The big picture
To date, the discussion has focused mainly on high-level concepts. House Republicans released a 35-page narrative description of their tax reform blueprint, while President Trump released a four-page narrative during his campaign and has since made some verbal clarifications and alterations. Neither has proposed specific legislative language.The most recent, detailed legislative proposal dates back to December 2014, sponsored by former Republican Chairman of the House Ways and Means Committee, Dave Camp. Although this legislation has received little attention of late, many aspects may well end up forming the basis for whatever legislative proposal comes next.
Even if certain rates or thresholds differ, the House Republican and President Trump proposals have many similarities. Both want to:
- Reduce individual income tax rates and increase the standard deduction, but reduce other deductions and credits.
- Reduce corporate income tax rates and cap the individual income tax rate that would apply to flow-through business income.
- Deduct all capital investments immediately, but limit or eliminate deductions for interest.
- Eliminate the individual and corporate alternative minimum tax.
- Move to a territorial taxation system in which foreign earnings are not taxed in the United States but add an “exit tax” on all current, untaxed foreign earnings.
- Eliminate the estate and generation-skipping tax.
One key difference between the plans is that House leaders would calculate business income using a border adjustment. In other words, the cost of imports wouldn't be deductible, but the receipts from exports wouldn't be taxable. In theory, this system would align with Trump’s stated goals of favoring American businesses over offshore enterprises, but it’s also currently the most controversial part of the House reform plan, and President Trump has yet to directly support it.
Procedural challenges
With Republicans holding the White House and a majority in both Congressional chambers, they certainly have an advantage when it comes to implementing their agenda. Still, the possibility of disagreement within the GOP or a Democratic filibuster in the Senate will require Republicans to jump through some procedural hoops to achieve their goals.Ordinarily, if a bill were to reach the Senate, it would be subject to a filibuster unless 60 senators vote for “cloture” to end the debate on the Senate floor and force a vote on a bill. This effectively requires 60 senators to support the legislation which, for tax reform, is unlikely in the current political climate. The Senate rules allow for an exception to the filibuster process if a bill is part of “budget reconciliation,” which a tax reform bill will almost certainly be designated as. Generally, Congress is allowed one reconciliation bill per budget.
Reconciliation bills are also subject to the Byrd rule. Among other requirements, this rule prevents a reconciliation bill from including items extraneous to federal spending or revenue or from increasing the federal deficit beyond 10 years. This limit on increasing the deficit requires a reconciliation bill to be either revenue neutral or to have all its provisions sunset within 10 years.
The degree to which Republicans want to reduce tax rates will make it difficult for legislation to be revenue neutral. But tax reform, particularly a provision as dramatic as a border adjustment, can’t have as strong an economic impact if it’s temporary.
This all presupposes that most House Republicans will support whatever tax reform legislation is put to a vote and that almost all Senate Republicans will be on board too. Given Republicans’ recent results on healthcare reform and dissenting views on tax reform already voiced, this is by no means a done deal.
Timeline challenges
House Republicans and Treasury Secretary Mnuchin have said they want to have tax reform legislation enacted before Congress adjourns for its August recess on July 31. However, it’s possible that legislators could wrangle with a tax package right up to the scheduled end of the session in December or beyond. This would likely mean using the budget reconciliation provisions of the 2017–2018 budget, which should be enacted by October 1 if Republicans want to enact their desired spending cuts. The budget reconciliation process then could not be used again for another major initiative until the 2018–2019 budget is enacted.If tax reform debate goes beyond December, it would also push into an election year, which many Republicans would rather not have happen. And keep in mind that any legislation must pass both houses — and that any differences between House and Senate bills must be reconciled — before President Trump can sign it.
What's the uncertainty mean for businesses?
It’s hard to plan strategies around big-picture concepts that may or may not materialize. If the tax reform debate were to extend into the fall, it will make 2018 tax planning even harder. Even so, there are ways to better position your business to minimize potential adverse consequences of reform and to benefit from potentially favorable provisions.As always, if you have questions about what you can do today, please give us a call.
