CONSISTENTLY DELIVERS

May 23, 2017

Tax Policy Update

QUOTE OF THE WEEK

 

“We do assume in this budget that [the tax] plan is deficit-neutral, just because it was, in all honesty, the most efficient way to look at it. Because if we said it’s going to add to the deficit, then we have to go into more detail than what’s in the summary right now. If we say it’s going to reduce the deficit, we have to go into more detail than what’s in it now. And we simply are not in a position to do that.”
-- OMB Director Mick Mulvaney on the Trump Administration’s FY2018 budget request.

Budget Day. The Trump Administration today released its FY2018 budget request, calling for steep cuts in both mandatory and discretionary spending in order to achieve a balanced budget in 10 years.

While domestic programs like the Supplemental Nutrition Assistance Program (SNAP) and Medicaid would bear the brunt of the cuts, the administration has left Social Security and Medicare untouched — fulfilling a promise made by Trump on the campaign trail. Of note, the budget also calls for a $200 billion infrastructure investment plan and restates the administration’s principles for comprehensive tax reform.

As with all past presidential budget requests, Trump’s FY2018 budget is simply a wish list that will largely be ignored by Congress. Sen. John Cornyn (R-TX) said yesterday that the budget is “dead on arrival.” Republican appropriators like Rep. Hal Rogers (R-KY) and Mike Simpson (R-ID) are already balking at the proposed level of cuts. “This is Mulvaney’s budget […]. There’s just some of the stuff in here that doesn’t make sense […] you can’t pass these budgets on the floor,” Simpson said. Ultimately, lawmakers will put together a budget resolution that reflects their own policy priorities.

The Tax Policy Update team will provide a more detailed breakdown of the proposal once we have a chance to review it in full. Stay tuned!

LEGISLATIVE LANDSCAPE

Gettin’ Busy. Senators are rolling up their sleeves and delving into healthcare. The official Senate healthcare working group has been meeting twice a week, with an additional weekly lunch to brief Senators who are not part of the working group’s discussions. To date, senators have discussed Medicaid reforms and stabilizing the individual market. The working group is expected to meet with CMS Administrator Seema Verma today at their weekly lunch to discuss Medicaid reforms.

A faint outline is slowly emerging as senators work to make the House bill’s tax credits more generous and phase out Obamacare’s Medicaid expansion gradually. Sen. Rob Portman’s (R-OH) proposal to phase out Obamacare’s expansion funding over five years starting in 2020 has been gaining traction.

In a May 17 meeting, the working group also discussed proposals to stabilize the individual market, including how to lower premiums, according to Sen. John Barrasso (R-WY). Senate Finance Committee Chairman Orrin Hatch (R-UT) suggested that the Senate retain Obamacare’s individual mandate, though it is unclear whether other members are supportive of Hatch’s proposal. The working group is still debating whether they need a short-term package to stabilize the markets or whether they can do it all in one package.

If the Senate opts for a short-term package, it is likely to include key elements of Sens. Lamar Alexander (R-TN) and Bob Corker’s (R-TN) bill — Health Care Options Act of 2017. This includes allowing people to use Obamacare premium subsidies to buy plans that are not on exchanges in places without any exchange options. Sen. Claire McCaskill (D-MO) is planning to introduce a Democratic bill on the same issue in the coming weeks. She is currently discussing her proposal with Republicans and her bill may have bipartisan support. A short-term bill to stabilize the markets will likely require buy-in from Democrats.

As senators cobble together a new plan, in an effort to ensure that the Senate bill does not simply shift the costs of health care to the states, Gov. John Kasich (OH) and Gov. John Hickenlooper (D-CO) are leading a bipartisan effort to develop a proposal that governors could present to Congress. Governors, much like their congressional counterparts, are divided over the House bill’s approach to Medicaid, with Republican governors from expansion states pushing for less drastic cuts to the program.

The governors seem to be more united on their approach to stabilizing the individual market, hoping to outline broad principles on improving affordability and giving states more control in the coming weeks.

Revenge of the Nerds: CBO in the Spotlight. Congressional Republicans are anxiously awaiting Wednesday’s release of the Congressional Budget Office’s score of the House-passed American Health Care Act. The CBO score will help senators determine how to move forward on crafting their own version of the healthcare bill. However, the score may also deliver a devastating blow to Republicans if it shows that AHCA does not pass muster under Senate reconciliation rules. Specifically, there are two major procedural hurdles that the House bill must clear: (1) It must satisfy Senate reconciliation instructions; and (2) It will establish the baseline that the Senate bill must meet.

Satisfying Senate Reconciliation Instructions. To date (and to the surprise of many members), House Speaker Paul Ryan has held off on sending the AHCA to the Senate due to concerns that the bill may need to be amended if it does not conform with the Senate’s budget reconciliation instructions. If this is the case, the House would have to modify the AHCA and hold another vote.

