House Speaker Paul Ryan (R-WI) addressed the National Association of Manufacturers on Tuesday in an effort to build support for tax reform, emphasizing the unique, and diminishing, window of opportunity that exists to enact permanent tax reform ahead of next year’s primaries and midterm elections. According to his press office, this speech marks the beginning of his “sales pitch” for tax reform in 2017. Speaker Ryan’s prepared remarks are available here. You can also watch his speech here (starting at 1:41:34).
Here are the key takeaways:
- Republicans Are Aiming for End of 2017: Speaker Ryan said that lawmakers would “begin to turn” their plan into legislation to put in front of Congress, and promised to “get this done in 2017.” We have heard this line before, both from Speaker Ryan and from Treasury Secretary Steve Mnuchin during the press conference unveiling Trump’s tax principles. Interestingly, Ryan continued on to explain that they would get it done in 2017 “because we have to get this done in 2017. We cannot let this once in a generation moment slip by.” This may be an indication that Ryan is concerned that the midterm election cycle will get in the way of tax reform in 2018. Another interesting takeaway from this remark is that Brady seems to be operating on a longer timeline than the Trump Administration. Gary Cohn, Director of the National Economic Council, told a group of executives from the technology sector this morning that the White House expects to present a unified, pre-negotiated bill to the floor of Congress during the first two weeks of September. With just 6 1/2 working weeks to go (unless legislators work over the July 4 and August recesses), we remain skeptical.
- House Exploring Other Options for International Tax Reform: Ryan dedicated much of his speech to the need for a shift toward a territorial system that “reverses the trend of inversions and enables companies to bring back cash stranded overseas without being taxed.” While Ryan did not declare the DBCFT dead just yet, he acknowledged that it may be time to look to an alternative means to achieve territoriality: “There are a number of ways to achieve this—we in the House have our own idea—and that is one of the things that we are discussing with the Administration. But the bottom line here is this: We cannot accept a system that perpetuates the drain of American businesses overseas.” Add this to reports from earlier this week that Senate Republicans have quietly begun working on an alternative plan that draws heavily from Dave Camp’s 2014 tax reform plan (and in particular his “Option C,” which proposed a dividend exemption system with a minimum tax rate of 15% on foreign profits from intellectual property and other intangible assets). Click here for our summary of the Camp plan’s international reforms, and here for our predictions from February of what the Senate might do (the summary of the Enzi Plan from 2012 may be particularly relevant, as industry sources have reported that Senator Mike Enzi (R-WY) is leading the Senate discussions). However, House Ways and Means Committee Chairman Kevin Brady (R-TX) implied last week that the DBCFT was still on the table, floating the idea of a border adjustment phased in over five years.
- Temporary Tax Cuts Are Not An Option: Speaker Ryan firmly rejected the idea of temporary tax cuts, stating that “every expert agrees” that “temporary reforms will only have a negligible impact on wages and economic growth.” This once again raises questions as to how Republicans can enact permanent tax cuts through the budget reconciliation process without the DBCFT. Perhaps we will see the quiet work of Senate Republicans expand to include Senate Democrats as talks progress.
- Preferences for Retirement Income are Safe (Probably): The Trump tax plan created some confusion over whether tax preferences for retirement savings would survive in tax reform. Brady made clear that his vision of tax reform involves preserving existing preferences for retirement savings. Whether that means that current rules surrounding retirement savings will survive unscathed remains to be seen.
- No Commitment to a 15% Tax Rate on Business Income: Unlike the Trump plan, Brady did not propose a particular set of tax rates, stating instead that “real tax reform means slashing our corporate tax rate as low as possible,” pledging to “eliminate special-interest carve-outs and replacing them with lower tax rates for all businesses,” and announcing a push for “a new, lower tax, specifically for small businesses.”
- Special Small Business Rate? Brady talked about creating a lower tax rate specifically for small businesses. He also talked about how 8 out of 10 businesses file their taxes as individuals (i.e., as pass-thrus), and how it is unfair that these businesses pay tax at a top marginal tax rate of 44.6% while corporations are taxed at 35% (again ignoring the fact that corporate income is taxed again upon distribution to shareholders). He did not, however, provide for a special tax rate for pass-thrus writ large, nor did he link the special small business rate to taxation as a pass-thru.
- No Mention of Full Expensing or Interest Deductibility: While House Ways and Means Committee Chairman Kevin Brady (R-TX) said last week that he thinks full expensing is “the best way to expand the economy,” Speaker Ryan paid no lip service to the proposal in his speech, even though it was a central piece of the House Blueprint. Whether that means that the existing cost recovery system (and the availability of a net interest deduction, which is often framed as a trade-off for full expensing) will remain intact in tax reform remains to be seen.
- Other Aspects of the Individual-Side Plan Remain the Same: Overall, the basic contours of the plan to reform individual taxes remain the same: reducing the number of tax brackets to three, lowering rates, doubling the standard deduction, eliminating the AMT and the estate tax, eliminating exemptions and deductions other than to support home ownership, charitable giving and retirement savings and simplifying the return filing process.
Prospects for tax reform have so far been hindered by the Administration’s incomplete (and at times contradictory) tax policy statements, a fractured Republican caucus that has not united on an approach to tax reform and populist politics – voters are more interested in the fate of the Affordable Care Act and immigration policy than tax reform and recent polls have shown that a majority of registered voters think corporations should pay more tax, not less. There is however, still bipartisan acknowledgement that it would be beneficial to make a permanent shift toward a business tax regime that is more in line with those of our trading partners – with lower rates and a territorial (or more territorial) system. Politics will likely require that this be done in tandem with simplification and rate cuts for lower and middle income individuals.
Despite comments from the Trump Administration and certain members of Congress, Politics will also likely require that tax reform be reasonably revenue neutral, after taking into account revenue generated by the economic effects of the tax reform measures. Is comprehensive tax reform doable by the end of September? Probably not. Is comprehensive tax reform doable by the end of 2017? Place your bets.