With the elections behind us and the Inauguration of President Trump on January 20, it is important to assess the new President’s plans for tax reform and how they will fit with the House Republican Blueprint for tax reform and what may happen in the Senate. But before we can make that assessment, it is equally important to gain some perspective as to what is expected to take place in 2017 that will have an impact on when tax reform is taken up. That will help inform strategy for stakeholders in tax reform. The timeline and activities suggested below take into account the desire of the White House and Senate and House Republicans to pass a tax reform bill this year. While fulfilling that desire necessitates an aggressive schedule that could very well be sidetracked, we need to prepare for it.
SECTION I THE YEAR AHEAD
- The Senate and House have passed a fiscal year 2017 budget resolution that instructs both chambers to meet certain budgetary goals in part by repealing the Affordable Care Act. This month’s action will not repeal the ACA but it establishes the foundation for committee action by January 27 and House and Senate Floor votes in February. At least five Senate Republicans and the President-Elect, however, support calling for repeal only if a replacement also is identified. If that approach were to be adopted, the legislative schedule on repeal and replace of the ACA will be thrown off course, as will the schedule for other items on the Republican agenda, including tax reform. The Congressional Republicans currently do not have a detailed replacement plan. Their failure to produce such a plan could hurt them politically and could cause major disruptions in the health industry – principally with insurers and hospitals.• The Senate has held hearings and will continue to hold hearings on the President’s cabinet nominations. Most nominees will be approved in January and early February because they require only a simple majority, but it is possible that one or two could get tripped up. The hearing dates for the Treasury Secretary nominee, Steven Mnuchin, have not been set.
- Once taking office, the new President will take action to repeal many of President Obama’s executive orders and direct agencies and departments to delay or halt further action on regulations recently promulgated. Congress will have already begun the process of repealing certain regulations through the Congressional Review Act with a focus on energy and the environment.
- President Trump is expected to nominate someone to take the place of the late Justice Scalia on the Supreme Court. The approval process is expected to be treacherous in the current political environment because, at least as of now, approval requires 60 votes.
- The Senate Finance Committee and the Ways and Means Committee are expected to hold hearings on tax reform to build a foundation for the advancement of tax reform legislation later in the year. The process will begin in earnest in February but will be very fluid through most of the year.
- The Senate and the House are both expected to vote on legislation to repeal the ACA in early February which will provide a two or three year transition period to a new system. The House and Senate will consider various replacement options which will be considered later in the year.
- President Trump is supposed to submit his first budget for FY 2018 to Congress but the timing may slip. His budget will outline in more detail his tax and spending priorities. Congress will write its own budget but will try to meet the President’s priorities. The release of the President’s budget should provide a clearer idea on the President’s views on tax. In addition, he may also address how he proposes to handle his campaign promise to initiate a $1 trillion program for infrastructure.
- President Trump is also expected to deliver his first State of the Union address which will also detail what he will prioritize this year. This will also be an opportunity for the President to address tax reform and infrastructure.
- Dodd-Frank repeal legislation known as the CHOICE Act will begin to move through this process will take several months. The legislation will require Democratic votes to move in the Senate, and that is unlikely. The process may produce some limited results.
- The nation’s debt ceiling of over $20 trillion will be reinstated on March 16. This will begin a process that will require Congress to extend the debt ceiling to allow for the government to pay its bills. Action is expected later in the year but the debt ceiling will be reinstated.
- Both the House and Senate will pass another budget resolution, this one for FY 2018. It will have reconciliation instructions to advance a tax reform bill to be enacted in the Senate will only a simple Majority vote. Very few details will be included in the budget resolution.
APRIL – MAY
- The Ways and Means Committee is expected to begin the process of marking up a tax reform bill. This process could take weeks or it could be a shorter process, depending on the degree to which Chairman Brady will permit the Minority to participate through the amendment process. The end result, however, is expected to produce a bill passed strictly along Party lines.
- The bill will then be sent to the House floor where it is virtually certain to pass, notwithstanding any potential defections by the unpredictable Freedom Caucus. The bill will then be sent to the Senate.
- At the same time, the House Transportation Committee and Senate Commerce, Science and Transportation Committee may begin addressing how to implement a Trump devised program to provide over $1 trillion for transportation infrastructure. If the program requires a tax credit, then that program will be considered by the House Ways and Means Committee and the Senate Finance Committee. Its implementation as a tax program has the potential of derailing the House GOP Blueprint due to the revenues involved.
- Chairman Hatch has not yet indicated when he expects to begin his markup process, but a few of his Republican colleagues expect to have their own blueprint on tax reform sometime in late Spring or early Summer.
- Chairman Hatch is expected to try to produce a bipartisan bill. If he succeeds in doing so, it is likely to take place after a lengthy drafting and markup process that could stretch into July. In any event, votes in Committee would take place in the June-July time frame with the legislation going to the Senate floor for a floor vote perhaps sometime before the August recess. The Senate floor is where a number of amendments will be offered. The small Republican Senate majority (52-48) will empower moderates like Cassidy, Collins, Murkowski and, perhaps, Portman at this time. It will also give willing Senate Democrats a change to achieve changes to gain their votes. Regardless whether the Republicans chose ultimately to use Budget Reconciliation, it will be in their interests to attract Democrat votes.
