Although light on details, the recent statement on tax reform from the “Big 6” group of Republican Congressional and White House policymakers provided two important hints on the direction that tax reform may be heading. First, the Big 6 remain dedicated to imposing a “system that encourages American companies to bring back jobs and profits trapped overseas.” Whether this means true international tax reform or merely lower tax rates at home is up for debate. However, if international tax reform remains a goal, the joint statement made clear that it will not be accomplished by way of a destination-based cash flow tax (a “DBCFT”). Continue Reading
45 out of 48 Senate Democrats signed a letter to President Trump, Mitch McConnell (R-KY) and Orrin Hatch (R-UT) today, urging Republicans to work with them on tax reform. The olive branch, of course, came with terms:
- No increase in the tax burden on the middle class
- No tax cuts for the top 1%
- Tax Reform is accomplished through regular order, not the budget reconciliation process
- Tax Reform is deficit neutral
The full letter is available here. Aside from the request to pursue tax reform through regular order, the Democrat’s terms look remarkably similar to positions publicly supported by the Big 6 (check out our infographic). Continue Reading
The Legislative Calendar: Six Months In. With yesterday’s late night last ditch failed effort by the Senate to pass a so-called “skinny” repeal of the Affordable Care Act, the Republican controlled chamber has nearly run the clock on its strategy for passing major legislation by majority vote, which relied on reconciliation instructions under the FY 2017 budget resolution (a process we highlighted back in December). Congress will soon need to adopt budget resolutions for the 2018 fiscal year if regular order is to be readopted and any progress is to be made on the President’s budget proposals (which are traditionally only a starting point for negotiations). Continue Reading
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.
At a WSJ conference yesterday, House Ways and Means Committee Chairman Kevin Brady (R-TX) gave a few tantalizing hints as to the content of the much anticipated house tax reform bill. Most notably, Brady suggested that the bill would include a DBCFT that is phased in over a five-year transition period. This is intended to respond to a number of concerns, including the fear that currencies may not adjust immediately (click here for the Tax Foundation’s summary of the concerns alleviated by, and new concerns raised by, a five-year transition).
Brady also reaffirmed that certain industries (financial services, communications, insurance and digitally-focused businesses) would be subject to “special treatment” under the DBCFT. Continue Reading
In advance of yesterday’s House Ways and Means Committee hearing on tax reform, the Joint Committee on Taxation released its own comprehensive report on destination-based taxation and border adjustments. The report gives an overview of the current state of U.S. international taxation and then delves into the economics of border adjustments, including a summary of the academic literature on associated exchange rate (or other wage or price) adjustments such that exporters would not be advantaged and importers would not be disadvantaged (defined as “trade neutrality,” which we’ve previously explored here and here). Although the JCT ultimately does not take a view on whether the proposed destination-based cash flow tax would achieve this “trade neutrality,” the report does suggest that any currency adjustments would not happen quickly or, perhaps, evenly among importers and exporters, citing empirical studies that conclude that changes in consumer prices affected by exchange rate adjustments happen asymmetrically. Continue Reading
President Trump and Congress have recently undertaken measures to preserve the ability of tax-exempt organizations to engage in limited forms of political speech, and efforts in Congress may signal a willingness to provide further relief to tax-exempt organizations.
The Presidential Executive Order. On May 4, 2017, President Trump signed an executive order entitled “Promoting Free Speech and Religious Liberty” that directs the executive branch “to vigorously enforce Federal law’s robust protections for religious freedom.” The executive order further instructs the Treasury Department, to the extent permitted by law, not to “take any adverse action against any individual, house of worship, or other religious organization” that discusses moral or political issues from a religious perspective, but only where such speech has not ordinarily been treated by the Treasury Department as the endorsement of or opposition to political candidates. Continue Reading
Yesterday, Republican members in the House of Representatives passed the American Health Care Act, H.R. 1628, by a 217-213 vote, with 20 Republicans and all Democrats voting against. Although the House made various health-policy and spending amendments to the bill since our March 21st post, the tax provisions described in that post survived with only one change – the repeal of the 0.9% Medicare surtax on wages above certain amounts was delayed to taxable years after December 31, 2022. Notably, the tax provisions included in the AHCA passed by the House includes the retroactive repeal (starting on January 1 of this year) of the 3.8% tax on certain net investment income under Section 1411 of the Code. Continue Reading
As noted in yesterday’s summary, the basic outline of the Trump Administration’s tax plan is largely similar to the Trump campaign proposals, with fewer details and with one notable shift toward the House Blueprint’s approach – the move toward territoriality. The table below shows how this latest plan compares to the House Blueprint and the Trump 2016 campaign plan.
