Senate Tees Up Corporate Integration in Tax Reform Bill

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By Allyson Versprille

A provision in the Senate tax reform bill providing a zero percent deduction for dividends companies pay to shareholders might lay the groundwork for a move to corporate integration in the tax code.

With the provision as a start, there is a possibility of an actual deduction in a later version of the bill, or in future legislation.

“This looks like somewhat of a placeholder, and I don’t know if it’s something that’s being set up for possible consideration either by the full Senate or in conference of the bill, or it’s just something out there for future consideration,” said Marc Gerson, chair of Miller & Chevalier Chartered.

Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) has been pushing for a dividends-paid deduction as a way to integrate the corporate and individual income tax systems. This concept—known as corporate integration—would help reduce what Hatch and others object to as the double taxation of corporate profits distributed as dividends, which under current law are taxed at both the entity and shareholder levels.

If the deduction, which wasn’t included in the House bill ( H.R. 1), were to be increased from zero percent in conference committee—a temporary, ad hoc panel composed of House and Senate members that would be formed to reconcile differences in the legislation that both chambers pass—that change would need to be paired with significant revenue offsets that may be brand new, Gerson told Bloomberg Tax. “That strikes me as fairly dramatic,” but “perhaps this is the notice of that potentially happening.”

The Senate Finance Committee released the legislative text of its tax bill the week of Nov. 20. In addition to providing a zero percent deduction for dividends paid, the bill would create new reporting requirements for corporations. Beginning in 2019, corporate taxpayers that pay dividends would have to report the total amount of dividends paid during the taxable year and the first 2.5 months of the succeeding year. (For a road map of where to find key provisions and compare the House tax reform bill (H.R. 1) with the Senate version, read Bloomberg Tax’s analysis.)

The Senate is to vote on its bill as early as the week of Nov. 27. The House passed its version Nov. 16.

Future Legislation?

It’s possible that lawmakers are using the provision to establish a framework for corporate integration but won’t actually change the zero percent rate in the tax reform package lawmakers are hoping to pass before the end of the year, Gerson said. “I think they can set up the statutory regime but just set the deduction at zero and legislate in the future to change the zero to some number.”

Ryan Ellis, a conservative tax lobbyist, said that is most likely what will happen.

The new reporting requirements would help policy makers gather information and modify tax returns in a way that would help them implement a dividends-paid deduction in future legislation, he said.

Ellis said the Senate provision reminded him of a measure included in the 2010 Affordable Care Act that requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement. “Everyone knew at the time that the whole reason to do that was to one day make it easier to tax employer-provided health insurance,” said Ellis, who writes about tax reform for Forbes and is a tax adviser to the Family Business Coalition. If they wanted to impose such a tax, the information is already “right there on the W-2,” he said.

The Finance Committee didn’t return requests for comment.

Overcoming Hurdles

Hatch will have his work cut out for him if he wants to include a deduction of more than zero percent in the tax reform bill, lobbyists said.

“Hatch very much likes this piece,” but “I think that his colleagues on the Finance Committee are much more skeptical,” Henrietta Treyz, director of economic policy research and a managing partner at Veda Partners LLC, told Bloomberg Tax.

“I think that what you’re seeing here is the bare minimum of what he could get included, and if there are going to be changes made in this iteration of the bill or maybe in a future technical corrections bill, the opposition to the dividends-paid deduction is pretty widespread among Ds and Rs alike,” Treyz said.

Ellis said there are still many questions to be answered before a dividends-paid deduction is enacted. “Corporate integration is easier said than done because you want to make sure that the dividend income is taxed once,” he said. “Right now we’re taxing it in a bifurcated way"—taxation at the source, or corporate, level and taxation at the recipient level, he said. “But the recipients are very different types of taxpayers.” They can include other corporations, foreign taxpayers, charities, college foundations, or 401k plans, Ellis said.

“If a certain amount of dividends is excluded from the corporate tax base, what happens when it flows to a charity or a college foundation, or it flows overseas and it’s not easily taxed?” he said. “There are all of these very difficult, sticky questions on the recipient side when you’re doing corporate integration that just never ripened enough for Hatch to be able to base tax reform around it.”

Higher Corporate Rate?

If the dividends-paid deduction were to be enacted at a rate higher than zero, Congress would need to consider offsetting changes to prevent revenue loss, the tax professionals said.

“What I’ve heard throughout this year is basically if you can’t get the corporate tax rate all the way down to 20 percent—say we just can’t pay for it—one of the things you could do is provide companies with a dividends-paid deduction, which is much cheaper than reducing the corporate tax rate,” Treyz said.

While the dividends-paid deduction “is a deficit-increasing provision, if it’s done to offset the cost of the corporate tax cuts—so say the corporate tax rate has to be 22.5 percent—you could still say that with the dividends-paid deduction you could net corporations out to a 20 percent rate but it’s revenue neutral,” she said.

Gerson said on a macro level this trade-off would work in terms of federal revenue. However, the trade would tilt the scales in the direction of companies that pay out more dividends, he said.

“That would benefit taxpayers who were utilizing the deduction and so were paying out a greater portion of their earnings,” Gerson said. But corporations that were retaining their earnings to reinvest them or promote growth would have a higher rate—22.5 percent instead of 20 percent—"but wouldn’t be able to take advantage of the deduction.”

Ellis said if Congress had more time, he could envision the dividends-paid deduction being fleshed out and used in conjunction with a slightly higher corporate tax rate, but the current time crunch and other pressing priorities make that less likely. “I wouldn’t put money on that,” he said. At the same time, the 20 percent rate is now a symbolic number, Ellis said. “People have really bought into 20 as a goal.”

Even if the dividends-paid deduction were increased from zero in future legislation instead of in the current bill, offsets would need to be considered, Gerson said. “Whenever it comes up, it will have a significant revenue cost that would—depending on the budgetary environment—arguably need to be offset.” In addition to an increased corporate tax rate, withholding taxes could be considered to counterbalance the deduction, he said.

Any future offsets could be faced with opposition, Gerson said. “Folks will have to evaluate both sides of the equation and see where they are on a net basis.”

To contact the reporter on this story: Allyson Versprille in Washington at

To contact the editor responsible for this story: Meg Shreve at

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