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Nov. 10 — Expectations for an overhaul of the tax code in 2017 changed overnight with Donald Trump’s election. A comprehensive tax revamp next year had been addressed by Ways and Means Committee Chairman Kevin Brady (R-Texas), though many weren’t optimistic it would happen. Now, with Republicans controlling Congress and the White House, tax lawyers, lobbyists and corporate directors are scrambling to review the finer points of the House Republicans’ tax blueprint and Trump’s plans, as an overhaul of the Internal Revenue Code seems more plausible.
The tax plan House Republicans released earlier this year could “not only be the starting point, but the ending point,” Ray Beeman, a principal at Ernst & Young LLP, said Nov. 10 on a company webinar.
The blueprint maps out a plan to reduce tax rates for businesses and individual taxpayers and eliminate a number of deductions, benefits and other tax breaks.
It was initially regarded as a partisan wish-list of tax ideas that Republicans could use to start negotiations. The Trump plan closely mirrors several ideas in the document, including a tax rate structure for individuals and corporations and a trade-off between full expensing and interest deductibility, indicating the plan may have more momentum behind it. Legislative language is expected sometime this winter.
Companies should start meeting with Ways and Means staff now while it’s easier to influence the policy direction of the plan, Cathy Koch, Americas Tax Policy Leader for Ernst & Young, said during the webinar. “If you’re not at the table, you’re on the table,” she said.
Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) has so far held off releasing his corporate integration plan. The plan, which would give corporations a deduction for dividends paid while requiring all dividend recipients to pay tax on them at ordinary rates, has been delayed as the Joint Committee on Taxation has worked through the details of the plan, Hatch has said in recent months.
Russell W. Sullivan, a partner at McGuireWoods LLP, said on a company webinar, “It’s time for him to put up or shut up” with his corporate integration proposal. “How long does he have before the House approach in their blueprint with Trump’s campaign agenda takes the day?” he asked.
Hatch has said the plan could stand on its own or be a component in a larger tax overhaul package. Plan details are expected to come before the end of the year.
“It would not surprise me if at the end of the day the Senate moves toward a vision like the one articulated by Trump,” Jonathan Traub, a principal at Deloitte Tax LLP, said during a firm webinar.
During the campaign, questions circulated about how Trump’s unconventional positions mesh with the Republican party’s traditional stance. The election “papered over” the need for a “major reckoning” within the GOP, but the differences still exist, Douglas Kantor, a partner at Steptoe & Johnson LLP, told Bloomberg BNA Nov. 10.
Many of the Republican party’s more conservative lawmakers, most notably members of the House Freedom Caucus, got their start in politics over concerns about the deficit, Kantor said. Battles over spending levels, the national debt and tax rates are likely to occur within factions of congressional Republicans during the tax overhaul process, he said.
“The big question about tax reform is at what point do Republicans make deals with Democrats that leave out their own constituencies, or at least anger them,” Kantor said. “Tax will be one of the first areas where that plays out.”
One route to passing a large tax package is a procedural pathway, known as reconciliation, which would limit Senate Democrats’ ability to block Republican legislation.
“That certainly is probably the most efficient way to move this along,” Rosemary Becchi, a partner at McGuireWoods LLP, said.
Reconciliation comes with some limitations, including the need to wait for a budget resolution, which could take until March or April, and it can’t expand thefederal deficit outside the 10-year budget window.
That is why the tax cuts in 2001 under President George W. Bush “had its sunset after 10 years and creating uncertainty in a number of areas about whether those provisions would be made permanent or old law will spring back,” Sullivan said. “So there are downsides to reconciliation but they will more than likely proceed with that process, at least as a backup plan.”
Trump’s plan calls for ending the tax break for investment fund managers, known as carried interest. His plan said the profits they make should be taxed at ordinary rates, rather than lower capital gain rates.
However, hedge funds and private equity firms that used carried interest are structured as partnerships, which under the Trump plan could be taxed at 15 percent, significantly lower than the 33 percent top ordinary rate for individuals, Gerald V. Thomas II, a partner at McGuireWoods LLP, said.
The proposed 15 percent rate for passthrough entities has been subject to some uncertainty during the campaign, and it is still far from becoming law. However, the House GOP plan also includes a special 25 percent rate for passthroughs, indicating such a provision could be in play.
“That’s something we should keep an eye on,” he said. “It may still provide incentives to structure certain interests as carried interests.”
It’s unclear if presumptive Senate Minority Leader Charles Schumer (D-N.Y) will stay on the Finance Committee, but he will be an influence on tax policy either way, said Nick Giordano, U.S. tax policy leader at Ernst & Young LLP.
Schumer is likely to be sensitive to the fact that eight of 12 Democrats on the committee are facing re-election in the 2018 cycle. In two years, 24 of the 33 seats up for re-election are Democratic, including several in states where they could be vulnerable. Schumer will likely negotiate to keep his members from having to vote on politically problematic issues.
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