CONSISTENTLY DELIVERS

May 16, 2017

Tax Policy Update

WORD OF THE WEEK: INFRASTRUCTURE

Welcome to Infrastructure Week! Yes, it’s a thing.

T is for Trump and Transportation and I is for Infrastructure. This week marks the 5th Annual Infrastructure Week with events occurring in Washington, D.C. and across the country to highlight the critical role infrastructure plays in our economy.

This year’s Infrastructure Week seems particularly relevant given the emphasis President Trump has placed on the need to invest in roads, bridges, airports and more throughout his campaign and time in office.

Among those bringing focus to the need to improve and expand our nation’s infrastructure include Secretary of Transportation Elaine Chao, who announced at a kick-off event on Monday that key principles for an infrastructure plan would be available in the next several weeks. (Side note: If the administration’s outline of principles for infrastructure investment is anything like its outline of principles for tax reform, it may leave more detail to be desired.)

Congress has also embraced the reason for the season (or at least the week) and is holding seven committee hearings on a wide array of infrastructure-related topics. Key hearings include:

  • Senate Environment and Public Works: Transportation and Infrastructure Subcommittee hearing entitled “Leveraging Federal Funding: Innovative Solutions for Infrastructure” on Tuesday, May 16 at 3:15 pm.
  • Senate Environment and Public Works Committee hearing entitled “Improving America’s Transportation Infrastructure: The Road Forward” with Secretary Chao testifying on Wednesday, May 17 at 10:00 am.
  • House Transportation and Infrastructure Committee hearing entitled “The Need to Reform FAA and Air Traffic Control to Build a 21st Century Aviation System for America” on Wednesday, May 17 at 10:00 am.
  • House Transportation and Infrastructure: Subcommittee on Water Resources and Environment hearing entitled “Building a 21st Century Infrastructure for America: Improving Water Quality through Integrated Planning” on Thursday, May 18 at 10:00 am.

There are also a number of events occurring on and off Capitol Hill hosted by public and private sector stakeholders. A full schedule of events can be found here.

LEGISLATIVE LANDSCAPE

Back-Channel Chats Steal Focus. Despite being excluded from Senate Majority Leader Mitch McConnell’s (R-KY) official health care reform working group last week, Sens. Susan Collins (R-ME) and Bill Cassidy (R-LA) have stolen the show. Media reports have largely focused on the work of a different, more inclusive group of senators with their own ideas on health care reform.

On May 15, this group of six Republicans and three Democrats met to discuss a possible path forward on bipartisan health care legislation. The meeting, organized by Sens. Collins and Cassidy, included Republican Sens. Dean Heller (NV), Lindsey Graham (SC), Dan Sullivan (AK), and Shelley Moore Capito (WV) and Democrats Joe Manchin W(WV), Joe Donnelly (IN), and Heidi Heitkamp (ND), among others.

Using the Collins-Cassidy Patient Freedom Act of 2017 as a starting point, the senators discussed various ideas on how to reform the health care system. Though the group is far from reaching a compromise, Collins noted that the session allowed Republicans and Democrats to have a substantive discussion on health care, instead of focusing on tired rhetoric.

Unlike the contentious process in the House where GOP leaders insisted on repeal, this group of senators seems more open to …

Still Aiming for 2017 Tax Reform. Storm clouds have been gathering in Washington over the untimely firing of FBI Director James Comey. The events of recent days have led some Capitol Hill watchers to wonder whether the fallout will slow the momentum for tax reform. The Tax Policy Update team shrugs at this — maybe, maybe not. Keep in mind that even before the Comey episode, there were doubts that comprehensive tax reform can be accomplished this year.

Forget that Congress is less than three months away from the August recess — Treasury Secretary Steven Mnuchin has already conceded that passing a bill by August is unrealistic. The real challenge to getting tax reform done in 2017 is the crowded congressional calendar. There is, of course, the healthcare bill in the Senate. Additionally, before the end of September, lawmakers will have to (1) pass a FY2018 budget resolution, (2) approve a set of appropriations bills, (3) raise the debt limit, and (4) reauthorize the FAA, national flood insurance program, and the Children’s Health Insurance Program (CHIP).

