Congress take the lead on tax reform and his tax plan has evolved  to fall  substantially in line with the Ryan/Brady plan.  He has suggested eliminating “most corporate tax expenditures except for the research and development credit” and capping itemized deductions at $100,000 for single people and $200,000 for married couples.

Trump’s choice for Treasury secretary, Steve Mnuchin, said last month that the mortgage interest deduction and perhaps others would be capped.  But incoming White House Chief of Staff Reince Priebus said more recently that limiting the deduction was not a fait accomplis.

  • Differences with the Blueprint

Trump has long argued for and seems still to support a 15 percent corporate tax rate, as opposed to Ryan’s 20.  Ryan has indicated that he is open to aligning his rate with Trump’s in the future but many are betting on parties settling on 20.

The problem with cutting the rate to 15 percent is that it could add more to the budget deficit than Ryan and the House GOP can countenance, and the tax package mustbe revenue neutral to pass through budget reconciliation.

  • Repatriation

Trump also wants a 10 percent repatriation tax holiday rate on corporate profits coming back into the United States after being held overseas.

Criticism of Republican Plans

 

Senate Finance Democratic staffers describe the House Blueprint as regressive and fiscally irresponsible.  They especially regard the border adjustment concept as risky, untested, vulnerable to unforeseen consequences, and subject to consumer price spikes.

Democrats have also attacked the GOP plans as heavily favoring the rich, lowing their net taxes, while eliminating deductions that mostly benefit lower and middle class American, while keeping those that benefit the wealthy.

Some sectors of Wall Street have also come out against the proposals from the House.  JPMorgan released a paper last week assailing the border adjustments plan, saying it would lead to high levels of volatility in the market, could seriously hurt American retailers, risk higher consumer prices, and impair American productivity in sectors relying on imported resources.

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.

Counterprogramming Trump on Taxes (July 21)

Mike & Co.,
In a couple of hours, when Donald Trump takes the stage in Cleveland in a couple of hours to accept the GOP presidential nomination, it’s a good bet he won’t say much about his tax plan.  With good reason: he doesn’t have one.

Yesterday, Trump’s campaign announced  that the candidate is preparing a new tax plan, featuring new taxes on the wealthy and no deficits.  Advisors said specifics have yet to be finalized — the plan isn’t expected to be formally released for weeks after Trump is nominated. 

Below we analyze the details of the new plan available, compare it to Trump’s original proposal, and imagine its reception in the next Congress.

Best,

Dana

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Take Two on Taxes

After releasing a tax plan during the primary campaign with tax cuts that dwarf the GHW Bush cuts of 2001 and 2003, loading trillions onto the national debt, Trump is tacking toward fiscal reality.  Per estimates by the Tax Foundation, the next plan will cost at least $3 trillion over the next decade; his original plan cost $10 trillion.  

Trump advisors reportedly made “tough decisions” on which tax breaks to keep in order to reduce the cost by $7 trillion, and a number of deductions presently enjoyed by wealthy Americans have been eliminated.  They have indicated that the plan will resemble House Speaker Paul Ryan’s recent proposal. Says one, there’s “not a heck of a lot of daylight” between the two proposals.  House Ways and Means Chair Kevin Brady described the plans as “kissing cousins.”  Both plans would reduce the corporate rate to 20 percent, as opposed to Trump’s original 15 percent.  The new tax agenda will reportedly feature a top individual rate of between 30 and 33 percent, higher than the original 25 percent, and in line with Ryan’s proposed 33 percent.  

The new plan is expected to be unveiled a few weeks after the Republican Convention in a speech at the Detroit Economic Club, though a date has yet to be officially announced. 

The revision is seen as an effort to attract support from Congressional Republicans, many of whom have been reluctant to endorse the candidate. Allegedly included in the proposal is a tax credit for children and families similar to one supported by Sen. Rubio in his campaign, supposedly part of framing the plan as beneficial for the middle class.  

 The Original Plan

Trump’s original tax plan would have made sweeping changes to the individual and corporate codes.  The seven tax brackets on the individual side would be collapsed into three, with the top bracket cut from 39.6 to 25 percent.  The standard deduction would be raised to $25,000 for single filers and $50,000 for joint filers.  It would repeal the alternative minimum tax and estate tax, reduce the corporate rate to 15 percent, and impose a tax of up to 10 percent on repatriated revenue.  It would eliminate the 3.8 percent net investment income tax on people with incomes over $200,000, a tax  paying for the Affordable Care Act.  

The Trump campaign website describes his original tax plan as “revenue neutral” with numerous pay-fors, including a reduction in loopholes and deductions for the very rich.  The Tax Policy Center has concluded the proposed loopholes are “nowhere near enough” to overcome the tax-rate cuts, hence the significant costs over a decade.  

An analysis of the original plan and overall economic agenda by Moody’s Analytics found it “fiscally unsound,” resulting in “very large deficits and a much higher debt load.”  It predicted a lengthy recession, enormous job losses, higher interest rates, increased unemployment, a plummeting stock market, reduced long-term growth opportunities, and a “diminished” U.S. economy.  

