CONSISTENTLY DELIVERS

Mar 28, 2017

Tax Policy Update

HEADLINES OF THE WEEK:

Uh…That Was Awkward. In case you were off the grid last week, here’s a quick recap of what happened with the House GOP’s efforts to replace and repeal Obamacare. A vote was scheduled for Friday. Then it was canceled. There, that’s it — you’re all caught up on last week’s shenanigans.

On a more serious note, Friday was a tough one for House Republicans. As the day dragged on, it became clear that the American Health Care Act (AHCA) was facing certain defeat. Speaker Paul Ryan made a trip to the White House to deliver the bad news to President Trump, whose threat to the caucus had failed to whip members in line. The president instructed Ryan to pull the bill just before the chamber was ready to vote.

“I will not sugarcoat this, this is a disappointing day for us. Doing big things is hard. All of us. All of us, myself included, we will need time to reflect on how we got to this moment, what we could have done to do it better,” a somber Ryan said to reporters after the bill was withdrawn.

It did not take long for the finger-pointing to begin. All of the fingers (and you can guess which particular finger) were pointed towards the House Freedom Caucus and its recalcitrant members. Ryan’s failure to move the bill across the finish line handed the president his first major legislative defeat in 2017. And as expected, the Monday morning quarterbacks have lined up to share their thoughts on the GOP’s botched playbook, offering lessons for the next legislative battle: tax reform.

McGuireWoods’ tax policy team is avoiding the “woulda-coulda-shoulda” game. Instead, we will take a look at some of the implications of the GOP’s healthcare debacle.

LEGISLATIVE LANDSCAPE

AHCA Pulled from Life Support — Now What? We don’t want to be premature and conduct a “post-mortem” on the AHCA. After all, there really isn’t a DNR order just yet. Let’s take a look at some of the reasons why the AHCA failed as well as the options that Republicans can take to salvage their street cred.

Groundhog Day. Like Bill Murray, Speaker Ryan seems trapped in a time warp of his own. After seven years and over 60 attempts to repeal Obamacare, the House GOP’s latest efforts culminated in the failure of the AHCA. After years of rallying around repealing Obamacare, the question remains, why did the GOP fail?

For starters, repealing Obamacare is not the same as replacing it. For years, conservative ideology is partly defined by its hatred of Obamacare. However, while most Republicans wanted to repeal the health care law, few had detailed legislative …

DNR, CPR, AND? While Obamacare might have cheated death, its future remains uncertain. For months, insurance companies and industry experts have warned that the individual market is in dire straits. Without action, the exchanges will fail and leave millions without insurance or with unaffordable prices. The GOP must now decide which approach to take:

  1. Allow a Natural Death – Let Obamacare collapse and employ various tactics to ensure that the law is unsuccessful : As the dust settles, the GOP will have to decide whether to pour resources into propping up a system it wants to take apart. If the GOP wants to maintain Obamacare, it must stabilize the individual marketplace by providing certainty to insurers.

  2. In the coming months, insurance companies will have to negotiate with the GOP on a variety of issues including the repeal of the Health Insurance Tax (HIT) and relief through regulatory reform. Without certain reassurances, insurance companies may not be willing to participate in the exchanges due to the effect on their bottom line, driving up the number of uninsured.

  3. In addition to showing a willingness to negotiate and recruit additional insurance companies to the exchanges, the administration must also decide whether to pursue a court ruling stating that Congress must approve cost-sharing subsidies to help …

  4. CPR – Work with moderate Democrats to fix Obamacare instead of repealing it : Instead of unifying the various factions of the GOP, the administration has indicated a willingness to work with moderate Democrats to improve the 2010 healthcare law. Fixes may include the addition of “copper plans,” which would provide low-cost coverage for young adults to address the issue of the exchanges being crowded with older and sicker individuals. Bipartisan legislation may also consider fixing Medicaid by lowering the …

  5. Do Not Resuscitate – Attempt to Repeal and Replace Obamacare on Party Lines : While GOP leadership has indicated that they are moving on to tax reform, House Speaker Paul Ryan announced that he is still working on ways to overhaul Obamacare. Though Ryan has not divulged additional details or a timeline, his office issued a statement noting that the speaker intends to keep his promises on health care.

  6. There has also been speculation that the Senate may release its own healthcare bill. However, according to one of our sources on Capitol Hill, the upper chamber is unlikely to do so, especially since Congress is shifting its attention to tax reform.