- The issue with this time frame is that both the House and Senate bills would be left hanging through the August recess when Members would be heavily lobbied back home in their States and Districts. Usually, Members try to avoid this scenario. Nevertheless, in view of importance of tax reform and the desire to achieve in n 2017, this may be unavoidable.
- Congress will recess in August with or without a final tax bill. If past experience is a good teacher, it is likely that a final bill will be produced after the August recess. As will be explained, the August recess will be a time for opportunity for the industry to make any necessary points on the legislation.
- When Congress returns in September, the House and Senate will need to reconcile the House and Senate tax reform bills. This will be a time of critical lobbying that will involve House and Senate Leadership, the Committee Leadership and key Senators whose votes can make a difference on the Senate floor. It is difficult to predict when this process will end but it could stretch well into the Fall.
SECTION II THE TAX REFORM PROPOSALS
1. President Trump’s Tax Proposals as Set Forth in the Campaign
- Top corporate rate = 15 percent
- No corporate AMT
- Election between full expensing of assets or deductibility of interest expense
- Eliminates all credits except R&D
- Taxes capital gains and dividends at 20 percent
- Eliminates the 3.8 percent tax on net investment income
- Foreign Earnings Repatriation at 10 percent
- Per the Tax Foundation, the Trump plan could lose $2.6 and $3.9 trillion on a dynamic scoring basis
2. House Republican Tax Reform Blueprint (published June 2016)
- Top corporate rate = 20 percent
- No corporate AMT
- Dividends and capital gains would be taxed at 50 percent of the top individual rate (top individual rate = 33 percent)
- Eliminates the 3.8 percent tax on net investment income
- Preserves the R&D corporate tax credit but is silent about the LIHTC, Bonds and other credits
- Full expensing of all assets (except land) in the year placed in service
- Interest deductibility limited to interest expense
3. Senate Finance Committee
- Chairman Hatch originally backed what he called a dividends paid deduction approach to corporate tax integration. However, in view of the similar approaches to tax reform taken by President Trump and the House Republicans – focusing on comprehensive tax reform – Hatch no longer is pushing his plan. Instead, he is taking a wait and see approach while he develops his own plan in his Committee.
SECTION III THE PLAYING FIELD FOR TAX REFORM AND PITFALLS
- With Republican control of the White House and both houses of Congress, the odds of tax reform of some nature being enacted have greatly increased.
- The question is “What type of tax reform”: corporate only, individual only, both corporate and individual, international only.
- A critical question is whether the legislation will be revenue neutral or whether it will lose revenue.
- If the Republicans choose to pass tax reform through the budget reconciliation process (requiring only a majority vote in the Senate), the legislation must not lose revenue beyond the 10 year budget period (the Byrd rule).
- If the legislation loses revenue beyond the 10 year budget window, then those provisions in tax reform that lose revenue would end in 10 years and prior law provisions – principally tax rates – would spring back. That is what happened to the Bush tax cuts for higher income families.
- Trump has proposed a net tax cut while McConnell and Ryan have said that their tax reform proposals will be revenue neutral.
- The House GOP Blueprint currently includes a $1.2 trillion revenue raise that is labeled a “border adjustment” provisions affecting exporters and importers. The proposal is highly controversial, and the Senate has not signed on to it. Resolution of this one provision will be a key issue, although it is expected to be included in final tax reform legislation that will most certainly pass the House. However, if the Senate does not go along, it would leave a huge revenue hold to fill in the tax reform bill.
- Every tax preference in the Internal Revenue Code has substantial Congressional support, and key defenders with well-organized and funded advocacy efforts. For example, the National Association of Homebuilders has launched a major effort to protect the mortgage interest deduction. Charities are doing the same thing with respect to the charitable donation deduction. States and localities are also working to preserve the deduction for state and local taxes. Those are just three efforts, and there are dozens that are ongoing.
- The process will be lengthy and could spill into next year – an election year which will make decisions much more difficult, particularly when an ACA replacement may not have yet been determined.
- If the Republicans ultimately decide to go with budget reconciliation that requires only a majority vote, the tax reform plan that is adopted could suffer the same fate as the ACA: acceptance by only half the people and ultimate repeal efforts. The GOP could also suffer major losses in the elections.
- Going the budget reconciliation route will empower the handful of moderate Republicans: Senators Cassidy, Murkowski and Collins. Senator Portman could also fit this profile and will empower him on the Senate Finance Committee.
- If the Republicans decide not to go with budget reconciliation but seek to attract enough votes to reach 60, that will empower the Democrats in the Senate who may be willing to deal, particularly those in Red states which Republicans have carried for several elections. They include: Senators Manchin, Tester, McCaskill and Donnelly. However, to reach 60 votes, the Republicans will need at least 8 Democrats, and that means significant compromise.