CONSISTENTLY DELIVERS

Mar 14, 2017

Tax Policy Update

PICTURE OF THE WEEK:

Show and Tell. House Speaker Paul Ryan rolled out a PowerPoint last week to break down the GOP’s American Health Care Act (AHCA). Predictably, the presentation setup sparked a series of memes poking fun at the speaker.

The Congressional Budget Office’s March 13 release of its report detailing the budgetary effects of the AHCA only added to Ryan’s headache. The CBO report draws the following conclusions:

  • Enacting the AHCA would reduce federal deficits by $337 billion over the 2017-2026 period (due in large part to reductions in Medicaid spending and elimination of Obamacare subsidies for individual coverage).
  • In 2018, 14 million more people would be uninsured under the AHCA than under Obamacare (due in large part to repealing the individual mandate, which would no longer incent people to purchase or seek health insurance). This number would rise to 21 million in 2020 and 24 million in 2026 (due in large part to changes in Medicaid).
  • The legislation would increase average premiums in the non-group market prior to 2020 (due to fewer healthy people purchasing insurance) and lower average premiums in the following years (due to a number of factors, including a younger mix of enrollees; flexibility in plans that can be offered by insurers; and grants to states, which are expected to be used in large part to limit the costs to insurers for very high claims).
  • The legislation would change premiums significantly for people of different ages (due to the change in age-rating rules and the size of tax credits for older enrollees not covering the total expected increase).
  • Medicaid would see dramatic reductions. The CBO projected that the program would be cut by $880 billion over a decade, which amounts to about a 20 percent reduction.

According to a report obtained by Politico , the White House’s analysis of the AHCA shows even steeper coverage losses than projections by the CBO. The administration’s analysis indicates that 26 million people would lose coverage over the next decade. Of course, its own internal report confirming the CBO’s numbers did not stop the White House from disparaging the agency. In fact, the White House Communications Director Michael Dubke attempted to explain away the administration’s internal analysis: “This is not an analysis of the bill in any way whatsoever…this is OMB trying to project what CBO’s score will be using CBO’s methodology.”

HHS Secretary Tom Price also criticized the CBO score, noting “We disagree strenuously with the report that was put out…It’s just not believable is what we would suggest.” The AHCA already has an uphill battle to fight, as it has been besieged by attacks from moderate and conservative Republicans. The conservative House Freedom Caucus has already threatened to derail the legislation, calling the AHCA “Obamacare Lite.” While Speaker Ryan remains confident that House conservatives will vote in favor of the repeal, the GOP continues to hemorrhage votes on the Senate side. Moderate Republicans are spooked by the CBO numbers and are especially wary of the effects of the Medicaid expansion repeal.

LEGISLATIVE LANDSCAPE

McConnell: Tax Reform Won’t Be Done by August. Congress is notorious for missing its self-imposed deadlines when it comes to significant legislative undertakings (e.g., highway reauthorization, government funding, etc.). So when the Senate majority leader comes out to say that work on tax reform will likely go beyond the August recess, it’s something to take heed of.

Senate Majority Leader Mitch McConnell (R-KY) and Senate Finance Chairman Orrin Hatch (R-UT) have cast doubts on the ambitious timeline for tax reform set forth by Treasury Secretary Steven Mnuchin. “Finishing on tax reform will take longer,” McConnell told reporters last week. Hatch simply noted that the healthcare debate could very well delay legislative action on tax reform. Both lawmakers reaffirmed that Congress will not get to the tax debate until healthcare is done. Meanwhile on the House side, House Ways and Means Chairman Kevin Brady (R-TX) said that his committee is on track to take up a bill in the spring and is still aiming to deliver tax reform this summer. However, Brady admitted that he has not talked to McConnell about the timing.

The White House can certainly help move things along. Back in February, President Trump said he would put forth his own tax reform plan in the coming weeks, but tax wonks are still waiting to see the administration’s proposal. It looks like the tax world may have to wait a little while longer — Trump’s top economic adviser Gary Cohn said that the administration’s plan would come after Congress is done with healthcare. Cohn remains reticent on details — especially on the administration’s take on the border adjustment tax (BAT) — but he did go on the record to say that the administration’s plan will be deficit-neutral.

Just in case folks aren’t completely clear on how the BAT is playing out in the Senate, Sen. Lisa Murkowski (R-AK) has officially jumped into the debate: “I’m not interested in anything that is going to increase the price of gasoline in Alaska. I think [a border tax] is something we need to look at very, very critically.”

So there you have it — it’s mid-March and lawmakers are still struggling to get on the same page on tax reform. Those who still believe Congress can enact comprehensive tax reform* in 2017 can go sit in the corner with McGuireWoods’ tax policy team members Russ Sullivan and Dan Chung who are holding out hope. The rest of you skeptics can sit with us cool kids who are looking between 2018 and never.