Sure, congressional Republicans and their aides have been telling reporters that tax reform and healthcare are moving on parallel tracks and that the party can “walk and chew gum” at the same time. But if the GOP’s earlier handling of the healthcare bill serves as any indication of the hot mess to come with tax reform, Republicans will unlikely inspire much confidence.

Despite disagreements over some key tax reform provisions, Republicans on and off Capitol Hill do agree on one thing: Comprehensive tax reform is happening in 2017. Perhaps once David Kautter steps in as assistant secretary of the Treasury for tax policy, the tax reform triumvirate of Treasury Secretary Steven Mnuchin, NEC Director Gary Cohn, and Kautter can really start to move things along.

Yawn. Enough with Revenue Neutrality! In the last two editions of the Tax Policy Update, we took a closer look at revenue neutrality — a topic that has divided the White House and congressional Republicans. Our focus this week will be on interest deductibility — namely, the net interest expense deduction, which is another subject that Republicans can’t seem to see eye-to-eye on. As our readers may recall, the House GOP tax blueprint (“Blueprint”) proposes to eliminate the net interest expense deduction — specifically, businesses “will be allowed to deduct interest expense against any interest income, but no current deduction will be allowed for net interest expense [emphasis added].

Getting rid of the deduction would raise $1.1 trillion according to an estimate by the Tax Foundation. However, some would argue that the Tax Foundation’s score is wildly optimistic because to get close to the $1 trillion figure, lawmakers would have to …

Brady Hears a Who. House Ways and Means Committee Chairman Kevin Brady (R-TX) is set to convene the first tax reform hearing of the year on Thursday, May 18. The hearing will focus on the impact of tax reform on economic growth and job creation. At this writing, the committee has yet to announce the witness panel. The Tax Policy Update team isn’t expecting much firework at this Thursday’s hearing. On Friday, National Taxpayer Advocate Nina Olson will testify before the tax-writing panel’s Oversight Subcommittee, where she is expected to discuss potential reforms at the IRS.

Rumor has it that the Ways and Means Committee will …

Didn’t We Just Finish Appropriations? Congress averted a government shutdown on May 4 by passing an omnibus spending package for FY2017. Lawmakers are about to get back on the appropriations rollercoaster. This week, the House Appropriations Committee is kicking off the FY2018 budget season with four hearings in its Legislative Branch Subcommittee. As a reminder, we still do not have details on the FY2018 budget resolution, which is expected to carry the reconciliation instructions for comprehensive tax reform.

The White House is planning to unveil its full FY2018 budget request during the week of May 22, while GOP lawmakers are shooting for the week after the Memorial Day Recess.

Regulatory Reform Bills in the Spotlight. The Senate Homeland Security and Governmental Affairs Committee will mark up a series of regulatory reform bills on Wednesday, May 17:

  • S. 951 – the Regulatory Accountability Act would update the federal regulatory process by requiring agencies to conduct an effective cost-benefit analysis, improve transparency, provide certainty for businesses and consumers, create an automatic review process for major rules, and allow agency hearings on certain significant regulations.
  • S. 21REINS Act would require congressional approval before any major regulations of the Executive Branch comes into effect.
  • S. 34Midnight Rules Relief Act would allow Congress to repeal regulations en bloc under the Congressional Review Act.
  • S. 577Providing Accountability Through Transparency Act would require each agency to provide a 100-word plain language summary of any proposed rule.
  • S. 584Small Business Regulatory Flexibility Improvements Act would ensure complete analysis of potential impacts on small entities of rules.
  • S. 579Early Participation in Regulations Act would require agencies to publish an advance notice of proposed rulemaking for major rules.

Out of these six measures, the Regulatory Accountability Act has the most traction as it is a bipartisan effort by Sens. Rob Portman (R-OH) and Heidi Heitkamp (D-ND). The bill also has the support of Sen. Joe Manchin (D-WV). Thus, Republicans will need to persuade six more Democrats to their side in order to secure passage of the bill.

