CONSISTENTLY DELIVERS

Feb 7, 2017

Tax Policy Update

NUMBER OF THE WEEK: 39 percent

The percentage of registered voters who ranked comprehensive tax reform as the most urgent priority for the new administration and the GOP-led Congress. In a recent online survey conducted by Morning Consult and POLITICO, voters were asked which of the GOP’s top three policy goals should take priority. Coming in at second place is the repeal of Affordable Care Act (28 percent). Only 11 percent of survey participants said the border wall should be the most important item.

Which brings us to this week’s…

COMMANDER-IN-TWEET

LEGISLATIVE LANDSCAPE

Border Adjustment Tax to Face Extreme Vetting in the Senate. The momentum for comprehensive tax reform has hit some speed bumps recently. Congressional Republicans and the Trump Administration have struggled to get on the same page on the border adjustment tax proposal (“BAT”) — a key provision in the House GOP’s tax reform blueprint. Criticisms for the BAT have put House Ways and Means Chairman Kevin Brady (R-TX) and House Speaker Paul Ryan (R-WI) on the defensive.

In the past two weeks, Brady has been hitting the speech circuit in Washington, visiting the U.S. Chamber of Commerce and various media outlets to tout the benefits of the BAT. Brady explained that the current tax code essentially imposes a tax on American manufacturing, which disadvantages American companies and hurts the country’s global competitiveness. The chairman has been forceful in his …

Senate Republicans Throw Cold Water on BAT, White House Still Confused. Other Senate Republicans who have expressed skepticism for the BAT include:

  • Sen. John Cornyn (R-TX). Cornyn has not been shy about his opinions on the BAT. The senator took to Twitter recently to note that there are still “[m]any unanswered questions about proposed ‘border adjustment’ tax.” Given the proposal’s unknown impact on domestic prices, Cornyn believes the BAT needs careful scrutiny. He has called on Senate Finance Chairman Orrin Hatch to hold hearings on the topic.
  • Sens. Ben Sasse (R-NE) and Lindsey Graham (R-SC). Graham and Sasse seem to consider the BAT as a form of tariff, which they oppose.
  • Sen. Rob Portman (R-OH). Portman does not want the BAT to cause “dislocation in the economy.” He is also concerned that the tax may violate World Trade Organization rules.

Cornyn has also noted that he has been getting mixed signals from the White House on the BAT. This should not be a surprise, as White House Press Secretary Sean Spicer has had to walk back the administration’s position on the BAT several times already. At one point, it was too complicated; then, the tax was going to be used to pay for the border wall; as of late, the BAT became just one of many options to consider.

Come One, Come All, But Watch Yourself. Various industry stakeholders have offered numerous possible carve-outs to the BAT, but House GOP leaders are hesitant to go down that path. “One carve-out becomes one hundred,” said one GOP committee chairman in an off-record discussion. GOP tax staffers have been digging into whether the BAT could be drafted in a different form to accomplish the same purpose but perhaps with a softer impact on certain industries. Here are three ideas under exploration …

House Democrats to Focus on the Middle Class. While Republicans work to sort themselves out on the BAT, House Democrats have been busy putting together a package of tax cuts for the middle class. House Ways and Means Ranking Member Richard Neal (D-MA), along with Reps. Lloyd Doggett (D-TX) and Rosa DeLauro (D-CT), introduced three bills to expand the Earned Income Tax Credit (EITC), the American Opportunity Tax Credit (AOTC), and Child Tax Credit (CTC).

“Democrats are focused on standing up for our nation’s middle class. We must make sure that hardworking Americans – the lifeblood of our economy – get the tax cuts they deserve and need for their families, enabling their hard work to pay off and help them get ahead,” Neal said.

Here are short summaries of the bills:

  1. Earned Income Tax Credit Improvement and Simplification Act
    • Expand the EITC to individuals between ages 21 and 25 with no qualifying children. Individuals cannot be full-time students.
    • Allow families with children who do not have a valid Social Security Number to qualify for tax credits similar to the EITC for individuals with no qualifying children.
    • Revise the credit eligibility rules relating to married individuals living apart and qualifying children claimed by another family member.
    • Repeal provisions that would deny the credit to taxpayers due to excess investment income.
  2. Expand American Educational Opportunity Act
    • Increase the portion of the credit that is refundable and allow Pell Grant recipients to receive full benefit of the credit.
    • Simplify the credit by eliminating the need for two separate higher education credits, while increasing the credit’s lifetime maximum limit.
  3. Child Tax Credit Improvement Act
    • Index the value of the Child Tax Credit with inflation and increase the value of the credit for families with young children under the age of 6 to $3,600.

Hatch Disappointed in This Kind of Crap. Republicans on the Senate Finance Committee voted, 14-0, to advance the nominations of Steven Mnuchin (Treasury secretary nominee) and Rep. Tom Price (HHS secretary nominee). The vote took place in spite of a boycott mounted by the panel’s Democratic members who continue to have serious concerns about both candidates.