* Your author would like to note that after our tax policy team divided itself into two camps debating the prospects for reform, members of the team clamored to clarify what they mean by “comprehensive tax reform.” Nerds. Feel free to tell what you think!

Flaking on the BAT. Last week, Sen. Jeff Flake (R-AZ) became the most recent Senate Republican to criticize the border adjustment tax. Flake noted that at first glance the plan seems to take a commonsense approach by taxing companies in the U.S. less and taxing goods overseas more. However, Flake admitted that “it’s not so easy, we simply do not produce everything we need here in the United States. That’s why we trade with other countries.”

In addition to Sen. Flake, both Sens. John Cornyn (R-TX) and Lisa Murkowski (R-AK) denounced the proposal on the grounds that the BAT is based on unproven assumptions. As an increasing number of lawmakers come out against the BAT, their comments are fueled by industry groups that are in “sticker shock” over the effects of the proposal. According to a study by Roland Berger, a global consulting firm, the BAT would increase the average cost of a car by $3,300. This would cause a drop in demand for cars, thereby forcing manufacturers to downsize their U.S. workforce.

While the GOP maintains that the BAT would mainly affect non-U.S. products, the auto industry tells a different story. U.S. built cars will also suffer under the proposal because many components are foreign-sourced. As a result, costs for the top three U.S.-based manufacturers would rise by an average of $1,500 per vehicle.

Getting Our Markup On. On March 8, the House Ways and Means and Energy and Commerce Committees marked up their legislative recommendations to repeal and replace Obamacare. After all-night mark-ups, both committees advanced all of their legislative recommendations. The recommendations now move to the House Budget Committee, where they will be combined and marked up on March 16 at 10:00 AM. Since the budget committee cannot make major substantive changes to the legislation, it is unlikely that we will see amendments to the bill.

Sen. Brown Shares Plan to Empower American Workers . In a speech at Ohio State University, Sen. Sherrod Brown unveiled a proposal to raise wages, strengthen employee benefits, and encourage U.S. companies to invest in their workforces. Of note to those in the tax policy world, Brown’s plan proposes to:

  • Tighten the definition of “independent contractors” to prevent large employers from abusing the classification system. Brown wants employers with more than 500 independent contracts and $7.5 million in annual receipts to pay payroll taxes for independent contractors.
  • Expand savings and retirement opportunities for U.S. workers by allowing part-time workers to participate in employer-sponsored retirement plans if they meet certain requirements, by formally authorizing the myRA program, and by modifying eligibility rules for Open Multiple Employer Plans (MEPs), among others.
  • Encourage U.S. companies to invest in their workforces in two ways:
  • Require companies to reimburse taxpayers when their employees have to rely on federal assistance due to low wages – Brown dubbed this the “Corporate Freeloader Fee.”
  • Create a tax credit for companies that (1) maintain their HQs in the U.S., (2) pay their employees an hourly wage equal to 156 percent of the federal poverty level for a family of three, and (3) provide 90 percent of their workers with adequate retirement options.

Brown’s plan has not been introduced formally via legislation, but the Ohio senator is planning to introduce a series of bills over the next few months to implement his proposals.

Last Week at Bernie’s. Sens. Bernie Sanders (I-VT) and Brian Schatz (D-HI) introduced the Corporate Tax Dodging Prevention Act — a bill that would put an end to U.S. companies’ ability to defer taxes on their offshore income. The bill would also impose a 35 percent tax on profits currently held abroad. Companies would still be able to get a credit for any foreign taxes paid on those profits.

In addition to going after money stashed offshore, the lawmakers are also going after inversions and earnings stripping. Under the bill, a company would still be subject to U.S. taxes if it is majority-owned by U.S. persons and if its management and control operations are still based in the United States. The bill also specifically calls out oil and gas companies that claim the foreign tax credit for certain royalty payments made to foreign governments. Sanders introduced a similar bill in the 114th Congress, but it received little legislative action.

REGULATORY WORLD

None of the Power and All of the Responsibility. Despite plans to gut the Internal Revenue Service in the House GOP’sA Better Way proposal for tax reform, the American Health Care Act would give the agency full control over the refundable tax credit.

In a departure from the Affordable Care Act, the IRS and the Department of Health and Human Services will no longer jointly administer credits offered to help Americans buy insurance. As the AHCA transitions away from the Obamacare premium tax credit, the bill authorizes the IRS to implement the new system. Despite the fact that the GOP tax credit is less complex since it is mostly based on age with means-testing, administering the credit will still be challenging. Some experts note that the IRS has never approved tax breaks for health care based on projected income. The IRS may lack the expertise and tools to handle the task.

To date, the IRS has not commented on its expanded role under the House GOP health plan. The agency might still be reeling from the shock of their potential new role. However, shortly after the passage of Obamacare, having to implement the new health care law placed a strain on the agency’s budget. Given recent funding cuts, the agency may once face the same obstacles.

