Mike & Co.,
The hopes of even the most zealous advocate of tax reform must be modest this year, but brave talk is heard from some well-placed members. Almost any reform would be seen as a crowning accomplishment for the new Speaker but the maw of election year politics militates against anything bipartisan and ambitious.
Below is a look at the state of play for the major tax legislation likely to see votes in 2016. Tomorrow we look at the same issue from the campaign perspective in a pre-debate update.
Legislative Tax Prospects for 2016
- Customs Bill and Internet Moratorium
Early in the session, the Trade Facilitation and Trade Enforcement Act conference report, to which the House added a permanent Internet Tax Moratorium, will hit the Senate floor. Sen. Durbin thinks he has enough votes to sustain a Budget Act point of order to knock that out, preserving slim odds of moving the Marketplace Fairness Act. Most Senate Democrats will vote against cloture and for a Budget Act point of order against the report. Democrats cite language discouraging the inclusion of climate change provisions in future trade agreements and weakened human trafficking language. A permanent Internet Tax Moratorium, if enacted, would kill any chance for adding the Marketplace Fairness Act to subject Internet sales to state sales and use taxes.
Sen. John Thune: “I think that, in the end, if the Customs conference moves—and I think it will move soon—then the Internet-tax moratorium will be included in it as it was reported from the House.” Regarding the Budget Act point of order against the Internet Tax Moratorium, he says: “Right now, I think the vote count is probably fairly close on that. There are a lot of groups who are interested in that that are whipping it, and it could be a close vote, but I think in the end there will be 60 votes for keeping that in the bill.”
- Tax Extenders:The passage of the tax extenders package through to the end of 2016 should give Senate Finance some breathing room to pursue comprehensive tax reform legislation in the coming year. Thirty-two more expire at the end of this year, so look for another extenders bill during next December’s lame duck session of Congress.
As noted last week, within Senate Finance is a series of working groups organized last year to discuss potential tax reforms in a variety of areas. The working groups are:
- International Tax Reform:The working group proposes ending “the lock-out effect” on international profits by adopting a dividend exemption system. This and minimum tax proposals are expected to help end base-erosion and tax inversion activities. The Committee will continue to hold hearings on international tax reform in 2016, but no legislation has been introduced yet. Chair Hatch: “I think it’s more likely that we could work out an international tax bill because there are a number of us that want to get rid of the inversion problem … Both Democrats and Republicans ought to want to get rid of the inversions of our larger corporations over to other lower tax jurisdictions.”
- Business Income Tax Reform:This group has put forward proposals to lower business income taxes. The group’s report also catalogued recent legislative proposals, including the cash method of accounting, a pass-through entity business deduction, the research credit, publicly traded partnership rules, and corporate integration.
- Individual Tax Reform:The working group calls for tax simplification and the adoption of incentivizing tax policies, such as those that encourage charitable giving and saving for education.
- Savings and Investment: The group’s report lists three goals for policymakers to pursue: (1) increasing access to tax deferred retirement savings; (2) increasing participation and levels of savings; and (3) discouraging early withdrawals from retirement accounts.
- Community Development and Infrastructure:The working group has proposed creating an alternative for funding the Highway Trust Fund. Proposed solutions are meant to increase available funds to “… fix America’s roads and bridges, while also overhauling our broken tax code.”
In the House
- International Business Tax— Ways and Means Chair Kevin Brady seems determined to present an international business tax reform bill which addresses dividend repatriation. Dividend repatriation is expected to pass House Ways and Means this year (more on this below). Some Representatives have already begun pushing for such reforms; yesterday, Rep. Devin Nunes, with 26 cosponsors, introduced the American Business Competitiveness Act. He wrote: “The ABC Act has four main components: it will allow 100 percent, same-year expensing for all businesses; lower the maximum business tax rate to 25 percent; eliminate all loopholes and special deals; and switch to a territorial international system.” Broad tax reform proposals don’t have much viability in the coming year; however, such proposals are important precursors for future tax reform efforts, possibly in 2017.
Getting the top corporate and individual tax rates down to 30 percent would be difficult, and anything lower would be politically impossible because it would require wholesale elimination of major and very popular tax deductions. If Brady tries to lower the top corporate rate below the top individual rate, pass-through business entities would oppose the bill, killing any chance for passage.
In any event, dividend repatriation has apparently been ruled out by a Ryan aide. George Callas, on a Pricewaterhouse Coopers webcast, said it would cost more than $100 billion over ten years, that it would only be considered as part of a broad tax reform, and that “It’s not just a money generator. It’s a transition rule to deal with old earnings that were earned under the credit and worldwide system when you’re moving to an exemption system.”
House Ways and Means
Brady inherited an odd situation when he took over the Committee in November, coming in almost halfway through a Congress. But he also replaced now- Speaker Ryan, who took key members of the Ways and Means policy team with him. Brady had to immerse himself in tax extenders negotiations pretty soon after he got the gavel. The passage of the permanent extenders package will now give Brady a period of relief to get his bearings for a run at other policy priorities.
He must now secure new hires for his office, which lobbyists have said could offer an indication of his intentions. During Ryan’s time on the Committee, fewer resources were committed to tax policy staff.
Obama Overture and the EITC
Meanwhile, President Obama said at the SOTU address: “I’d welcome a serious discussion about strategies that we can all support, like expanding tax cuts for low-income workers without kids.” It was an olive branch to Ryan, who has also made battling poverty one of his signature issues. On that matter, note that both sides are interested in lowering the eligibility age for the EITC from 25 to 21 and doubling what those recipients can get, from $500 to $1,000.
The stimulus-era expansions of the EITC just became permanent in the tax extenders deal, but GOP concerns about fraud in the program persist. Ryan has said fraud savings could go toward offsetting the cost of an expansion. Obama proposed paying for the $60 billion 10-year cost of his proposal by changing the taxation of carried interest and eliminating a break self-employed professionals can use to avoid payroll taxes.
Both parties have come to see the EITC as a potent tool in fighting poverty. In 2013, the EITC pulled about 6.2 million people out of poverty, according to Census data. SNAP benefits (aka food stamps) kept 4.8 million people out of poverty that year.
Despite the reputation of election years being bereft of significant legislative activity, it looks as if we can expect some interesting actions over the next 12 months on the tax policy side. Going forward, look for action from Sen. Hatch and Rep. Brady on their pet projects. Speaker Ryan’s well-deserved reputation on tax reform is also a factor in the future of this policy debate. But there is not much to entertain the electorate in tax reform and Congress lacks for comity.