More Difficult to Enact Tax Reform in 2017? After their haphazard handling of the healthcare vote, congressional Republicans and the White House are desperate for a legislative “win.” Policymakers and pundits quickly shifted the conversation towards comprehensive tax reform. The failure of the AHCA prompted many to ask whether it has made tax reform more difficult. The consensus is tilting towards “yes” — just ask some of the top tax writers in the House and Senate who have been around the block a time or two. But as Speaker Ryan said, difficult does not mean impossible. There are two factors compounding the GOP’s headache with tax reform. The first one …

Tax Reform via Budget Reconciliation or Bipartisanship? Among other things, the AHCA episode revealed deep fractures within the House GOP conference. The dysfunction is particularly glaring when the GOP has a 237-seat majority. Republicans may only need 51 votes in the Senate to pass tax reform via budget reconciliation, but what would happen if Republicans once again failed to secure a simple majority in the House for their own bill?

The vote-wrangling during the AHCA debate also reaffirmed the unreliability of the House Freedom Caucus. If Republicans cannot count on their own members, it means that they will have to …

Who is in the Driver’s Seat? President Trump gave House Republicans free rein over the AHCA and did not intervene until things started to go south. It appears that the White House may have learned its lesson. Press Secretary Sean Spicer has already come out to say that the president will be “driving the train” on tax reform.

In February, the president told reporters that his team will soon unveil its own proposal on tax reform, but nothing has materialized yet. The White House can certainly do more than offer its own plan. Given the emerging disagreements between the House and Senate on key tax provisions such as the BAT, there is a real opportunity for the president to step in and serve as a mediator between the two chambers. The House is expected …

What Else? As a refresher, recall that Republicans wanted to use the reconciliation instructions in the FY2017 budget to pass healthcare. They were also planning to insert instructions in the FY2018 budget for tax reform. But the healthcare fallout has complicated the GOP’s plan to pass a FY2018 budget resolution. House GOP leaders do not appear to have the appetite to engage in a protracted spending fight with its House Freedom Caucus members. To avoid that battle, House leaders are reportedly looking at using the reconciliation instructions in the FY2017 budget resolution for …

Let’s Get Uncomfortable. “It has to be uncomfortable, frankly, for us to go this bold […],” House Ways and Means Chairman Kevin Brady said about tax reform — the statement was made just a few days before the House GOP’s healthcare bill imploded.

Brady remains committed to marking up a tax bill before the end of spring. However, the White House’s forthcoming tax reform proposal may frustrate the chairman’s timeline — especially if the administration’s plan deviates significantly from the House blueprint. Brady is perhaps already wary of such potential delays. In an interview with Fox News on March 26, Brady said it didn’t make much sense for the administration to put out a separate plan: “Why not take the basis of the House plan?”

Although both Speaker Ryan and Chairman Brady have conceded that the GOP’s failure to pass its healthcare bill will make tax reform more difficult, Treasury Secretary Steven Mnuchin dismissed this notion, noting that the two issues are “very different” and that tax reform, in some ways, is “a lot simpler.” Mnuchin’s comments should raise some eyebrows. Even if tax reform is “simpler,” it’s still no walk in the park. The last time Congress succeeded in enacting comprehensive tax reform was in 1986.

Though tax policy watchers have yet to see anything concrete from the administration, Mnuchin has recently dropped some hints regarding what the administration is thinking. Broadly speaking, the Trump team is looking to cut taxes for middle class, simplify the code, and make U.S. business competitive again. And unlike the House proposal, the administration’s plan may not eliminate the net interest income deduction outright. The administration also appears inclined to tax carried interest as ordinary income.

REGULATORY WORLD

Lax Procedures at the IRS. According to a recently released TIGTA report, the Internal Revenue Service did not immediately deactivate an Identity Protection Personal Identification Numbers (IP PIN) tool after a security breach in May 2015. Despite repeated requests by TIGTA asking the agency to temporarily take the tool offline, the IRS allowed the application to remain active, subjecting taxpayers to heightened risk of fraud. Specifically, the IRS’s failure to immediately deactivate the IP PIN tool may have impacted 24 percent of tax returns with refunds totaling $26 million. The IRS eventually disabled the application in March 2016 and didn’t reactivate it until July 2016.

The IRS initially started issuing IP PINs to eligible taxpayers in 2011. An IP PIN is a six-digit number assigned to taxpayers that allows their tax returns/refunds to be processed without delay and helps prevent the misuse of their Social Security Numbers (SSN) on fraudulent Federal income tax returns. In Processing Year 2016, the IRS issued approximately 2.7 million IP PINs to taxpayers for use in filing their tax returns.