The boycott enraged Chairman Hatch who did not mince words regarding his counterparts’ behavior: “I’m very disappointed in this kind of crap. […] This is the most pathetic thing I’ve seen in my whole time in the United States Senate.”

Without a Democratic member present, the committee lacked a quorum to proceed to business. Consequently, Republicans moved to suspend the committee rules, so that they could vote on the nominees without their Democratic colleagues. Ranking Member Ron Wyden (D-OR) said the procedural move was “deeply troubling,” calling out the Republicans for their hypocrisy: “Boycotts of committee meetings are not unheard of — my Republican colleagues, led by Chairman Hatch, took such a step just a few years ago.”

The Senate is set to begin debating and confirming Price and Mnuchin this week.

Stabilizing the ACA. Last week, Republicans held a flurry of hearings on the state of the Affordable Care Act. Of note was the Senate Health, Education, Labor, and Pension Committee’s hearing on various bipartisan solutions that might help stabilize the current situation. The witnesses testifying before the panel stressed that Congress has a very narrow time window to act before millions of Americans are left without coverage. With the April deadline laid out by the panelists fast approaching, Senators were eager to get feedback on various proposals that are floating around Capitol Hill.

Importantly, panelists urged lawmakers to continue cost-sharing subsidies, “advance premium tax credits”, and full federal reinsurance payments, warning that discontinuing these programs will upset any chance of a smooth transition from the ACA to a new healthcare model.

Experts also urged Congress to consider passing the following market stabilizing measures, including changes to ACA tax credit grace periods …

Honor Thy Treaties. This may be the latest tax commandment to be thrown out the window under the House GOP plan to reform the U.S. tax code. The Republican proposal to lower the tax rate and move towards a territorial destination-based cash flow tax model may put U.S. tax treaties on the chopping block. Currently, U.S. multinationals with business operations in foreign countries rely on complex tax treaties in order to determine their tax obligations, decide how taxes are withheld on cross-border payments, make transfer pricing calculations, and prevent double taxation of income. The provisions of these treaties also dictate …

REGULATORY WORLD

Mr. Trump, Tear Down This Wall. President Donald Trump is making good on another campaign promise – “totally destroy[ing]” the Johnson Amendment that ensures the separation of church and state. During the campaign, Trump openly criticized the 63-year old ban that prohibits tax-exempt institutions from engaging in political speech. During a prayer breakfast last week, Trump revived the dialogue, noting that representatives of faith should be allowed to speak freely and without fear of retribution.

Why is the wall there? The Johnson Amendment was created to ensure that entities exempt from federal income tax cannot use their tax preference to participate or intervene in any political campaign. Trump’s ban on the amendment might be part of tax reform, though the likelihood of it passing through both chambers is low.

Risky Business. As the director of the Consumer Financial Protection Bureau, Richard Cordray, awaits a ruling from the U.S. Court of Appeals for the D.C. Circuit on whether the president has the power to remove him from office, allies of the Trump administration are growing impatient calling for the president to oust Cordray. Those in favor of firing Cordray believe Trump has a case to do so for “inefficiency, neglect of duty, or malfeasance,” which are the only conditions under which the director may be removed. Ejecting Cordray however, is a risky …

A Tax Upon Your Houses. Last week, European Commissioner Pierre Moscovici, announced plans for a tax on sharing economy companies like Airbnb. According to Moscovici, the EU plans to impose a technology tax to ensure that the “gig” economy pays its fair share. If the tax is imposed on an EU-wide basis, it will also help avoid tax fragmentation across Europe. The tech tax will likely be unveiled later this year.

IRS Adds New Members to Key Committees. The Internal Revenue Service Advisory Council (IRSAC) added five new members this year:

  • Sharyn Fisk
  • Kathy Hettick
  • Sheldon Kay
  • Phyllis Jo Kubey
  • Charles “Sandy” Macfarlane

The IRS also announced the following seven new members for the Information Reporting Program Advisory Committee (IRPAC), a forum for IRS officials and members of the public to address information reporting issues:

  • Lisa Allen
  • Tenesha Carterf
  • Randall Cathell
  • Ryan Lovin
  • James Paille
  • Thomas Prevost
  • Clark Sells

The new members join 13 returning members to serve on the committee for three-year terms beginning in 2017.

ROAD WORK AHEAD

House Authorizers Get in the Infrastructure Game. On February 1, 2017 the House Transportation and Infrastructure Committee held its first hearing of the new Congress focused on building a 21st century American infrastructure. Participating in the hearing were a number of business and labor representatives, including the President and Chief Executive Officer of FedEx Corporation Frederick Smith and AFL-CIO President Richard Trumpka. The committee convened with the purpose of seeking input regarding the challenges facing our nation’s current transportation infrastructure and what could be done to make it the G.O.A.T. (greatest of all time)… just like Tom Brady.