In the press conference to announce the “broad-strokes” plan, both Treasury Secretary Mnuchin and National Economic Council Director Cohn said that they were in agreement with members of Congress over the four driving goals of tax reform – grow the economy and create millions of jobs, simplify the tax code, provide tax relief to American families, especially middle-income families and lower the business tax rate from one of the highest in the world to one of the lowest. Continue Reading
The Trump Administration is expected to announce its tax reform plan during a 1:30 PM press conference at the White House today. The Administration is boasting that the tax plan will be “the biggest tax cut and the largest tax reform in the history of our country.” We will be covering the press conference, so stay tuned for our summary and analysis of what is proposed. In the meantime, here are our predictions for what we may see:
- Corporate tax rate reduced to 15%
- Pass-through business income also taxed at 15%
- Repeal the corporate AMT
- Deemed repatriation of accumulated offshore earnings taxed at 10%
- No destination-based cash flow tax
- Shift toward territoriality?
Treasury Secretary Steven Mnuchin told the Financial Times yesterday to expect tax reform to slip past the August recess, stating that the previously announced timeline was “highly aggressive to not realistic at this point.” Mr. Mnuchin’s interview touched on other areas of tax reform as well, confirming that the Administration has not ruled out the DBCFT (and the ~$1 trillion of revenue it would purportedly raise) while implying that the Administration is also considering alternative revenue raisers. When asked how the Administration would ensure tax reforms were deficit-neutral, Mr. Mnuchin also stressed the importance of economic growth in generating revenue, implying that the Administration may lean on dynamic scoring to meet the reconciliation process’s budget neutrality requirements. Continue Reading
Certain aspects of the Foreign Account Tax Compliance Act (“FATCA”), the revenue-raising portion of the 2010 stimulus bill known as the HIRE Act, have been a continuing source of controversy since its inception. A spate of recent criticism and introduced legislation raises the question whether FATCA will survive if any tax reform proposals are enacted. For example, on April 5, Senator Rand Paul (R-KY) and Representative Mark Meadows (R-NC 11th) sent an open letter to the Treasury Secretary and the Director of OMB outlining administrative steps that the Trump administration could take to halt, or at least severely slow, the enforcement of the law. Continue Reading
While House Republicans could use the budget reconciliation process to pass tax reform without the need for Democratic support, leaders in the Senate have indicated a desire for bipartisan reform. White House press secretary Sean Spicer’s statement earlier this week on the tax reform process also suggests that input from the Democrats may be relevant.
With that in mind, we thought it would be useful to highlight a bill introduced in the Senate by Senators Bernie Sanders (I-VT) and Brian Schatz (D-HI) – the “Corporate Tax Dodging Prevention Act of 2017.” A companion bill was introduced in the House of Representatives by Representative Jan Schakowsky (D-IL). Continue Reading
Yesterday New York State Governor Andrew Cuomo floated the possibility that New York State will pass its budget in two parts this year – with an initial extender of last year’s budget, followed by a full budget later this year once the impact of Trump’s proposed spending cuts on state revenues become more clear. This serves as a reminder that although the focus right now is on the federal budget and federal tax reform, state budgets and state tax systems are inextricably linked with the federal system. Notably, and as the Tax Foundation highlighted in a recent publication, most states piggy back their tax code to the federal tax code, so any changes made to federal definitions (such as the definition of adjusted gross income) would influence the revenue that states collect. Continue Reading
The favorable tax treatment of so-called “carried interest” that is earned by private equity managers gained a considerable amount of attention from both parties during the 2016 presidential campaign. President Trump has repeatedly called for its elimination, a goal that Treasury Secretary Mnuchin reaffirmed in remarks that he made last Friday.
This is not a new issue. In recent years, there has been a series of legislative proposals to turn off the “flow-through” character, in whole or in part, of partnership allocations of long-term capital gain in respect of carried interest and, instead, to treat all or a portion of those allocations as ordinary income. Continue Reading
After House Republicans pulled last Friday’s vote on the American Health Care Act (see our prior posts summarizing the bill’s tax provisions here and here), the legislative agenda seems to have turned squarely to Tax Reform. With this turn comes much speculation as to what the House’s initial tax reform proposal will look like, whether Republicans will opt to use the budget reconciliation process and whether any attempt will be made to court Democratic support. The House Ways and Means Committee is expected to meet to discuss Tax Reform tomorrow. We eagerly await additional details. Continue Reading
On March 8th we published two blog posts detailing pending legislative changes. The first, Details on the House Health Care Bill’s Numerous Tax Changes, summarized the tax changes contemplated by the House Republican’s bill (the American Health Care Act, or AHCA) to repeal and replace the Affordable Care Act. The second, Proposed Expansion of New York State Real Estate Transfer Tax, described legislation introduced in the New York State Legislature that would amend the existing New York State Real Estate Transfer Tax (“NY State RETT”) to tax transfers of minority interests in certain entities holding real estate located in New York. Continue Reading
There’s a lot at stake for tax-exempt organizations in the current proposals for tax reform.
