On a recent vacation, my 2-year-old daughter asked me the proverbial question, “Are we there yet?” With Congress on the August recess until after Labor Day, it seems a fitting question on tax reform efforts at this point as well. Let’s take a quick look in the rearview mirror before considering my daughter’s question and the road ahead for possible tax reform in 2017.
Two areas germane to tax reform efforts have dominated the discussion in recent months: health care reform efforts in the Senate and the timing, focus and extent of tax reform efforts. For more background on tax reform efforts in the first half of 2017—and a discussion on why health care and tax reform are related—see our May 2017 BKD Thoughtware® article, “Recent Developments’ Effects on Possible Tax Reform.”
Here’s a closer look at each of these topics.
Health Care Reform Efforts Stalled in the Senate
Efforts to repeal and possibly replace the Patient Protection and Affordable Care Act (ACA) have been a focus in the Senate following the passage of the American Health Care Act by the house on May 4. However, despite the budget reconciliation process that requires only a simple majority for legislation to proceed and a decision to delay the start of the August recess to allow more time to work on priorities such as health care reform, Republicans in the Senate were unable to advance health care reform before leaving Washington earlier this month. While these efforts are seemingly stalled, bipartisan hearings on ways to improve individual health insurance markets are scheduled to begin after the recess.
Joint Statement on Tax Reform Released
On July 27, Republican leaders in the White House and Congress issued a Joint Statement on Tax Reform, indicating unity behind many previously articulated tax reform priorities. The two-page statement was issued by the “Big Six,” a group comprising House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, Treasury Secretary Steve Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch and House Ways & Means Committee Chairman Kevin Brady. Key points from the statement include:
- Republican leadership in Washington has a “shared vision for tax reform” with three main priorities: spur economic growth, make it easier for U.S. companies to compete with companies based overseas and simplify the filing system for individuals to make taxes less of a hassle.
- The destination-based, cash flow system with border adjustability, a key but controversial aspect of the House Ways & Means Committee’s blueprint for tax reform, “A Better Way: Our Vision for a Confident America,” will not be considered.
- The House Ways & Means Committee and Senate Finance Committee are ready to “begin producing legislation” that will “move through the committees this fall.”
- A priority will be permanent tax reform that will focus on reducing tax rates as much as possible, “allow unprecedented capital expensing” and encourage American companies to bring back jobs or profits trapped overseas.
What does this joint statement tell us about possible tax reform? Let’s turn our focus to the road ahead.
Are We There Yet?
As I told my daughter on our road trip: no. The joint statement indicates broad unity on the focus of tax reform and a commitment to prenegotiate the main points of tax reform legislation to facilitate its passage. However, fundamental differences and a lack of details remain on several significant areas. Key unresolved areas include:
- By how much should individual and corporate income tax rates be cut?
- How far will the “unprecedented capital expensing” called for in the joint statement go?
- Will the deduction for net interest expense be eliminated for some or all taxpayers?
- Should tax reform legislation be revenue-neutral?
Since we aren’t there on tax reform, let’s consider what it’ll take for tax reform legislation to advance. Much like rules of the road, the rules of the legislative process dictate what’s possible for any tax reform legislation.
How Do We Get There?
The U.S. Constitution provides that all bills for raising revenue, i.e., tax legislation, must originate in the House. Bills proposing tax change are referred to the House Ways & Means Committee for study. A public hearing is then typically held and, after deliberation, the committee votes to determine if the bill will advance to the House floor for consideration. If the bill passes with a majority in the House (218 of 435 representatives), the bill is considered by the Senate Finance Committee before advancing to the Senate floor for debate and approval. With a simple Senate majority (51 of 100 senators), the bill will go to a conference committee consisting of House and Senate members. They reconcile any differences between the two versions of the bill. The result is voted on again by Congress and, if approved, goes to the president for signature or veto. Enacted tax bills become tax law and part of the Internal Revenue Code.
Only a simple Senate majority is necessary for a bill’s approval. However, 60 votes are necessary to overcome a filibuster, which is a tactic used to delay or prevent a vote on a proposal. This can stall the bill and prevent its advancement through the legislative process. Republicans control the Senate with 52 senators but lack the 60 votes needed to prevent a filibuster under Senate rules. That said, budget reconciliation procedures exist in the Senate to expedite legislation and prevent filibuster. There are limitations to the use of these procedures, namely the 60-vote supermajority necessary under the Congressional Budget Act and Impoundment Control Act of 1974 to approve provisions that lose revenue beyond the current 10-year budget window.
Republican leadership has indicated plans to use budget reconciliation to advance tax reform legislation. Budget reconciliation would negate the need for bipartisan support to advance a tax reform bill; however, such legislation will need to be revenue-neutral to comply with the rules of reconciliation and omit any provisions outside of tax and spending. Despite Republican control in Washington and well-established rules for the legislative process and budget reconciliation, challenges remain for tax reform legislation.
First, a fiscal year 2018 budget resolution must be passed to use budget reconciliation. This isn’t guaranteed at this point despite a Republican majority, as some Republican members are expressing concern with these procedures. Second, a direction on scoring will need to be determined for the Congressional Budget Office to assess whether a tax reform bill is revenue-neutral over the budget window under the rules of the budget reconciliation process. A relatively new but controversial dynamic scoring approach considers the macroeconomic effect of tax changes to include things like jobs, wages, investment and federal revenue. The more traditional static scoring approach doesn’t consider these broader economic developments. Leadership in the House Ways & Means committee has voiced a preference for tax reform legislation to be revenue-neutral on a dynamic basis, but members of the Senate have articulated a preference for a static score.
Will We See Tax Reform?
The overall outlook on tax reform remains truly uncertain. Many key aspects of tax reform are still to be worked out beyond the outline released in July and a crowded Congressional calendar—the debt limit and continued funding of the government must be addressed by the end of September. At the same time, White House Legislative Director Marc Short recently called for markups on a tax reform bill in September and for the bill to pass the House in October and Senate in November. Republican leadership in Congress has echoed a similar timeline of having tax reform enacted by year-end. Momentum continues to build outside Washington from groups such as the Americans for Prosperity and Freedom Partners, which are leading a campaign to advance tax reform efforts.
What Does This Mean for Tax Planning?
The uncertain tax environment promises to make year-end tax planning for 2017 difficult. Adding to the challenges of navigating the tax landscape this year, the Protecting Americans from Tax Hikes Act of 2015 retroactively and only temporarily extended numerous individual and business provisions, which expired December 31, 2016. The fate of these provisions is uncertain pending any legislation with a retroactive application. For a complete list of provisions that expired at the end of 2016, see BKD’s 2016 Federal Business Tax Legislation Update.
While the outlook for tax change is uncertain, the joint statement from the Big Six calls for lower individual and business income tax rates. Taxpayers expecting to see tax change and lower tax rates in 2017 should evaluate year-end tax planning strategies to accelerate deductions to 2016 and defer income. To learn more, see our BKD Thoughtware article, “Planning for Tax Change & Lower Tax Rates Under the Current Tax Proposals.”
Learn more about existing tax reform proposals on BKD’s Tax Reform Resource Center, and be sure to give careful consideration to any plan you implement related to possible tax reform. It’s important to discuss your tax plan with your tax advisor on an ongoing basis. That way, you’re ready to respond to whatever the future holds.