In May, in repeated interviews, Trump stated his belief that taxes on the wealthiest Americans should be increased, albeit slightly.  However, when later pressured for details, he revealed this “increase” pertained not to current rates, but the rates proposed in his original plan, which are far lower than under present law.  If this intention holds true in his new plan, taxes on the wealthy would still be lower under Trump, assuming the candidate doesn’t change his mind again.

 Personal Profit

It would appear that Trump himself stands to gain a large sum of money as a result of his tax plan.  According to one estimate, the Trump family would gain a tax cut of $7.1 billion.  Such an estimate is necessarily speculative — Trump has shown no evidence that he has paid taxes in nearly forty years.

Looking Forward

No matter what the election outcome, it won’t be easy for Congress to pass a major tax bill in 2017.   

Both Trump and House Republican leadership have stressed their intention to prioritize tax reform, with Chairman Brady noting his preparation for a vote on tax reform in 2017.   But the GOP may not control Congress next year and willy-nilly there is nothing close to consensus on comprehensive reform.  Conservatives will insist on paying for it in full; progressives will emphasize increasing taxes on the wealthiest Americans.  On the corporate side, multinational corporations will lobby for a revised system, with a top rate of no higher than 25 percent and favorable terms for dividend repatriation.  Small businesses will push for equal treatment.  Put all of that together, and you have a very expensive bill that probably can’t pass.  

We don’t know what the tax reform landscape like in 2017, but as the primary campaign and this week’s convention show, tax policy though traditionally a headline GOP issue, has been particularly muted this year.  This may reflect not only Trump’s uncertainty about his revised plan but also an abatement of the popular ardor for tax cuts in recent decades.  Americans may have recognized that tax cuts are not an optimal solution, given the devastation of public services, the further crumbling of an unreliable infrastructure, and exacerbated inequality wrought by the recent recession.

The Three Tax Buckets for 2017 (May 18)

Mike & Co. — 

Defying a tradition dating back to 1976, presumptive GOP presidential nominee Trump has continuously flipped his answer about whether will or won’t release his tax documents, saying at times absolutely yes.  Or would never dream of it.  Or really wants to but really can’t just yet. 

While we wait, we have a moment to survey tax policy issues and proposals currently under discussion in Congress and assess the Trump factor on the Hill through the prism of tax legislation. 

Best,

Dana 

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Policy Asymmetry or Vacuum

Typically in an election year, tax policy stands as a major pillar of the candidates’ and parties’ platforms.  But that’s not been the case in 2016.  In fact, this Congress has been a rather active tax policy laboratory.  This year the Hill has rapidly become a testing ground and showcase for future initiatives.

This cycle is unusual in that the party in control of Congress does not have any solid indication of where its nominee will end up on major tax issues.  Of late, Trump has begun trying to mix a message of populist anger with pro-Wall Street financial reform promises, leading to a muddied and confused tax platform.  Such basic tax policy positions as he has taken he has taken back. Other positions come with such sketchy detail that large unanswered questions remain.

Consequently, down-ballot candidates still don’t know if they will be running with or away from their nominee’s tax policy. That lack of predictability has led lawmakers to seek shelter in a safe harbor: preparing for 2017.  By fixing their sights on the next Congress, legislators today can spare themselves the risks involved in trying to predict the policies of an unpredictable politician.

Three tax approaches

Members from both sides have focused on developing policy in three major tax areas, all of which have seen proposals, from the comprehensive and bipartisan to the narrow and ideologically tilted.

  •  Corporate tax reform

Senior members of the tax-writing committees in Congress are doing their best this spring to generate buzz around promised bipartisan broad-based corporate tax reform initiatives.  This annual ritual looks like it will come up short again.  But the debate is prologue.

Senate Finance Chair Hatch has said that his own corporate integration plan will be released in the “next several” weeks, and the plan had its own hearing yesterday in Finance.   It enjoyed the support of most of the witness panel, though Ranking Member Wyden did point out with one witness that corporate integration may cause a dip in investment from savers.  Concerns were raised about the impact on Americans’ retirement security.

House Ways and Means Chair Brady has promised to release his own comprehensive tax reform plan by June, a substantial portion of which is expected to address corporate tax issues.  His office has stated that no ideas are off the table: “consumption tax, cash flow tax, reformed income tax, and any other approach that will be pro-growth.”

  •  International tax reform

The name of the game in international tax reform is this: inversions.  Finding a way to curb the corporate maneuver which takes American companies overseas to avoid U.S. taxes has been a major priority of Congress for some time now.

Rep. Sander Levin, Ranking on Ways and Means, recently released his third measure this Congress to address the issue.  Yesterday, he announced a plan that would address “de-controlling” and “hopscotching.”  The former allows foreign companies to reduce the U.S. ownership level of a company to just under the minimum requirement for an inversion to take place; the latter enables a foreign parent company to use overseas earnings of the foreign subsidiaries of a U.S. company without paying tax.