While he had the ball, the committee’s quarterback Chairman Bill Shuster (R-PA) laid out his vision for building a 21st century infrastructure for America, which is summarized here . The Democratic defense, led by the committee’s Ranking Member Peter DeFazio (D-OR), provided a broad outline of their response, which centers around the use of expanded user fees to pay for infrastructure projects, which differs from the plan loosely articulated by President Trump, who hopes to provide tax incentives to the private sector that will spur massive investment in the form of public-private partnerships.

While the hearing did not create any momentous surprises (like a second-half comeback), it did make clear that there is bipartisan and bicameral support for advancing a major infrastructure package through Congress. However, the plays being called are proposing very different strategies for winning the game. It’s yet to be seen whether the lack of consensus between parties, and even between Congress and the White House, will concuss a Trump touchdown on this key priority for the Administration.

A recording of the House Transportation and Infrastructure Committee Hearing can be found here.

LINE ITEMS

  1. President Donald Trump signed a presidential memo directing the Labor Department to conduct an economic and legal analysis of the fiduciary rule. The rule may be rescinded or revised if the department finds it to be inconsistent with administration policy. SPOILER ALERT: The department will likely find it to be “inconsistent” with administration policy.
  2. The president also signed an executive order directing the Treasury secretary to produce a plan to revise any Dodd-Frank rules issued by the Obama Administration. The secretary will have 120 days to complete and send a report to the White House.
  3. In a rare moment of bipartisan agreement, the Senate voted, 93-6, to confirm Elaine Chao as secretary of transportation. The chamber also confirmed Rex Tillerson to be secretary of state in a 56-43 vote.
  4. A group of centrists on Capitol Hill, led by Reps. Terri Sewell (D-AL), Don Beyer (D-VA), and Brad Schneider (D-IL), are teaming up to draft proposals that will modernize the tax code to create U.S. jobs, foster innovation, and support middle class families.
  5. The U.S. Conference of Mayors have launched a formal campaign to preserve the tax deduction for those who invest in municipal bonds. The group is currently allying itself with key players on Capitol Hill, noting that they have support from the Trump Administration for preserving the tax benefit.
  6. The Joint Committee on Taxation recently released JCX-4-17, a publication explaining tax legislation enacted in 2016. The publication includes a discussion of the following bills: (1)Trade Facilitation and Trade Enforcement Act of 2015; (2) Airport and Airway Extensions; (3) Recovering missing Children Act; (4)U.S. Appreciation for Olympians and Paralympians Act of 2016; (5)21st Century Cures Act; and (6) Combat-Injured Veterans Tax Fairness Act of 2016.

LOOKING AHEAD

Congressional Activity

Tuesday, 2/7

House Financial Services Committee
The committee meets to organize for the 115th Congress.

House Ways and Means Committee
The Social Security and Oversight Subcommittees will hold a joint hearing on “Social Security’s Representative Payee Program.”

Other Activity

Tuesday, 2/7

CNN Town Hall
CNN holds a town hall debate with Sens. Bernie Sanders and Ted Cruz on the future of the Affordable Care Act agenda.

Bloomberg BNA
Bloomberg hosts its annual Tax Outlook event where tax policy experts will dissect the legislation in the works as well as changes down the road to help you gain insight into the tax policy landscape.

Brookings Institution
The institution holds a forum on “Identifying a Fiscally Responsible Approach to Funding Infrastructure.”

Wednesday, 2/8

Bipartisan Policy Center
The Bipartisan Policy Center (BPC) holds a discussion on "Are Pass-Through Businesses the Key to Tax Reform?" Focusing on congressional Republicans blueprint to create a new structure for taxing the business income from entities such as S corporations, partnerships, and LLCs.

Brookings Institution
The institution holds a “Fintech: How can government promote the good and protect against the bad,” focusing on how well the regulatory regime can adapt to promote the benefits of financial technology.

Thursday, 2/9

National Economists Club
The club holds a lunch discussion with Keith Hall, director of the CBO, on the budget and economic outlook for the next ten years.

Brookings Institution
The institution will hold a discussion on “What Worked and What Didn’t in Obamacare Insurance Markets.”


For listings of all the week’s tax and financial services happenings, read below to find out how you can become a subscriber.

The McGuireWoods’ Tax & Financial Services Policy Group assists clients in understanding how the latest legislative and regulatory proposals and decisions may impact their business and industry. To learn more about how our team can help you monitor, analyze, and navigate all relevant legislative and regulatory developments, please contact any of our attorneys and consultants below at (202) 857-1700. For more information on how to subscribe to our weekly Tax Policy Update and tax news alerts, please contact Radha Mohan, , (202) 857-2944.

Russell Sullivan
Partner

Rosemary Becchi
Partner

Danielle Dellerson Hayes
Vice President

Charlie Iovino
Vice President

Jessica Monahan
Vice President

Radha Mohan
Assistant Vice President


Assistant Vice President

Daniel Chung
Associate