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.
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
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
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
- 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
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
HHS to the Rescue.
On Feb. 15, the Department of Health and Human Services
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
- Revising guaranteed availability to promote continuous
- 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
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
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.
- 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.
- 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.
- 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
**Congress is in recess until Feb. 27**
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