GOP plans focus on solving inversions by drastically reducing the corporate income tax rate and switching to a territorial tax system — which would forego taxing the income earned by companies abroad.  So far no proposal has surfaced this Congress to codify these ideas.

  •  Financial reform through taxes

This is a part of tax reform which is firmly in the hands of progressive members.  A number of proposals seek to close tax loopholes which benefit the wealthy (such as carried interest, below) or to add a surcharge (the Buffett Rule), in particular for those who gained wealth through work in financial services.

Sen. Baldwin’s Carried Interest Fairness Act of 2015 aims to close the loophole allowing hedge fund managers to claim their income as capital gains.  Sen. Warren aims to fund one-time emergency social security payments by eliminating tax deductions for “performance-based” wages at America’s biggest companies.

Yesterday, Sen. Wyden released a proposal aimed at preventing “sophisticated” taxpayers from avoiding paying taxes on investments by streamlining the rules for taxing derivatives.  Some taxpayers have been able to take advantage of the complexity of rules in this area to reduce the amount of taxes they have to pay.

Under the proposal, derivative contracts would be treated as if they had been sold and bought again at the end of each year, and the gains and losses would be taxed as ordinary income.  The discussion draft is targeted toward those trying to avoid taxes and not toward those hedging business risks, employee stock options or derivatives in pension funds. JCT estimates that the proposal would raise $16.5 billion over a decade.

Let a Thousand Tax Plans Bloom (May 17)

Mike & Co.,

Word this afternoon is that Senate Banking will take another shot at a conformations votes for five regulatory nominees, including two for SEC commissioner, perhaps as soon as this week.  This follows an aborted April 7 vote, in which four Democrats (Schumer, Menendez, Warren, and Merkeley) withheld support for their own party’s nominee at the last minute.  While a new vote hasn’t been scheduled yet, it is now expected in the coming days.

Should the nominees clear the Committee, it’s unclear they can get any floor time in the Senate.  Observers have predicted that they will need to pass by unanimous consent — meaning that just one Senator can block their confirmation.

Meanwhile, once again, the main legislative developments of note are on the tax front. We try to bring you up to date below. 

Best,

Dana

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Today marks the beginning of a series of tax hearings in Congress as Democrats begin to position themselves for what could be a power swap in 2017.  Per Todd Metcalf, minority chief tax counsel for Senate Finance:  “We are putting together the building blocks hopefully so that we will be ready when in 2017 or whenever the opportunity arises, we are ready.”

Democrats in Congress  are using 2016 as a staging area to gauge reaction to their plans for next year – drafts are being  circulated and released so offices and gather feedback and make the necessary changes to improve the odds of pet projects’ passage in 2017, where circumstances are likely to improve, possibly markedly.

The GOP is up to the same thing. The corporate integration plan to end double taxes on corporate income from Senate Finance Chair Hatch and the tax blueprint by House Ways and Means Chair Brady are being developed to carry forward priorities while awaiting the right moment.

What’s Been Released, What’s Ahead

Senate Finance ranking member Wyden has been busy this year, releasing a number of proposals.  On April 26, he released a proposal changing the rules on capital depreciation, simplifying the schedules currently in use; earlier in the year he proposed changing the minimum ownership stake require for a company to invert.

Wyden is expected to introduce draft legislation to revise taxes on financial products like derivatives in short order. The draft is said likely to resemble, at least partly, proposals offered in early 2013 by former Ways and Means Chair Dave Camp, while incorporating some of the changes sought to Camp’s bill.

Sen. Wyden and other Democrats have also talked regularly about legislation to tackle inversions and related cross-border income issues.   Last year, Wyden published a report saying legislation to mark all derivative instruments to market and tax the resulting gains or losses as ordinary income would end the manipulation of timing and income character that derivatives allow.  On wash sales, the Wyden report said rules could be updated to apply to forward contracts, swaps and derivatives involving commodities and currencies, and additional legislation could address immediately replacing a loss position.

Sen. Schumer is focused on achieving some sort of tax overhaul that would be linked to infrastructure investment.  His plan for 2016 —  “Let people know how great the need is on both sides to straighten out the international system, for the inversions and everything, but also how demanding our need for infrastructure is and to marry the two.”

In a moment of bipartisan success, and perhaps a view of what we stand to lose as we wait for 2017, the Senate passed a bill on May 10 allowing tariff relief for goods that domestic manufacturers cannot find inside the United States.  The bill took longer than expected, but has been hailed as a way to allow American manufacturers to remain competitive.

The Landscape for 2016

Congress is on an abbreviated schedule for this election year and it’s sloped heavily toward the spring side of 2016.  Legislative days are in short supply already and whatever time for compromise existed in 2016 is fast disappearing.  It is likely that we will have to wait even for a hint of bipartisan agreement on tax reform issues until after the November election.  Even if 2016 turns out to be a year for preparing and showcasing legislative ideas in Congress, but that doesn’t mean it will be a boring one for legislation.