Republicans Face Tax Decision Crunch Time as Year’s End Looms

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By Colleen Murphy and Laura Davison

Congressional Republicans are facing a deadline to make the tough decisions in tax reform: what revenue raisers they are going to use to offset their ambitious cuts to corporate, passthrough, and individual rates.

“You can imagine over the next two or three weeks as we’re looking for pay-fors, there’s a disposition to be more forward-leaning on some of these sorts of things. Proposals that may not be particularly attractive at the beginning of the tax reform process become more attractive given the alternative,” Rep. Peter Roskam (R-Ill.), chairman of the Tax Policy Subcommittee, said Oct. 11 at an event hosted by The Hill and the RATE Coalition.

The GOP is working on a compromise between leadership and New York, New Jersey, and California Republicans to curb the state and local tax deduction without eliminating all the benefit to taxpayers. But that won’t be enough to cut corporate tax rates and expand expensing allowances for more than a few years.

Republicans may take aim at the unrelated business income tax imposed on tax-exempt organizations, Roskam said.

He cautioned that the subject of nonprofits’ unrelated business income tax, known as UBIT, hasn’t been a big focus of conversations so far. And overall, lawmakers haven’t said much about how nonprofits will be treated in tax reform, aside from promising to preserve the charitable giving deduction. Still, nonprofit practitioners have feared that their sector could be targeted as a pay-for in a reform bill, particularly as Republicans search for ways to offset the rate cuts they hope to achieve.

Capitol Hill tax counsels have previously said they are reviewing proposals from former House Ways and Means Committee Chairman Dave Camp (R-Mich.) as they craft a bill. In his 2014 tax package, Camp proposed expanding the scope of situations in which nonprofits’ unrelated business income tax is imposed. Under the proposal, nonprofits would be taxed for royalties, income from research that isn’t public, qualified sponsorship payments over $25,000 and gain or loss from the sale of distressed property. The proposal also changed how the tax was calculated.

Tax Reform Mixture

Ways and Means Chairman Kevin Brady (R-Texas) has said the bill will include a mix of permanent and temporary provisions. The Sept. 27 tax framework called for full expensing for five years, but didn’t specify whether the rate reductions would be a long-term change.

A Joint Committee on Taxation letter from earlier this year said reducing the corporate rate to 20 percent for three years would start to affect the deficit outside the 10-year budget window. Budget reconciliation, the streamlined process Republicans are using to pass the bill, requires that any revenue losses after a decade must be offset.

Kevin Hassett, chair of the Council of Economic Advisers, said Oct. 11 that the administration still expects to see a tax bill with permanent rate cuts and no deduction for state and local taxes.

Many Republican lawmakers have said elements of the bill will have to be temporary because it can’t pass the Senate without Democratic votes if it adds to the deficit outside of a 10-year window. Rep. Pat Tiberi (R-Ohio) told reporters he thinks the rate cuts can be permanent.

“I think everybody on my end of Pennsylvania Avenue is hopeful that stuff will get worked out and we can have a nice permanent tax bill,” Hassett said at The Hill and the RATE Coalition event.

Political Considerations

Hassett also said he hopes the bill will be bipartisan and lead to wage increases of $4,000 “over a relatively short time"—a period that White House economic advisers have estimated at eight years. Trump touted such a wage increase in an Oct. 11 speech in Harrisburg, Pa. The framework Republicans released Sept. 27 doesn’t include enough details to calculate whether it will boost wages.

Marc Short, director of legislative affairs at the White House, told Bloomberg BNA that the White House would still like to see a full repeal of the state and local tax deduction as suggested in the Republican tax framework. The idea has met with fierce opposition from some House Republicans in high-tax states such as New York and New Jersey.

“There’s a dichotomy in that—the argument is not to give a tax cut to the wealthy. Let’s focus on the middle class, and yet the number of people that itemize at that level is really—you are talking about significant income. So that’s obviously what we have to balance out,” Short said.

The “challenge for us is holding together Republicans,” Short said, “because I don’t think the Democrats likely come until we show that we can hold together our group.”

Tax code provisions related to individuals are the main sticking points among Republicans at this point in tax negotiations, Chief Deputy Whip Patrick T. McHenry (R-N.C.) said.

“The challenge of tax reform will not be C corps. It will not be a question of interest deductibility or some large fundamental piece of tax reform,” he said at an event hosted by the Financial Services Roundtable. “In order to simplify the individual code you have to make serious decisions.”

Most questions from members during briefings have been about elements of the individual code, he said. That’s because there are more politically charged decisions in individual provisions than in corporate provisions, McHenry said. The White House has committed to a middle-class tax cut, leaving members to decide such things as adding a fourth bracket for high earners or repealing the state and local tax deduction and using it as a pay-for.

“We can resolve the better part of the challenge for members. We can resolve it economically. The question is, politically, can it be resolved,” McHenry said.

With assistance from Kaustuv Basu

To contact the reporters on this story: Colleen Murphy in Washington at cmurphy@bna.com; Laura Davison in Washington at lDavison@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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