CONSISTENTLY DELIVERS

Feb 28, 2017

Tax Policy Update

Quote of the Week:

“We believe we can be competitive and get sustainable growth at 3 percent or more. There’s going to be a lot of things that will impact it. I think the first issue…is going to be tax reform. I think the other issue is going to be regulatory relief.”

Steve Mnuchin, CNBC Squawk Box Interview, Feb. 23, 2017

Per the usual Republican refrain, Treasury Secretary Steve Mnuchin identified tax and regulatory reform as the magic beans for economic growth. Mnuchin noted that current economic projections of 1.8 percent growth are based on the status quo and do not take into effect the policy changes proposed by the administration.

The administration is yet to release its own tax policy proposal, but President Donald Trump has promised to do so in the coming weeks. In the meantime, Mnuchin noted that the administration will pass a tax reform plan that includes middle-class tax cuts, simplification of the tax code, and making business taxes competitive with the rest of the world. He added that the administration’s tax reform plan is designed to encourage investments in the United States. The administration is “looking closely” at the border adjustment tax (BAT), though various concerns still remain. Despite reservations with the BAT, Mnuchin assured that the administration and congressional Republicans are “on the same page” and all three branches will work together to release draft tax reform legislation by the August recess. Of course, Mnuchin conceded that the devil is in the details.

LEGISLATIVE LANDSCAPE

An Inconvenient Truth. Former House Speaker John Boehner must be smirking at the GOP, as lawmakers scramble to repeal and replace the Affordable Care Act and pass tax reform. At a conference hosted by the Healthcare Information and Management Systems Society, Boehner threw cold water on the GOP’s optimistic timeline, calling it “happy talk.” Boehner remarked that in his 25 years in Congress, Republicans have never been able to coalesce around a health care proposal. As the ACA replacement plan gets kicked further down the road, it will affect the timing of tax reform, making it increasingly difficult for the GOP to meets its self-imposed August deadline. Even if the GOP is able to repeal and replace the healthcare law this spring, Republicans are yet to …

BAT at CPAC. In other BAT news, as part of an ongoing door-to-door sales tour, House Ways and Means Chairman Kevin Brady (R-TX) took the proposal to the Conservative Political Action Conference (CPAC). Brady’s sales pitch had a nationalist tinge, noting that the U.S. tax code currently “gives special tax breaks to foreign products over ‘made in America.’” Brady explained that the House GOP proposal aims to redesign the tax code so that companies would stop shipping jobs overseas. To close his sales pitch, Brady also threw in a promise to repeal the Johnson Amendment, a provision in the tax code that prohibits all I.R.C. § 501(c)(3) non-profit organizations from endorsing or opposing a political candidate. It is unclear, however, whether the audience bought into the controversial BAT proposal — it was Brady’s promise to repeal the Johnson Amendment that garnered the most applause.

Here’s the Skinny on the Budget. On Feb. 27, the White House sent its initial budget guidance to general agencies. President Donald Trump announced that his proposal will focus on national security, while cutting various domestic programs and foreign aid. To that end, the initial budget outlines a $54 billion increase in defense spending and reductions to most non-security agencies. Trump promised further details in his joint address to Congress on Tuesday night. This move followed a Feb. 22 announcement by White House Press Secretary Sean Spicer that the administration hopes to release its “skinny budget” by March 13. The skinny budget is …

Get Ready for the Greatest Show…err Speech on Earth. President Donald Trump will make his first highly anticipated address to a joint session of Congress on Tuesday night — and our expectations are “big league.”

President Trump’s speech will include his vision for the nation, focusing on tax reform, deregulation to spur the economy, infrastructure spending, and a repeal of Obamacare with “Trumpcare.”

President Trump will make the case for comprehensive tax reform. For the administration, overhauling the tax code is a key step towards creating jobs, strengthening U.S. global competitiveness, and achieving sustained economic growth. Though Trump has yet to formally introduce his administration’s tax reform plan, expect the president to call for proposals that will deliver tax relief for American workers and businesses:

  • a simpler, fairer, and flatter tax code
  • a shift to a territorial tax system that will help U.S. firms to be globally competitive once again
  • a reduction in the individual tax rate so that American workers can keep more of what they earn
  • a reduction in the business tax rate to help stem tide of corporate inversions
  • a tax cut package for the middle class that may include a deduction for child care expenses, a federal education tax credit, and an increase to the standard deduction

Tax policy watchers will also be keeping a close eye on whether the president will take an official stance on the House GOP’s border adjustment tax proposal. If Trump fails to endorse the border adjustability provision, the controversial proposal will likely be doomed.

