Tax Reform: Where Are We Now?

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By Laura Davison

Lawmakers started the year with high hopes of passing a health bill quickly and then turning to one of the GOP’s favorite legislative projects: a bill that would cut tax rates and simplify the tax code.

Now, more than halfway through the year, the Republican-led Congress hasn’t been able to check off either priority. Health care legislation is stalled as Republicans in the Senate debate how, if at all, to proceed. The House and Senate have agreed to a broad-strokes outline of tax reform, but haven’t yet made the tough calls on how to approach a bill.

Before breaking for the August recess, the Finance and House Ways and Means committees agreed to work on tax legislation to “grow our economy and help the middle class get ahead.” A joint statement, released after months of meetings and disagreements about specific tax provisions, was an attempt to show unity among congressional Republicans and the White House.

“We have had one of the busier legislative years, but we have not had a successful year in regards to the large items,” Finance Committee member Tim Scott (R-S.C.) said.

Big-Picture Consensus

Lawmakers will come back after Labor Day with little more than a five-paragraph outline of a general vision—an alarming sign if Republicans hope to pass comprehensive tax legislation in the coming months, tax lobbyists and staffers told Bloomberg BNA.

Republicans agree on three major goals for tax reform: Spur economic growth, make it easier for U.S. companies to compete with companies based overseas, and simplify the filing system for individuals to make taxes less of a hassle.

But lack of consensus has reigned over big issues: what the corporate and passthrough rates should be, how to treat asset depreciation for businesses, and whether to continue allowing companies to deduct the interest they pay on loans.

“I don’t think they are surefooted yet,” Ways and Means ranking member Richard E. Neal (D-Mass.) said. “I just hope that they don’t miss this opportunity. Given the fact that, if nothing else, everybody agrees how inefficient and underproductive the current code is. If we can’t get the big deal, let’s at least head down the road to simplicity.”

Process Considerations

Republicans are still planning to use budget reconciliation to pass a tax reform bill, which comes with a mixed bag of advantages and handicaps. The bill would only need a simple majority to pass in the Senate, meaning it wouldn’t need Democratic backing, but it would be constrained by Senate rules that require it to be revenue-neutral and to omit any provisions outside the realm of tax and spending.

That means proposals to restructure the Internal Revenue Service—as House Republicans’ tax blueprint calls for—likely wouldn’t make it into the bill.

Despite the consensus on using reconciliation, Republicans also still haven’t decided if they want the bill to be revenue-neutral. Ways and Means leadership is pushing for the bill to be revenue-neutral on a dynamic basis, meaning that the revenue effects would be scored incorporating broader economic developments. In the Senate, however, some members are looking also for a more traditional, or static, score, one that doesn’t factor in macroeconomic elements.

“We have people who are going to be in the revenue-neutral probably statically scored, some it will be revenue-neutral dynamically scored, some would like to actually probably go beyond that,” Sen. John Thune (R-S.D.) told reporters. “Right now I think we’ll have to figure out exactly what the guardrails are in terms of where our caucus is and what we can get passed.”

White House Legislative Director Marc Short has said he envisions markups on a bill happening in September, with the House passing the bill in October and the Senate following suit in November.

Using reconciliation to pass the bill is also contingent on lawmakers approving a budget resolution for fiscal year 2018. The House budget could get a vote as soon as the chamber reconvenes in September, but both moderate and conservative GOP members have expressed displeasure with it. Members of the conservative House Freedom Caucus have also demanded that Ways and Means release tax plan specifics before they will agree to vote for the resolution.

A tax reform bill will have to originate in the House, as the Constitution requires, but congressional leaders and White House officials—a group known as the Big 6—are aiming to pre-negotiate a bill so that the main points are ironed out before the legislation is marked up in committee.

