Ideas to Replace Income Tax Cause Transition, Debt Concerns

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March 22 — Taxing cash flow and consumption rather than income could lead to transitional troubles as well as debt financing and interest deduction concerns, according to some majority-side members of the House Ways and Means Tax Policy Subcommittee.

Such potential difficulties triggered questions on revamping the U.S. tax code through ideas vetted at a hearing March 22 that featured testimony from three Republican lawmakers backing different consumption tax bills.

“Any of these proposals create a change in business models and the way people do business,” the subcommittee's chairman, Rep. Charles Boustany Jr. (R-La.), told Bloomberg BNA after the hearing, “and you have to think about how you transition out of that.”

For example, a small business that capitalizes itself instead of taking out loans would get preferential treatment under legislation to tax cash flow, Rep. James B. Renacci (R-Ohio) said during the hearing. That would set up a winner-loser situation, he said, in discussing loans he used to finance an early nursing home business of his.

But no business would choose the negative setup going forward, said Rep. Devin Nunes (R-Calif.), who sponsored the bill (H.R. 4377) and testified before the subcommittee. He argued that the current income tax system penalizes new investment, whereas his legislation would foster it.

Encouraging Investment

“There would be so many more equity opportunities because you have so many more Americans that perhaps don't have a lot of capital, but what little capital they do have, they would take risks with people like yourself,” said Nunes.

The Ways and Means member's bill also includes provisions to switch to territorial taxation of cross-border income and a 5 percent tax on repatriated earnings from abroad.

But on the company financing issue, Renacci said he would prefer a single partner, a lender like a bank, rather than others with equity stakes in his business.

The hearing's other witnesses included Rep. Michael C. Burgess (R-Texas), who has sponsored a bill (H.R. 1040) that would give businesses and individuals an option for a 17 percent flat tax and for being taxed on a cash-flow basis for business activities, and Rep. Robert Woodall (R-Ga.), whose legislation (H.R. 25) would establish a national sales tax to replace all current federal income, payroll and withholding, and estate and gift taxes.

Questions about federal revenue, business inventories, retirement savings and wage taxes also surfaced during the hearing.

Economic Worries

Groups opposed to consumption taxes in general have said they are regressive and would increase prices, resulting in reduced consumer spending and other economic troubles.

Both Burgess and Woodall argued that their ideas are fairer and better for the economy, though. Nunes said he conceptually supports their plans but has developed his legislation because he considers it more politically viable than getting the Burgess and Woodall bills across the finish line.

The subcommittee will next hold a hearing on April 13 to examine bills that make changes within the context of an income-based tax system, Boustany said. Witnesses could include Democratic members, none of whom testified at the consumption tax hearing because none took Boustany up on an invite to do so, he said.

To contact the reporter on this story: Aaron E. Lorenzo in Washington at aaron@bna.com
To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com