House Bill Repeals Deductions (Nov. 8)

The Loopholes Most Beloved By Lobbyists

Tonight, the House Ways and Means Committee concludes Day 3 of marking up HR 1, the Tax Cuts and Jobs Act of 2017.   As Committee members debate the bill’s hundreds of provisions, the legislation’s impact on specific groups of taxpayers is coming into sharper focus.

The U.S. Chamber of Commerce hasn’t endorsed the bill.  The housing industry adamantly opposes it.  Small business is more con than pro.  For all the talk about spurring business activity, does the Ways and Means bill satisfy the interests of the  business community?  Which deductions matter most, fiscally and politically?  Which loophole closures cause the most pain, and to whom?  When you look at tax deductions (credits, deferrals, exemptions, etc.) you see the business face of opposition to the bill.  More below.
Best,

Dana

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Already, three of the country’s most influential business groups have already come out against the legislation.  This will undoubtedly become an issue for a GOP that has promised to bring about the most business-friendly tax reform since Reagan and has fostered expectations in the corporate community and capital markets about legislative outcomes that most analysts believe will be disappointed.

The Business Groups

•  Small Business:  The National Federation of Independent Business  (NFIB) has pledged to oppose the bill.  NFIB argues that slashing the pass-through rate to 25 percent will do precious little to help mom and pop shops. That’s because while most small businesses file as pass-through entities, they already pay less than 25 percent.

NFIB charges that the Republican plan will do nothing to repair a tax code that already favors big businesses. It will be hard for the party of business to brush off condemnation from the most powerful small business group in town.

•  Real Estate/Homebuilders:  The powerful National Association of Homebuilders (NAHB) announced its opposition to the Brady bill weeks ago.  Its main concern is a provision to double the standard deduction, which would significantly reduce the number of filers who claim the mortgage interest deduction.

The NAHB worked with Kevin Brady for months to include a tax credit for all homeowners, only to find out last weekend that no such credit would emerge. Brady expressed remorse over leaving the credit out, but explained the provision was simply too complicated to explain to rank-and-file lawmakers given the GOP’s aggressive timetable for their tax plans.

MVPs:  Most Valuable Provisions

•  Mortgage Interest Deduction Capped:  The Tax Cuts and Jobs Act reduces the cap on mortgage interest deductions from $1 million to $500,000, which the National Association of Realtors say will “threaten home values and take money straight from the pockets of homeowners.”  Expect the “housing industrial complex” to fight this portion of the tax bill with tooth and nail.

•  Local Lobbying Expenses:  The House bill repeals the deduction for local lobbying expenses.  This is a direct hit to those in the lobbying profession.  Can it survive in the Senate?

•  Business Interest Deduction:  House Republicans have also limited how much businesses can deduct for their interest payments, a technique widely used by finance and real estate companies. The original tax blueprint called for complete elimination of corporate interest deduction, but the House bill is much milder. The Brady bill would allow businesses to deduct interest expense up to a limit of 30 percent of their earnings before interest, taxes and depreciation.  Large companies with easy access to equity financing generally support the proposal, but debt-dependent firms have expressed opposition.”

•  Private Activities Bonds Exemption:  Private investors have not received conditions of the House bill well either.  In particular, investors oppose losing the ability to exempt interest associated with private activity bonds.  These bonds provide substantial financing to invest in hospitals, universities, museums, and sporting stadiums.

•  American Subsidiary Profits Levy:  The House GOP has already been browbeaten by business interests over a provision that is designed to crackdown on profit stripping. Originally, the plan called for a 20% excise tax on intra-firm payments from international subsidiaries to mother companies. Republicans hoped the tax would raise a significant amount of revenue and help deflect criticism that their plan is overly-friendly to large multinationals.

The provision quickly drew the ire of some powerful business groups, especially those that depend heavily on IP like tech and pharmaceuticals.  Late Monday night, House Republicans walked the measure back almost entirely, reducing the tax by 95 percent.

Next Up, Senate Finance

Such vocal opposition from powerful business interests sends an important signal to tax writers on the Senate Finance Committee.  Senate Republicans face this dilemma: write a bill similar to the House bill in order to ease the process in conference.  Or write a substantially different bill to accommodate powerful groups that are upset and make it Byrd Rule compliant to keep all the Rs on board.

The main challenge for Republican Senators would be adhering to the arcane Byrd Rule.  Expect the Senate version to reduce the deficit impact by including fewer revenue raisers and few  cuts than the House bill.  The Senate will not likely cut the mortgage interest deduction cap in half or replicate the House bill’s state and local deduction limitation.  Senators may also phase in the corporate rate reduction.  The Senate bill may well sunset the full expensing provision just as the House bill does.

But therein lie dragons.  Phasing out/sunsetting provisions undermine the argument that tax cuts pay for themselves.  Dynamic scoring projections do not take temporary, phased-out provisions like full expensing into account in long term growth estimates.  Businesses simply don’t make dramatic behavioral changes when a tax change is only temporary.  Nevertheless, Republicans have to make changes temporary, otherwise legislation won’t meet the Byrd rule standard of keeping the deficit impact to $1.5 trillion or less over ten years.