The Big 6 includes Ways and Means Chairman Kevin Brady (R-Texas), House Speaker Paul D. Ryan, Senate Majority Leader Mitch McConnell (R-Ky.), Finance Chairman Orrin G. Hatch (R-Utah), Treasury Secretary Steven Mnuchin, and White House Economic Adviser Gary Cohn.

Finance Studying Ideas

It’s unclear whether Senate Republicans will bring a full plan to the table. The Finance Committee asked for tax ideas earlier this summer and received so many that its email inbox couldn’t accept any more. The committee is reviewing those submissions, but the approach has been ad hoc, with individual senators working on specific issues, rather than a coordinated effort to put together a comprehensive bill, a tax lobbyist, who spoke on the condition of anonymity to protect client sensitivities, said.

Hatch has said he’s still hopeful there could be a bipartisan tax reform bill because both parties agree on the broad strokes, though Democrats have been skeptical as long as Republican leaders plan to use reconciliation. The Senate Finance Committee will hold tax reform hearings this fall, according to an Aug. 3 statement.

In the coming weeks, the Big 6 will need to make calls on provisions, including what the tax rates should be and how to treat the expensive tax provisions, including expensing and interest deductibility. The group has abandoned the controversial border adjustment provision that would have taxed imports but exempted exports.

Brady told reporters after releasing the joint statement that the ideas in the blueprint still stand, but a GOP staffer, who requested anonymity because they weren’t authorized to speak publicly, said it was hard to see how many elements of the plan could continue, because they were written within the context of a border adjustment tax.

‘Big-Ticket Issues’

There are also other policy questions. “There still are uncertainties about big-ticket issues,” Rep. Pat Meehan (R-Pa.) told Bloomberg BNA. Lawmakers also can no longer count on the taxes in the Affordable Care Act being repealed, which would have given them more leeway to cut taxes.

The House in its blueprint proposed a 20 percent corporate rate. White House officials are pushing for 15 percent. Hatch has said he thinks it would be difficult to get the rate much below 25 percent.

Brady and Ryan are eyeing 20 percent, but they would be happy with anything in the low-20s realm, a second tax lobbyist said. Ways and Means tax staff will continue to work over the recess, but likely won’t release anything until the bill is ready to go to markup, the lobbyist said.

The House and Senate will have to find common ground about how to treat expensing of business assets. For more than a year, Brady has pushed to allow companies to immediately write off equipment investments. Members on the Senate side have been wary of this proposal.

Thune introduced legislation earlier this year (S. 1144) that would allow some small businesses to take deductions immediately and would also simplify the depreciation system.

The Ways and Means-Senate Finance joint statement called for “unprecedented capital expensing.” Brady said he would continue to push for full expensing, but would be willing to compromise on a system that allowed for more expensing than is currently permitted.

The House plan also called for eliminating the ability to deduct interest, though Ways and Means Tax Policy Subcommittee Chairman Peter Roskam (R-Ill.) said it would allow an exception for small businesses to keep both full expensing and interest deductibility to mirror the current tax code. The joint statement didn’t delve into how to treat interest expense at all. Mnuchin and several GOP senators have said their preference is to keep interest deductibility.

Summer Work

While lawmakers are away for the summer, tax counsels at the committee level will continue to work on legislative text, but the Big 6 still has to decide on several key ingredients.

“We do have more work left to be done,” Brady said. “There is a seriousness of purpose in those negotiations. Everyone understands we have to deliver this year. There is a remarkable lack of frivolous discussion.”

Brady and his Ways and Means colleagues have been pushing for a bill that is permanent, which means it would have to be revenue-neutral. The lawmakers have said that lasting legislation, rather than short-term tax cuts, is the only way to generate economic growth.

Rep. Dave Schweikert (R-Ariz). said that using more data and information graphics will be important to sell his colleagues on the importance of a permanent tax plan to expand the economy.

“I’m the guy who will show up with some charts and say, look, here is our experience from the early 2000s with lowering rates,” he said. “We got a nice bounce out of it for four years, and then it fades away.”

To contact the reporter on this story: 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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