Tune in here on February 28, 2017, at 9 p.m. Ratings promise to rival the Governator’s Apprentice.

A Cadillac Tax by Any Other Name Would Smell as Funky. Last week, a discussion draft of the House GOP replacement legislation for the Affordable Care Act was obtained by the media. The draft document is dated Feb. 10, 2017 and appears to be older than a leaked policy memo circulated to members last week. Though the draft may not be the most recent version of the House GOP’s replacement legislation, it is a good indication of where the GOP is headed in terms of health care reform and it appears to be consistent with the leaked policy memo as well.

While the discussion draft did not contain many surprises, it does show that Republicans are serious going after the generous tax exemptions for employer-sponsored health plans. In both the discussion draft and the leaked policy memo, the GOP proposes financing the replacement plan by capping the tax exemption for employer-sponsored coverage at the 90th percentile of current premiums. All benefits above that level would be taxed.

Chairman Brady (R-TX) noted that this tax break totals $3.6 trillion over 10 years. Critics of the plan compare this measure to the Cadillac tax — a 40 percent excise tax on elements of high-cost health insurance plans. For those hoping for a reprieve, Brady indicated that the tax is just one of many options they are currently considering. According to chatter picked up by McGuireWoods’ tax policy team, Brady and Speaker Paul Ryan (R-WI) are …

Regulatory World

Survivor: Regulation Elimination Edition. On Feb. 24, by executive order, President Trump directed federal agencies to set up task forces to review each agency’s existing regulations and identify rules that can be repealed or modified within 60 days. The president’s latest action follows a previously issued order directing federal agencies to identify two regulations to repeal for every rule that is written. Trump sees this order as one of …

Watershed Moment for Tax Regulation Lawsuits. Judge Lee Yeakel of the U.S. District Court for the Western District of Texas is set to make a ruling in Chamber of Commerce of U.S. v. IRS in the coming weeks. The case is a major landmark for lawsuits against the administration’s tax regulations.

In this case, the U.S. Chamber of Commerce and the Texas Association of Business filed a legal challenge to the IRS’s Multiple Acquisition Rule, which is aimed at preventing certain corporate mergers that are otherwise permitted under the inversion rules of I.R.C. § 7874. The Chamber of Commerce asserts that the “IRS ignored the clear limits of the tax code to target entirely lawful transactions.” A large part of this case focuses on the …

U.S. Country-By-Country Reporting Instructions Released. The Internal Revenue Service and the Treasury Department recently released instructions for completing Form 8975 and a revised copy of Schedule A, relating to country-by-country reporting requirements. IRS Form 8975 and the revised Schedule A were published at the end of last year, raising questions amongst U.S. multinational enterprises on how to fill out the forms.

The country-by-country reporting requirement generally mirrors the recommendations put out by the Organization for Economic Cooperation and Development (OECD) as part of its Base Erosion and Profit Shifting (BEPS) initiative. Many OECD member countries have adopted the recommendations on country-by-country reporting to further tax transparency. In July 2016, the IRS and Treasury finalized regulations under I.R.C. § 6038 (relating to information reporting with respect to certain foreign corporations and partnerships).

The instructions provide further guidance on an “ultimate parent,” which is the entity required to report on its various holdings in the countries if its group revenue is or exceeds $850 million. The country-by-country requirement final rules were effective on June 30, 2016. A copy of the draft Form 8975 instructions is available here.

ROAD WORK AHEAD

Trump’s Speech to Pave Path for Infrastructure Investment. President Trump’s speech before a joint session of Congress is expected to reveal long anticipated details on the president’s plan to invest $1 trillion in America’s infrastructure. During a discussion with the nation’s governors this week, Trump revealed that a HUGE statement on infrastructure would be a highlight of this evening’s programming. Despite making infrastructure investment a pillar of his campaign, Trump has remained fairly tight-lipped on how he intends to hit his trillion dollar infrastructure target.

A proposal drafted last year by the newly minted Secretary of Commerce Wilbur Ross called for tax credits to incentivize public-private partnerships (PPPs). Transportation Secretary Elaine Chao has acknowledged that PPPs are not the answer for all of our infrastructure needs, even going so far as to say during her confirmation hearing that she anticipates the president’s plan to include direct federal investment.