ROAD WORK AHEAD

What does the AHCA failure mean for infrastructure investment? Well, that is the trillion dollar question. With Obamacare repeal and replacement serving up a disappointing failure for the Trump Administration in its first 100 days, some are speculating that the president will set his sights on other key priorities such as tax reform and infrastructure investment (or even a combination of the two). While the healthcare process largely ignored Democrats, something like infrastructure investment could yield a significant opportunity for Republican leadership to deliver a win to the White House with bipartisan support.

Before a decision had even been made over whom to blame for ACA, Treasury Secretary Steven Mnuchin brought attention to infrastructure investment (perhaps confirming its place atop the priority list or even within the tax reform process). In remarks he made Monday, Secretary Mnuchin alluded to …

FAA Clears the Way for Flying Drones over People. Federal Aviation Administrator Michael Huerta announced this week the formation of a new Aviation Rulemaking Committee that will help guide the agency on a number of regulatory matters, including the flight of unmanned aircraft systems (UAS or “drones”) over people. This marks a meaningful step forward for UAS users who have urged the FAA to allow for the safe flight of UAS over populated areas. When the Obama Administration finally revealed its small UAS rule last year, the flying of drones over people was largely prohibited. With security and safety still of grave concern for the FAA, Administrator Huerta is hopeful that the new committee can help guide the expanded use of UAS over people and beyond the visual line of sight.

Key Committees Making Moves:

  • The House Transportation and Infrastructure Committee will mark up a number of transportation-related bills on Wednesday, March 29. Issues being addressed include a measure to repeal a joint Federal Highway Administration – Federal Transit Administration regulation on metropolitan planning organizations and legislation that requires congressional notice when the Federal Transit Administration or Federal Railroad Administration initiates safety audits of rail or transit agencies. Click here for more information.

  • The House Oversight and Government Reform – Government Operations Subcommittee holds a hearing on Wednesday, March 29 called “WMATA after SafeTrack.” The Subcommittee hopes to examine whether SafeTrack has been successful in restoring the Metro system to a state of good repair and to address Washington Metropolitan Area Transit Authority’s (WMATA) financial situation. Click here for more information.

  • The Senate Commerce Committee will hold a hearing on Wednesday, March 29 on Jeffrey Rosen’s nomination to be Deputy Secretary of Transportation. If confirmed, Rosen will return to the Department of Transportation with extensive experience, having previously served as the Department’s Chief Legal Officer. For more information on Jeffrey Rosen and tomorrow’s hearing, click here.

COMMANDER-IN-TWEET

LINE ITEMS

  1. In a 19-2 vote, the House Judiciary Committee approved the Mobile Workforce State Income Tax Simplification Act (H.R. 1393) — a bill that would limit the ability of states to tax nonresident workers. The bill would only allow a state to tax those who have worked in the state for more than 30 days in a given calendar year.
  2. The Campaign to Repeal FATCA sent a letter to the top House and Senate tax writers, urging them to include the repeal of the Foreign Account Tax Compliance Act in tax reform. According to the group, FATCA has had a negative impact on ordinary Americans, limiting their access to bank accounts abroad. Read the letter here.

LOOKING AHEAD

Congressional Activity

Tuesday, 3/28

House Ways and Means Committee
Markup of H. Res. 186, directing the Secretary of the Treasury to provide to the House of Representatives the tax returns and other specified financial information of President Donald J. Trump.

House Financial Services Committee
Financial Institutions and Consumer Credit Subcommittee hearing on "The State of Bank Lending in America."

House Financial Services Committee
Oversight and Investigations Subcommittee hearing on "The Arbitrary and Inconsistent Non-Bank SIFI (systemically important financial institution) Designation Process."

House Agriculture Committee
General Farm Commodities and Risk Management Subcommittee hearing on "The Next Farm Bill: Commodity Policy Part I."

Senate Banking Committee
Full committee hearing on "Fostering Economic Growth: The Role of Financial Companies."

Wednesday, 3/29

House Financial Services Committee
Capital Markets, Securities and Investments Subcommittee hearing on "Examining the Impact of the Volcker Rule on the Markets, Businesses, Investors, and Job Creators."

Agency Activity

Thursday, 3/30

CFPB
Meeting of the Credit Union Advisory Council to discuss alternative data and consumer access to financial records.

CFTC
Closed meeting to discuss surveillance, enforcement, and examinations matters.

Other Activity

Wednesday, 3/29

Cato Institute
Discussion on "Can Health Insurance Innovations Reduce Prices and Drive Cost-Effective Care?"

Global Business Dialogue
The Global Business Dialogue (GBD) holds a discussion on "Border Taxes: The Background, a Proposal and the Challenges."


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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.

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