Who’s Afraid of the Tax Man? No one apparently. Halfway through the 2017 filing season, the agency has received 5.7 million fewer individual returns than at a comparable point last year — an 8.5 percent drop.

There are several possible explanations for why taxpayers aren't filing. A few popular theories include:

  1. Delayed Refunds: As part of the Protecting Americans from Tax Hikes Act of 2015 , the IRS was required to increase scrutiny of the Earned Income Tax Credit and the Additional Child Tax Credit. As a result, this year the agency did not issue refunds under Feb. 15 certain tax credits often claimed by low-income households. As a result, the agency warned it wouldn't issue refunds this year until Feb. 15 for those claiming either credit. The delay may be a factor affecting why millions of Americans are yet to file a tax return.
  2. Confusion: Taxpayers may believe that they are affected by the refund delays caused by the PATH Act. As a result, they may be holding off on filing returns until the April 18 deadline.
  3. Undocumented Workers: As the administration ramps up its crackdown on illegal immigration, undocumented workers may be wary of filing federal income tax returns. Data shows that ITIN filers are down this year and undocumented immigrants tend to use ITINs instead of Social Security Numbers.

If none of these theories float your boat, there’s always plain old procrastination as well.

IRS Lays Framework for Exchanging Global Tax Data. The IRS recently reassured the business community that the framework for exchanging global tax and profit reports with foreign tax authorities will be ready by June — just in time for businesses to file tax returns with the U.S., rather than foreign tax agencies. This is important to many U.S. companies because the U.S. can safeguard sensitive information better than foreign governments. In order to meet the looming deadline, the IRS has prioritized negotiating the agreements under which tax information is exchanged, known as qualified competent authority agreements.

The exchange of global tax and profits reports is part Action 13 of the Organization for Economic Development’s Base Erosion and Profit Shifting 15-point action plan.

COMMANDER-IN-TWEET

President Trump’s thoughts on the GOP’s “repeal and replace” strategy:

LINE ITEMS

  1. In a bipartisan letter to the House Ways and Means Committee, more than 150 lawmakers urged the tax-writing panel to maintain the tax-exempt status of municipal bonds.
  2. Treasury Secretary Steve Mnuchin has added a new member to his team – Justin Muzinich, the president of the investment firm Muzinich & Co. In his new position Muzinich will focus on tax reform and other major domestic and international policy initiatives.
  3. In a letter to Speaker Paul Ryan and House Ways and Means Chairman Kevin Brady, conservative groups urged lawmakers to oppose efforts to increase taxes on capital gains, including proposals to tax carried interest. The group noted that a tax on carried interest would not only affect hedge fund managers, but would also hurt pension funds, charities, and colleges that depend on these investment partnerships as part of their savings goals. In addition, small businesses, and innovators.
  4. The federal government is expected to hit the debt ceiling on March 15. As a result, the U.S. government will not be allowed to take on any more debt, so the Treasury Department will have to take “extraordinary measures” in order to make essential payments. In 2015, Congress suspended the debt limit as part of the budget deal.

LOOKING AHEAD

Congressional Activity

Wednesday, 3/15

House Financial Services Committee
Financial Institutions and Consumer Credit Subcommittee hearing on “Ending the De Novo Drought: Examining the Application Process for De Novo Financial Institutions.”

House Education and the Workforce Committee
Subcommittee hearing on “Improving Federal Student Aid to Better Meet the needs of Students.”

House Financial Services Committee
Capital Markets Subcommittee to hold a hearing on “The JOBS Act at Five.”

House Agriculture Committee
Full committee hearing on “Agriculture and Tax Reform: Opportunities for Rural America.”

Thursday, 3/16

House Budget Committee
Full committee to mark up reconciliation submissions by House Ways and Means and House Energy and Commerce.

Agency Activity

Tuesday, 3/14

Federal Reserve
The Federal Open Market Committee (FOMC) holds a closed meeting, beginning at 9 a.m. The FOMC is the policy-making arm of the Federal Reserve, March 14-15.

Other Activity

Tuesday, 3/14

Peterson Institute
The Peterson Institute for International Economics (IIE) holds a conference on "U.S. Interest in International Financial Cooperation.

Bipartisan Policy Center
The BPC holds a discussion on “Regulating the Financial System During the Trump Administration.”

Wednesday, 3/15

Bipartisan Policy Center
Discussion on “Possible Impacts of Tax Reform on Housing.”

Friday, 3/17

RAND Corporation
The RAND Corporation holds a discussion on “Repeal, Replace, Repair or Improve? The Future of the Affordable Care Act (ACA).”


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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
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Charlie Iovino
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Jessica Monahan
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Radha Mohan
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Daniel Chung
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