The biggest barriers hindering a robust increase in federal funding for infrastructure, at least for roads, bridges and public transportation, have been a failing Highway Trust Fund (HTF) and a reluctance on the part of Congress to raise the additional revenue necessary to provide long-term solvency for the trust fund. With the HTF heading toward a major fiscal cliff in 2021, Trump will face the question of how to fund our nation’s transportation infrastructure even if his plan prefers to rely on the private sector to drive significant investment.

COMMANDER-IN-TWEET

President Trump’s thoughts on the rambunctious town halls encountered by Republican lawmakers when they were home during recess:

Line Items

  1. The Trump Administration believes in the “Golden Rule.” In an interview with Fox news, Treasury Secretary Steven Mnuchin said that the president is considering a “reciprocal tax” that will force other countries to treat the U.S. fairly in trade. Mnuchin said the tax will “create a level playing field so that other countries treat us the way we’re treating them.”
  2. Ivanka Trump has been wearing out her shoe leather recently, lobbying Congress to include a deduction for child care expenses as part of tax reform. Ivanka’s plan comes with a $500 billion price tag over a decade, making it difficult to find champions in Congress. It remains to be seen whether the president will include his daughter’s proposal in the administration’s plan for tax reform that will be released in the coming weeks.
  3. Many electric utilities, like Duke Energy and NextEra, have expressed concerns to their shareholders and investors about the potential impact of tax reform. In particular, the electric utilities have signaled that the House GOP tax blueprint proposal to restrict the interest expense deduction would be particularly harmful. House Ways and Means communication director, Emily Schilinger, said that lawmakers are aware of “special circumstances of regulated utilities and are working to ensure that the provision on deductibility of interest is crafted in a way that will accommodate those circumstances.”
  4. According to sources close to the administration, President Donald Trump will likely nominate economist Kevin Hassett of the American Enterprise Institute to be chairman of the White House Council of Economic Advisers. If appointed, Hassett would work closely with Gary Cohn of the National Economic Council Director.
  5. Treasury Secretary Steven Mnuchin will be meeting with the heads of the financial regulatory agencies on the Financial Stability Oversight Council (FSOC) in a closed door session on March 2. According to the Treasury Department, the preliminary agenda includes an update on market developments, a discussion of the Council’s 2017 annual report, and an update on the annual re-evaluation of the designation of a nonbank financial company.
  6. The Senate Finance Committee will likely vote Wednesday morning to advance Seema Verma’s nomination to lead CMS. The committee is expected to support her nomination.

LOOKING AHEAD

Congressional Activity

Tuesday, 2/28

House Financial Services Committee
The full committee meets to adopt its views and estimates for FY2018.

House Judiciary Committee
Full committee markup of H.R.372, the "Competitive Health Insurance Reform Act of 2017"; H.R.1215, the "Protecting Access to Care Act of 2017"; and H.Res.111, Resolution of inquiry directing the attorney general to transmit certain documents to the House of Representatives relating to the financial practices of the president.

Wednesday, 3/1

House Education and the Workforce Committee
Full committee hearing on “Legislative Proposals to Improve Health Care Coverage and Provide Lower Costs for Families,” including H.R.1101, the “Small Business Health Fairness Act;” the “Self-Insurance Protection Act;” and the “Preserving Employee Wellness Programs Act.”

Agency Activity

Tuesday, 2/28

SEC
The Commission will host the SEC-NYU Dialogue on Securities Markets – Securities Crowdfunding in the U.S. The event will include welcome remarks by SEC Acting Chairman Michael Piwowar, concluding remarks by SEC Commissioner Kara Stein and panel discussions.

Thursday, 3/2

FSOC
The council will hold a closed executive session to discuss market developments, the council’s annual report, and the annual re-evaluation of the designation of a nonbank financial company.

CFPB
Consumer Financial Protection Bureau (CFPB) (F.R. Page 10761) holds a meeting of the Consumer Advisory Board Meeting to discuss the consumer credit information marketplace, a review of Bureau enforcement actions, trends and themes in consumer financial markets, and enhancements to the CFPB Consumer Complaint Database.

Other Activity

Tuesday, 2/28

Heritage Foundation
The Heritage Foundation holds a discussion on “Prosperity Unleashed: Smarter Financial Regulation.”

Thursday, 3/2

Aspen Institute
The Aspen Institute holds a discussion on “Should They Stay or Should They Go? Re-examining Retirement Tax Incentives.”

Friday, 3/3

Tax Policy Center
The Tax Policy Center holds a discussion on "The Prospects for Corporate Tax Reform."


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