The Trump Administration has few places for big victories this year, but tax reform may be one of them. This assessment comes from Washington insiders who have carefully analyzed the “Big Six” joint statement released in July while most of the country focused on other topics. In this statement, top Republican leaders in Congress and the Administration announced a “shared template” of tax reform principles they will craft into legislation before the end of 2017.
Template for Tax Reform
The “shared vision” template focuses on the following principles:
- Make taxes simpler, fairer, and lower for American families. This idea encompasses a reduction in tax rates and an increase in the standard deduction.
- Reduce business tax rates as much as possible. The leaders would like to get as close to 20% as possible.
- Allow “unprecedented capital expensing.” While different plans have called for unlimited expensing instead of taking depreciation deductions over time, the template does not go that far but instead signals increased expensing.
- Retain some net interest deduction. Other Republican plans have called for sharply reducing or eliminating the corporate interest deduction, but the template contemplates retaining an interest deduction in some form.
- Change the international tax rules to bring jobs and profits back to the U.S. This signals a move to a territorial tax system. The group has agreed to take the controversial House GOP border-adjusted tax off the table in order to advance tax reform.
- The Big Six also have agreed to make the process transparent. Unlike the health care bill, there will be hearings, committee meetings, and debate on the House and Senate floors.
Who Are the ‘Big Six’?
The group includes the top tax policymakers in Congress and in the Administration, shown below with links to their contact information:
Problem Items — Passthroughs and State and Local Deduction
While President Trump has called for a 15% rate for passthrough businesses, many lawmakers on Capitol Hill believe a rate this low is unrealistic. If passthroughs get a very low rate, there are likely to be special rules for wages versus profits and higher rates for large organizations.
Both of the earlier plans, the Trump plan and the House GOP/Ryan plan, contemplated eliminating most deductions except the charitable deduction and the mortgage interest deduction. That leaves the fate of the third major individual income tax deduction, the write-off for state and local taxes, unclear. The elimination of this deduction will hurt the blue states the most, such as Illinois, Connecticut, California, New Jersey, and New York. Some believe this makes it more likely to be a target of Republican lawmakers looking for revenue to pay for tax rate reduction.
Distribution Problems, Net Investment Income Tax
One concern of the GOP is that the distribution of tax cuts should not be skewed to the highest incomes. If Congress and the President could have eliminated the net investment income tax in a health care bill, it would have been better for the numbers on impact of their tax reform plan. The net investment income tax, long a target of the GOP, is one of the funding mechanisms for Obamacare. If Congress tries to repeal it in a comprehensive tax reform bill, it will skew the tax benefits toward high-income taxpayers, a result many Republicans are concerned about.
Timetable and Outlook
It cannot be emphasized enough that all of the key Republican leaders in both the Administration and Congress have agreed on these core principles. The July statement may be the most promising legislative event of the year.
Further, the House Budget Committee has approved a fiscal 2018 budget resolution that would allow consideration of a tax reform proposal through the reconciliation process. If the House and Senate approve this reconciliation measure, the tax overhaul would need only a simple majority to pass in the Senate, without the threat of a filibuster. Watch for final passage of the budget resolution to jump-start the tax reform process. Of course, the House Freedom Caucus remains a wildcard in the tax reform debate, although any bona fide tax cut that does not add too much to the deficit could get their support.
The timetable that the Congressional leaders have set for tax reform is this: the House wants to pass a bill in October; the Senate will take it up in November. Then, the two houses of Congress will resolve their differences in early 2018 and send it to the President for his signature. If they stick to this timetable, the likely effective date of tax changes will be January 1, 2018.
Tax Reform v. Tax Relief
There is a fallback position if Congress and the President cannot agree on major tax reform. The Big Six statement “places a priority on permanence.” However, the Republicans could pass a temporary tax rate reduction to provide immediate relief. This approach could force action on permanent tax reform when the temporary provisions are about to expire. The Republican-controlled Congress has not been able to agree on long-term strategies for the budget and other spending measures, so a short-term tax cut may be the most successful strategy for a legislative victory for now.
“Our shared commitment to fixing America’s broken tax code represents a once-in-a-generation opportunity…” the Big Six statement notes. Let’s see if Congress and the Administration can deliver on this one.
About the blogger
Lucia Nasuti Smeal is a guest blogger on tax topics for Frazier & Deeter. Smeal is an attorney, a tax professor with Georgia State University’s J. Mack Robinson College of Business, and former editor of Tax Notes Today, published by Tax Analysts. Smeal also worked as a legislative analyst for the Congressional Research Service and is a former member of the U.S. House Periodical Press Corps. She is a frequent speaker on current tax developments.