The Charitable Deduction. In 2014, individuals contributed $258 billion to charity, more than 80% of which was donated by persons who itemized deductions and claimed a charitable contribution deduction. President Trump’s tax reform plan and the House Blueprint would substantially reduce the percentage of taxpayers itemizing their deductions, from a current 30% to as low as 5%, and would cap the total value of itemized deductions for those who still claimed them. The Charitable Giving Coalition, among others, is concerned that these changes would reduce the value of charitable giving and curtail charitable contributions. Continue Reading
Senate Majority Leader Mitch McConnell (R-KY) told reporters today that tax reform may not be completed before the August recess, the first public indication from Congress that the timing for tax reform is slipping. Read more from The Hill here. Continue Reading
Because the 114th Congress never took up action on a FY 2017 budget, the current Congress has the opportunity to pursue two separate budget resolutions with reconciliation instructions (one for FY 2017 and one for FY 2018). This would give Republicans two opportunities to pass legislation without threat of filibuster in the Senate, which appears to be the plan to push through both legislation to repeal and replace the Affordable Care Act, as well as tax reform legislation. (Senate debate over budget bills produced in the reconciliation process is limited to 20 hours, so Republicans will not need a 60-vote supermajority to end a filibuster and bring the bill to a vote.)
How does the budget reconciliation process actually work? Continue Reading
On Monday night the House of Representatives unveiled legislation to repeal and replace the Patient Protection and Affordable Care Act (the “ACA”), which would reduce numerous federal taxes by eliminating almost all of the tax increases that were introduced as part of the ACA. A copy of the bill is available here. According to analysis released yesterday by Congress’ Joint Committee on Taxation, the bill, titled the American Health Care Act (“AHCA”), is expected to reduce taxes by approximately $600 billion over ten years. Although the bill leaves untouched the economic substance doctrine that was codified with the ACA, the bill notably provides significant taxpayer relief by:
- Repealing the 3.8% tax on certain net investment income under Section 1411 for taxable years starting after December 31, 2017
- Repealing the 0.9% Medicare surtax under Sections 3101 and 1401 on wages above certain thresholds starting after December 31, 2017
- Reducing to zero the penalty/tax on employers that do not offer qualifying health insurance, effective starting in 2016
- Reducing to zero the penalty/tax on individuals who do not purchase qualifying health insurance, effective starting in 2016
- Repealing the annual fees imposed on health insurance providers and certain manufacturers and importers of branded prescription drugs, effective starting in 2018
- Delaying from 2020 to 2025 the imposition of an excise tax on certain high-value health insurance plans (commonly referred to as “Cadillac plans”)
- Generally lowering the threshold for deductibility of medical expenses for taxable years starting after December 31, 2017 and extending through 2017 the lower threshold under current law for taxpayers aged 65 or older
- Repealing the tax on medical devices under Section 4191 for sales after December 31, 2017
- Repealing the limitation on salary reduction contributions for health flexible spending arrangements under Section 125(i) for taxable years beginning after December 31, 2017
- Increasing the maximum contributions to Health Savings Accounts (“HSAs”) under Section 223 and lowering the applicable tax on distributions from HSAs includible in income for taxable years beginning after December 31, 2017
- Expanding the definition of qualified medical expenses to include non-prescription over-the-counter medicine for purposes of HSAs, Archer MSAs under Section 220, and Health Flexible Spending Arrangements and Health Reimbursement Arrangements under Sections 105 and 106 for taxable years beginning after December 31, 2017
- Repealing the sales tax on indoor tanning services under Section 5000B starting in 2018
- Eliminating the limitation on deductibility of remuneration for services paid by health insurance providers under Section 162(m) for taxable years beginning after December 31, 2017
Unlike prior versions of the bill leaked to the press in recent weeks, the AHCA does not include a cap on the exclusion from income for employer-provided health insurance under current law. Continue Reading
Following up on our “Who’s afraid of the WTO?” post last week, we were interested to see the WSJ reporting last night on Trump’s trade policy agenda, including the suggestion that the Administration may ignore rulings by the World Trade Organization if those decisions infringe on U.S. sovereignty. Continue Reading
Below is a transcript of the tax-related section of Trump’s address last night to a Joint Session of Congress. You can watch the full speech (and read the full transcript) here.
President Donald Trump’s Address to a Joint Session of Congress
Washington, D.C., February 28, 2017
But to accomplish our goals at home and abroad, we must restart the engine of the American economy — making it easier for companies to do business in the United States, and much harder for companies to leave.
Right now, American companies are taxed at one of the highest rates anywhere in the world. Continue Reading
Last week, at a U.S. Chamber of Commerce event, Senate Finance Committee chairman Orrin Hatch (R-UT) signaled that the Senate would take its own path to tax reform, saying “a major concern on tax reform is producing a bill that can get through the Senate, and that is likely going to require a separate Senate tax reform process, which will almost surely end up looking different from what passes in the House.”
With only a 52-vote Republican majority, Hatch will need to craft bipartisan legislation or (if the filibuster-proof budget reconciliation process is used) wrangle support from all but two of his Republican colleagues in the Senate to pass a tax reform bill. Continue Reading