May 12, 2015

Tax Policy Update

NUMBER OF THE WEEK: 15. The number of minutes it should take most Americans to do their taxes, according to potential GOP presidential candidate Chris Christie in a Wall Street Journal op-ed published last night. Christie offers a broad plan to drop the corporate rate to 25 percent and trim the individual rate to three brackets with the top rate no higher than 28 percent. To do this, Christie proposes eliminating or modifying “enough deductions, credits and targeted provisions in the code — both on the personal and the corporate side” to keep the plan revenue-neutral. Christie added that one approach would be to cap the total amount of deductions and credits available to individuals and married couples.


Pedal to the Metal: Short-Term Highway Patch Up Ahead. With the Highway Trust Fund running on empty ahead of a May 31 deadline, a short-term funding extension is in the works—despite vocal objections from both sides of the aisle. Lawmakers are divided over whether to do a two-month extension or one that would take funding authority through the end of the year, while negotiations continue over how to fund a six-year authorization bill.

Democrats on the House Transportation and Infrastructure (T&I) Committee, railing against the increasing likelihood of another short-term patch, are calling for a joint hearing of the Ways and Means and T&I Committees to discuss a long-term funding solutions. But so far, the major “solutions” that have been floated have quickly sunk, like increasing the gas tax.

Last week, Republican Senator Cory Gardner (CO) signed on as a co-sponsor of the Boxer-Paul repatriation bill, which would impose a one-time, voluntary tax holiday to encourage companies to bring profits home. But, despite some bipartisan support, both Senate Finance Chairman Orrin Hatch (R-UT) and Ways and Means Chairman Paul Ryan (R-WI) have already rejected such a holiday outside of comprehensive tax reform.

Another proposed solution has House T&I Chairman Bill Shuster (R-PA) putting out Tea Party fires, as members of the party call for devolving transportation funding authority to the states. The latest incarnation of the devolution concept would reduce the federal gas tax to 4 cents with the revenue earmarked for interstate projects and require states to pick up the tab for other transportation infrastructure projects. Senator Mike Lee (R-UT) is also looking to introduce legislation that would give states the decision-making power over transportation projects.

D’s and R’s Agree… That Tax Reform Ain’t Happening in 2015. Senator Jim Inhofe (R-OK) and House Ways and Means ranking member Sandy Levin (D-MI) may agree on very little from their ends of the political spectrum, but both lawmakers expressed doubts recently about the prospects of getting tax reform done in 2015. Levin recently told reporters major issues such as accelerated depreciation, pass-throughs, and tax extenders remain unresolved, making it difficult to get business tax reform done in 2015 in a bipartisan fashion. Inhofe’s outlook isn’t rosy either. The Oklahoman senator is afraid that tying multi-year highway funding to tax reform might spell doom for both efforts.

Senate Finance Staff Keeps the Faith on Reform. As skepticism for tax reform grows, Senate Finance Committee staff members will not let the August recess or the 2016 presidential campaigns disrupt reform efforts, according to the committee’s Republican tax and benefits counsel, Preston Rutledge. “I do think we intend to use the entire calendar year” to get things done, Rutledge told the crowd at last week’s American Bar Association taxation meeting in D.C. The committee’s tax reform working groups are in the process of holding closed-door roundtable discussions with committee members, and they are still aiming to present recommendations to Chairman Hatch and Ranking Member Ron Wyden (D-OR) by May 31. It’s not yet clear whether the groups’ recommendations will be shared with the public.

‘Patent Box’ Buzz Grows. Key tax staffers from both sides of the aisle and both sides of the Capitol are buzzing about increased support for the creation of some kind of a “patent box” regime in the context of international tax changes. The Senate Finance Committee’s international tax reform working group, led by Senators Rob Portman (R-OH) and Chuck Schumer (D-NY), is apparently making progress on recommendations for creating a lower tax rate applicable to a company’s intellectual property revenue. Patent boxes are hailed by some for increasing research and development and manufacturing in jurisdictions—like the United Kingdom—that offer them. But others, including the Treasury Department’s International Tax Counsel, Danielle Rolfes, caution that there are challenges to identifying which types of income should be subject to a lower “patent box” rate. Expect more developments in this area in the coming weeks.

