Both the House and Senate tax-writing committees are ramping up their focus on tax reform, hoping to set a pathway for legislation for the next president and Congress to consider.
A large number of proposals have been entertained by both committees, with offerings from other members of Congress, learned professors and prominent think tank members.
Among the proposals is a bill to “terminate” the Internal Revenue Code, which will act as an impetus to come up with real reform by the “termination date” of Dec. 31, 2019, according to its sponsors.
Then there’s the Jumpstart America Act, introduced by Rep. Roger Williams, R-Texas, which would cut personal tax brackets to 20 percent and 30 percent, and encourage U.S. companies to invest in expansion and employment at home by a permanent repatriation. It would also reinstate the 2 percent payroll reduction of 2011-2012, and cut the capital gains and dividends rates to 15 percent or 0 percent. It would eliminate the inheritance tax, make bonus depreciation permanent at a 100 percent level, and keep LIFO accounting.
Professor Michael Graetz of Columbia Law School appeared before the Senate Finance Committee to describe his Competitive Tax Plan, which would enact a VAT; use the revenue produced by the VAT to finance an income tax exemption of $100,000 of family income and lower the income tax rates on income above that amount; lower the corporate income tax rate to 15 percent; protect low- and moderate-income workers from a tax increase through payroll tax cuts; and protect low- and moderate-income families from a tax increase by substantially expanding refundable tax credits for children, delivered through debit cards to be used at the cash register.
LAYING THE GROUNDWORK
“Tax reform is more alive and ‘sticking’ than people give it credit for,” said Jeff Trinca, vice president of government relations firm Van Scoyoc Associates and former chief of staff for the Congressional Commission to Restructure the IRS.
“Everyone is saying that it’s not going to happen,” Trinca noted. “But the harder work, such as getting staff involved, and getting a handle on the costs and revenue effects of proposed changes, is being done already. They’re doing a lot of work on behind-the-scenes modeling and doing revenue estimates, and getting proposals down. The only missing ingredient is getting top-down commitment at the presidential level.”
“The staff and the leadership at the tax writing committees are working on it, and the speaker is clearly interested,” Trinca said. “Certain things will clearly change after the November elections, whether for better or worse for tax reform, but a lot of hard work is being done right now in anticipation of it.”
“Meanwhile, staff has done a lot of work,” he said. “They’ve brushed off the Baucus stuff, and the Camp stuff [reports and committee work from Max Baucus, former chairman of the Senate Finance Committee, and Dave Camp, former chairman of the House Ways and Means Committee].”
“Normally, it’s the other way around,” Trinca said. “You typically have the political process first, and the staff has to catch up. There’s so much work being done now on the staff side that once the political side catches up, tax reform could move pretty quickly next year. There will be a new president and a new Treasury secretary. Of course, they could be just as not committed as we now have, or you could have the 1985-1986 situation where the two parties jump off the cliff together.”
The extenders bill last year, which made the R&D credit permanent, facilitated reform, according to Trinca. “Once it was made permanent, you can cut back on it and lower the rates,” he said. “If it weren’t permanent you wouldn’t get a positive score for that change. For all the ones they made permanent, you get a revenue boost if you cut back on them.”
In the past, Trinca observed, they would wait two weeks for a revenue estimate, find that a proposal made a $30 billion hole, and go back to figure how to rejigger the proposal. “A lot of that debate and work has already happened,” he said. “Senators Portman and Schumer have spent much time digging on foreign tax reform, getting up to speed on a number of esoteric issues. So a lot of work has already been done, it’s just waiting for the political process to catch up.”
Chairman of the House Ways and Means Committee Kevin Brady has characterized the current situation as ripe for tax reform, similarly to the situation in 1985 that generated the Reagan tax reform. He noted taxpayer frustration with the current Tax Code, and interest and ideas from members of Congress. His position, similar to Trinca’s, is that the key element of presidential leadership should grease the skids for real reform next year.
Michael Greenwald, partner and corporate and business tax practice leader at Top 100 Firm Friedman LLP, agreed. “It comes down to who the new president is and how significant their willingness is to spend their political capital on tax reform,” he said. “There’s a reason we haven’t had major tax reform since 1986. It comes down to a president who is willing to make that a priority, and obviously, a Congress they can work with.”
BUSINESS ISSUES
“The view is different from the trenches,” noted Greenwald. “We did a survey of CEOs and business owners, and found that tax reform wasn’t that high on the list. There was no real consensus on any particular direction for tax reform.”
Surprisingly, the survey found that changes in the way individuals are taxed is of greater concern than the potential changes to the business/corporate tax regime, Greenwald observed. “This stands in stark contrast to the political rhetoric that suggests that the United States is at a competitive disadvantage in the world, primarily because of our burdensome corporate tax rates and byzantine Internal Revenue Code,” he said.
“While perhaps not eliciting the kind of reaction that we might have anticipated, it is important to note that two potential business tax changes could have a profound impact on middle-market businesses,” he said. Those are eliminating the business interest deduction, which is designed to make companies indifferent between issuing debt and equity, and creating one type of flow-through entity by combining the most restrictive aspects of partnership and subchapter S regimes.
“Limiting the business formation and operational structures available to closely held businesses further hampers their ability to raise capital and, in so doing, inhibits growth in these types of businesses across multiple sectors,” he said. “Making such entities less attractive could drive more businesses to become regular corporations, which are generally more tax-inefficient.”
The one consensus on tax reform, Greenwald noted, was “whatever Congress does to fix the code, they want that change made and left alone. They want consistency, and don’t want changes made after the fact.”
It may be more difficult to get meaningful reform passed this time than in 1986, according to Brett Beveridge, CPA, Esq., special tax counsel in the Atlanta office of Chamberlain Hrdlicka. “Congress seems to be gridlocked,” he said. “In 1986, Reagan and [then Speaker of the House] Tip O’Neill were able to get the bill passed even though they were in different parties because each got what they wanted. Now, it will be more difficult to pull off. Republicans are interested in lowering rates and significant international reform, but I don’t see the other side willing to do that unless they have some assurances that tax revenues will not go down.”
“In 1986, they proposed lower rates and got rid of deductions, and both sides felt like they were getting a good deal,” Beveridge said. “Now, there’s a philosophical difference between the parties. ... To get meaningful tax reform you would need a deliberate process where both sides trust each other and can work with each other. I don’t see that now, so I think we’ll see this present system ricketing along for a while.”
If there is any clue as to the direction proposed reform will take, it might be in the fact that Tax Policy Subcommittee Chairman Charles Boustany, R.-La., and ranking member Richard Neal, D.-Mass., called on the Joint Committee on Taxation to testify at their hearing in April on fundamental tax reform proposals. Thomas Barthold, chief of staff of the Joint Committee, was asked to review the legislation introduced by former Ways and Means Committee Chairman Camp, H.R. 1, the Tax Reform Act of 2014. “That legislation, like the Tax Reform Act of 1986, proposed broadening the base of income tax while lowering statutory tax rates,” observed Barthold.
In assessing any tax system or reform, policymakers make their assessment across four dimensions, according to Barthold: Does the tax system promote economic efficiency, does it promote economic growth, is it fair, and is it administrable for both taxpayer and the IRS?
“It is invariably the case that these different policy goals are in conflict,” he said. “There are always tradeoffs.”