REGULATORY WORLD

You’re Fired! T hough the Trump Administration might be tempted to dismiss Consumer Financial Protection Bureau Director Richard Cordray, the president has held his fire because he believes Cordray may be running for governor in Ohio when his term expires in July 2018. In the administration’s view, being fired by Trump may help Cordray score some political points. As a result, Cordray may beat the odds and serve out his term under the Trump Administration.

As Republican efforts to weaken the bureau heat up, Cordray is set to meet with House Democrats on Wednesday, May 17. The House continues its work on the CHOICE Act, which includes …

COMMANDER-IN-TWEET

LINE ITEMS

  1. Speaking at the American Bar Association, Gerald Fleming with the IRS Office of Associate Chief Counsel said that the IRS is considering issuing guidance on whether certain spinoff transactions should remain tax-free where the distributing corporation issues debt immediately prior to the spinoff and retires the debt with stock or securities of the controlled corporation.
  2. President Donald Trump has officially nominated David J. Kautter to the post of Assistant Secretary of the Treasury for Tax Policy. Kautter is the current managing director of the Kogod Tax Center at American University. Prior to joining the university, he served as the director of national tax at Ernst & Young.
  3. A bipartisan group of House lawmakers sent a letter to leadership urging them to keep the tax deduction for business advertising. Lawmakers wrote that “any changes in our tax system [needs to] be meaningful, economically sound, and do not threaten the impacts of advertising on jobs and the economy.”
  4. Brendan O’Dell, attorney-adviser in the department’s Office of Tax Policy announced that non-regulatory partnership audit guidance is likely to appear in the Internal Revenue Manual sometime this summer. Tax practitioners continue to express concerns about the lack of comprehensive guidance on the new partnership tax audit regime that is scheduled to go into effect at the beginning of 2018. The Treasury Department originally released proposed guidance to implement the new audit regime in January, but withdrew the regulations the same month.
  5. Using a new model tax treaty the Treasury Department released in 2016, the U.S. is currently negotiating tax treaties with Luxembourg, Ireland, the Netherlands, Argentina, and Colombia. The new treaty with Ireland may be of particular interest to American tech companies since many have large financial interests in the country. The 2016 model treaty includes provisions negating treaty benefits to “preferential tax regimes” that impose little or no tax. Given Ireland’s recent history with the European Union on state aid transactions, this may impact American companies that have operations in Ireland.

IN THE QUEUE

Congressional Activity

Tuesday, 5/16

Senate EPW Committee
Subcommittee on Transportation and Infrastructure hearing: "Leveraging Federal Funding; Innovative Solutions for Infrastructure."

Senate Finance Committee
Full Committee Hearing: "Examining Bipartisan Medicare Policies that Improve Care for Patients with Chronic Conditions."

Senate Banking Committee
Nomination hearing:

  • Sigal Mandelker to be Under Secretary for Terrorism and Financial Crimes, U.S. Department of Treasury
  • Mira Radielovic Ricardel to be Under Secretary for Export Administration, U.S. Department of Commerce;
  • Marshall Billingslea to be Assistant Secretary for Terrorist Financing, U.S. Department of Treasury
  • Heath P. Tarbert to be Assistant Secretary, U.S. Department of Treasury

Wednesday, 5/17

House Ways and Means Committee
House Ways and Means Human Resources Subcommittee hearing: "Opportunities for Youth and Young Adults to Break the Cycle of Poverty."

Senate EPW Committee
Full Committee Hearing: "Improving America’s Transportation Infrastructure: The Road Forward."

Joint Economic Committee
Full committee hearing on "The State of Social Capital in America Today."

Thursday, 5/18

House Ways and Means Committee
Full committee hearing on the role of tax reform in U.S. economic growth and job creation.

Senate Banking Committee
Full committee hearing on “Domestic and International Policy Update.” Treasury Secretary Steve Mnuchin to testify.

Agency Activity

Tuesday, 5/16

IRS
Meeting by teleconference of the Taxpayer Advocacy Panel Taxpayer Assistance Center Improvements Project Committee on improving customer service at the Internal Revenue Service.

Wednesday, 5/17

IRS
Meeting by teleconference of the Taxpayer Advocacy Panel Toll-Free Phone Line Project Committee on improving customer service at the Internal Revenue Service.


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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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