Senate Finance Tax Reform Working Group Spotlight: Savings & Investment
The Senate Finance Committee continues its tax reform roundtable discussions with the Business Income Tax and Savings & Investment Working Groups scheduled to meet today. In our spotlight this week, we take a look at comments submitted by the American Land Title Association to the Savings & Investment Working Group.

Members of the Senate Finance Committee’s Savings & Investment Tax Working Group
Mike Crapo, ID (co-chair)
Richard Burr, NC
Johnny Isakson, GA
Dean Heller, NV
Tim Scott, SC
Sherrod Brown, OH (co-chair)
Ben Cardin, MD
Bob Casey, PA
Mark Warner, VA
Robert Menendez, NJ

Comment Spotlight: American Land Title Association

The American Land Title Association (ALTA) commented on tax provisions that were critical to the success of homeownership and investment in real estate. In its letter, ALTA highlighted the mortgage interest and real property tax deductions, and exclusion of capital gains tax on the sale of principal residence. To further support the 12 million direct jobs accounted for by commercial and residential real estate sectors, ALTA endorsed the deferral of tax on gain for like-kind exchanges, and the Section 179 and bonus depreciation provisions. Citing lower housing prices, higher inflation, decreased employment and lower household income, ALTA urged the importance of these tax provisions. The full submission can be found here. The Senate Finance Committee Savings & Investment Working Group will be holding a closed-door meeting this week to discuss provisions like these to determine if there is bipartisan support.


Proposed Regulations Endanger Certain MLPs and MLP Hopefuls. Last week, the Treasury Department and IRS issued proposed regulations that would effectively reverse up to 12 previously issued private letter rulings affecting master limited partnerships (MLPs). The proposed rules would narrow the definition of qualifying income from what was considered acceptable under the letter rulings, which allowed certain publicly traded partnerships to pay one level of tax without being subject to the corporate tax. The proposed rules could substantially change the landscape for a number of companies, especially those engaged in processing of petrochemicals or plastics from natural gas, as well as those that produce paper and containerboard. Companies engaged in the upstream and midstream components of the oil and gas industry and timber companies structured as MLPs would generally not be affected. The IRS and Treasury are soliciting public comments on the proposed rules, so that they can better understand “how the industry works and how these processes work.” Comments and requests for a public hearing are due by August 4, 2015.

IRS to Ramp Up Private Letter Rulings; Input Requested. After severe budget cuts curtailed IRS private letter rulings in recent years, the agency says it is looking to dabble more in the PLR playground, according to an IRS official speaking at the ABA tax conference last week. Some might find this announcement ironic in the same week the agency released new regulations essentially gutting a dozen or so previously issued PLRs. Anyhow, the IRS official told the ABA’s Corporate Tax Committee that the agency wants public input on what areas of corporate tax should be the focus of future rulings. Perhaps areas that won’t be reversed by subsequent regulations?

Treasury Regulations to Facilitate Swap Clearing . Last week, the IRS and Treasury published final and temporary regulations that made the treatment for notional principal contracts with significant and non-significant non-periodic payments the same. The uniform treatment, regardless of the payment, would allow for more swaps to be cleared under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The “embedded loan rule” now broadly applies to notional principal contracts without exceptions for contracts with non-significant payments. Such contracts will now be treated as two separate transactions consisting of one or more loans and an on-market level payment swap. The Treasury Department is inviting comments from the public on these temporary regulations.



Committee for a Responsible Federal Budget
The Committee for a Responsible Federal Budget along with George Mason University’s Mercatus Center holds a discussion on “Responsibility Confronting Social Security Disability’s Financing Crisis.”

Week of 5/11

Infrastructure Week 2015
America’s leading organizations representing the full spectrum of business, labor, and public policy will host Infrastructure Week from May 11-15, 2015. Infrastructure Week will bring together thousands of stakeholders in Washington and around the country to highlight the critical importance of investing in and modernizing America’s infrastructure systems, and the essential role infrastructure plays in our economy. Read more here.

Thursday, 5/14

The Tax Council
The Tax Council hosts a legislative luncheon with Senate Dan Coats (R-IN).