CONSISTENTLY DELIVERS

Feb 22, 2017

Tax Policy Update

QUOTE OF THE WEEK

“The Congress is stumbling. Republicans in the Congress – we’re tied up in knots […]. The House is talking about a tax plan that won’t get 10 votes in the Senate.” 

 – Sen. Lindsey Graham (R-SC) on Face the Nation
Feb. 19, 2017

It’s as if the House GOP’s border adjustment tax proposal (“BAT”) is doing its own ice bucket challenge these days. Appearing on CBS’s Face the Nation, Sen. Lindsey Graham became the latest lawmaker to throw cold water on the controversial BAT.

LEGISLATIVE LANDSCAPE

Senators Throwing Shade at the BAT. Sen. Graham has joined Sens. David Perdue (R-GA), John Cornyn (R-TX), Tom Cotton (R-AR) and Mike Rounds (R-SD) to cast doubt on the viability of the House GOP’s proposal to tax imports while exempting exports. The BAT has been struggling to make friends in the Senate, making life a little harder for House Ways and Means Chairman Kevin Brady (R-TX) and Speaker Paul Ryan (R-WI) — the proposal’s two biggest cheerleaders. To make things worse, rumors are circulating that the border adjustment plan will not be a part of the Trump Administration’s forthcoming tax reform plan, which could arguably seal the fate of the BAT for good.

Even if the BAT survives the onslaught of criticisms, Brady may have to contend with industry groups (and lawmakers) agitating for exemptions. However, Brady has said, on several occasions, that there will be no carve-outs, but that decision may ultimately be out of the chairman’s hands if he wants the BAT to be included in any tax reform legislation. With divisions and questions growing, Sen. Cornyn and Rep. Jim Renacci (R-OH) are calling for hearings on the BAT. “I think having hearings would help answer some of those questions,” Renacci said, noting that other members have been asking for a hearing as well.

Last week, Speaker Ryan made a trip over to the Senate GOP’s weekly lunch to give a presentation on the proposal, the speaker apparently ruffled some feathers when he asked senators to “keep [their] powder dry” on the topic. The presentation left senators with more questions than answers — many were unmoved by Ryan’s sales pitch. What is clear, however, is that both Brady and Ryan have their work cut out for them this summer.

Brady Talks BAT at TCPI Conference. Don’t get too excited — House Ways and Means Chairman Brady’s speech at the 18th Annual Tax Policy & Practice Symposium is essentially a rehash of earlier remarks on tax reform and the border adjustment tax proposal. Brady gave a simplified explanation of how the BAT would work. According to the chairman, companies would only need to answer one question: “Is your product or service sold in the United States?” Companies that answer “yes” would be subject to a 20 percent tax regardless of where the product was made. Sales abroad, however, will not be subject to U.S. tax at all. Additionally, under the BAT system, import costs will no longer be tax deductible.

GOP Continues to Spring Leaks. On Feb. 16, following a House Republican all-members meeting on how to repeal and replace the Affordable Care Act (ACA), a policy memo presenting options for an alternative healthcare system was leaked to the press.

The policy memo provided for a universal, portable, monthly tax credit to provide financial assistance to low-income individuals and families, and it proposed enhancing health savings accounts (HSAs) by increasing the contribution limit to match the maximum out-of-pocket thresholds for high deductible health plans (HDHPs).

On the controversial issue of Medicaid, the proposal calls for a repeal of the ACA’s Medicaid expansion for able-bodied adult enrollees and reforms to Medicaid financing, considering block grants and per capita allotments. Though, according to chatter picked up by McGuireWoods’ tax policy team, House Republicans are leaning towards block grants. This of course, will make it difficult for the proposal to pass muster in the Senate, especially since 20 GOP senators are from states that expanded Medicaid.

The policy memo also called for the repeal of all ACA-related taxes, including the following:

  • Employer and individual mandate
  • Medicare payroll tax increase
  • Exclusion of reimbursement of over-the-counter drugs without prescription
  • Tax on health insurance premiums, the medical device tax
  • Prescription drug tax.

The memo was silent on additional pay-fors, but Republicans are still considering capping the healthcare tax exclusion as part of “a menu of pay-fors” for a replacement bill expected this spring. This provision is a controversial measure that has been strongly opposed by business groups representing plan sponsors, like the Chamber of Commerce. Chairman Kevin Brady and Speak Paul Ryan are interested in hearing from stakeholders to understand the impact of this provision. In the meantime, the House GOP is waiting for a CBO score of this provision and a score on the repeal of the ACA taxes, including the individual and employee mandates.

House Republicans expected to move forward with mark-ups in committees by the first week of March, though earlier reports indicated that a mark-up was scheduled for the week of Feb. 28.

After the release of the memo, it has become increasingly apparent that Republicans are deeply divided on how to move forward with repealing and replacing the ACA. The biggest differences remain on what type of tax credits individuals should receive in lieu of subsidies in order to help them purchase coverage and how Medicaid reform should be structured. While Ryan claims that the GOP will find a way to bridge the state divide on Medicaid, the clock is ticking — there are only a few weeks left before the individual markets collapse, according to private insurance companies.

REGULATORY WORLD

HHS to the Rescue. On Feb. 15, the Department of Health and Human Services released a rule aimed to stabilize the individual markets under the Affordable Care Act. A list of the provisions in the rule are below:

  • Limiting special enrollment periods (SEP) to prevent abuse
  • Revising guaranteed availability to promote continuous coverage
  • Shortening annual open enrollment periods (OEP)
  • Deferring network adequacy reviews to states
  • Preserving access to essential community providers (ECP)
  • Amending de minimis ranges for actuarial value (AV) requirements

A Second Bite at the Apple. Apple plans to appeal a European Commission ruling ordering the tech giant to pay €13 billion, plus interest, in back taxes to Ireland. In a summary of Apple’s appeal, submitted to the European Court of Justice on Feb. 20, the company accused European Commission regulators of ignoring critical evidence and violating basic procedural rights, which are in breach of the EU’s Charter of Fundamental Rights. Apple also contends that the court made fundamental errors when determining how Apple makes its profits and in interpreting Irish tax law.

In August 2016, the European Commission ordered Apple to pay Ireland €13 billion after it found that the company had a tax deal in the country that constituted illegal state aid. At the time of the ruling, European Competition Commissioner Margrethe Vestager maintained that Apple’s tax deal with Ireland enabled the company to pay less tax than other businesses, with an effective corporate tax rate of 1 percent on its European profits in 2003, down to 0.005 percent by 2014.

EU Taxman: “Be Thankful I Don’t Take it All.” On Feb. 21, after a meeting in Brussels, European Union finance ministers agreed on new anti-tax avoidance rules to close loopholes available through third-country tax systems. The regulations target various planning strategies used by multinational enterprises to exploit the tax regimes of EU and non-EU nations and to avoid or lower their tax obligation in each jurisdiction. Specifically, several companies exploit “hybrid mismatches” in tax law to avoid taxation of dividend income. The new rules go into effect in 2020 and should help EU countries recoup lost revenue from tax-saving schemes.

EU finance ministers also addressed criteria to define a tax haven, reaching a potential compromise. Ministers agreed that countries that have zero tax rates will not be automatically considered tax havens, but they will be subject to checks based on other criteria, including the number of off-shore structures in their jurisdictions. The EU has kicked off the process by sending letters to 92 countries, including the U.S., to screen practices that might be viewed as aiding or encouraging tax avoidance. The tax haven list should be finalized by the end of the year.

CFPB Lives to Breathe Another Day. The Consumer Financial Protection Bureau won a much-needed reprieve on Feb. 16 — the D.C. Circuit vacated a three-judge panel ruling from October 2016 in which Judge Brett Kavanaugh gave the White House the power to remove its independent director at will. The D.C. Court of Appeals will now rehear the bureau’s case. The full D.C. Circuit scheduled oral arguments for March 24, with briefing to begin on March 10.

Last week’s court order gives Richard Cordray – the bureau’s director – temporary job security and another chance to defend the structure of the agency. Since the election, the agency has become a target for Republicans who would like to restructure the agency and install a bipartisan commission in its stead.

House Financial Services Committee Chairman Jeb Hensarling (R-TX) issued a statement after the decision came out, noting that the case will not affect his plans to pass a bill to restructure the bureau.

COMMANDER-IN-TWEET

LINE ITEMS

  1. The IRS plans to continue to accept tax returns, even if taxpayers fail to indicate whether they have health insurance. Experts say this will not have a major impact on the Affordable Care Act’s individual mandate. The IRS had planned on rejecting tax returns that do not contain this information starting this year, but the agency changed its mind following the Trump Administration's executive order mandating that federal agencies lessen the burdens of the ACA.
  2. House Ways and Means Democrats welcomed Kara Getz as their new chief counsel on Feb. 21. Previously, Getz served as a senior tax counsel for the Senate Finance Democrats.
  3. The Trump Administration is exploring the idea of establishing a federal tax credit scholarship program to help low-income families send their children to private schools. The proposal could be included in the White House’s forthcoming tax reform plan. Critics of the proposal consider such tax credits to be nothing more than a voucher program by another name. Others fear that the program would only expand the federal government’s role in education

LOOKING AHEAD

**Congress is in recess until Feb. 27**


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