How will the Senate determine if the House bill passes muster? Bear with us, as we get into the weeds. Senate reconciliation instructions mandate that the Senate Finance Committee (SFC) and the Health Education Labor and Pensions Committee (HELP) each produce a $1 billion in deficit reduction through changes to policies that fall under their bailiwick. While many of the AHCA’s provisions, such as Medicaid reforms, fall under the SFC’s jurisdiction, other provisions such as the creation of a stabilization fund for states to reform insurance markets, may fall under the purview of the HELP Committee. Given the last minute influx of cash that House Republicans injected into the state stabilization funds, the bill may not achieve the necessary $1 billion in savings that it needs to pass muster under Senate reconciliation rules.

Theoretically, the CBO score should help the Senate parliamentarian determine whether the House bill conforms with Senate reconciliation instructions. However, it remains to be seen whether the CBO will break out the score of each provision and attribute costs to the appropriate Senate committees. Without this level of detail, the parliamentarian may not be able to verify whether each provision is compliant with budget reconciliation rules.

Senate Baseline. The CBO score is also expected to establish the budget baseline for the Senate bill. Specifically, this means that since the Senate is bypassing the traditional committee markup process, the Senate is not allowed to save less money in its health care bill than the House did. A March 23 score determined that the House bill would reduce federal deficits by $150 billion. However, the final House bill added several provisions that could potentially affect the score. In fact, according to one Committee for A Responsible Federal Budget (CRFB) estimate, the state waiver option added by the MacArthur Amendment may increase deficits, rather than reduce them if 6.5 million additional people enrolled in coverage. While it is unclear whether the CBO will make the same assumptions in its final score, these numbers have Republicans biting their nails in anticipation of the CBO report.

What does the House baseline mean for the Senate? Given that the Senate is planning to spend more money on softening cuts to Medicaid, slowing down the phase-out of Medicaid expansion, and beefing up the financial assistance for people to buy insurance, these new costs must be offset to match the House bill’s numbers. This may require the Senate to keep or delay the repeal of certain Obamacare’s taxes, such as the Net Investment Income Tax, or reinstate penalties such as the individual mandate.

Racing Against the Clock. While the Trump Administration has shown remarkable restraint in allowing the Senate to work at its own pace, time is slowly running out. With less than 60 working days until August recess, the Senate is hoping to hold a vote no later than July, according to Senate Majority Whip John Cornyn (R-TX). However, given the complexity of budget reconciliation rules and a potential lack of detail in Wednesday’s CBO score, many lawmakers, including Sen. Lindsey Graham (R-SC), doubt the chamber can meet this aggressive timeline.

Let’s All Agree to Agree. Republicans on both ends of Pennsylvania Avenue are determined to produce a single piece of legislation for comprehensive tax reform. “The objective is to introduce one bill. So the name of the game here is not to have a House bill, White House language and Senate Finance language. This is not the optimal thing,” Rep. Peter Roskam (R-IL), chairman of the Tax Policy Subcommittee, said. Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn have been meeting with both Republican and Democratic tax writers on Capitol Hill, hoping to get the collaborative process moving.

Tax reform efforts in the Senate have taken a backseat thanks to the chamber’s singular focus on the House-passed healthcare bill. While House Ways and Means Republicans have geared up for tax reform with a series of committee hearings and an expansion of its tax staff, Senate Finance Chairman Orrin Hatch (R-UT) appears to be taking a more deliberate approach. The chairman has asked committee members Sens. Rob Portman (R-OH), Pat Toomey (R-PA), and Tim Scott (R-SC) to work together and come up with some reform proposals. It’s unclear what the policy focus of this three-man working group will be, however. “As chairman, Sen. Hatch promotes a collaborative process at the committee level — one that is driven by member priorities and encompasses a variety of individual member views and input,” said Julia Lawless, a spokeswoman for the committee.

In view of the current disagreements over critical policy questions like the border adjustment tax (“BAT”), revenue neutrality, and interest deductibility, it would be a significant accomplishment for the White House and GOP congressional leaders if they could produce a single tax reform bill for Republican members to rally around. But the process or framework under which the White House is negotiating with House and Senate Republicans remains a mystery. The need for unity within the GOP caucus cannot be overstated — there’s little room for error, as Republicans aren’t expecting to get any help from Democrats in passing any tax reform legislation this year.

Thune on First. Sen. John Thune (R-SD) has beaten his colleagues on the Senate Finance Committee to the punch by releasing a tax bill that offers viable policy alternatives to some of the proposals in the House GOP tax reform blueprint.

On May 17, Thune introduced the Investment in New Ventures and Economic Success Today (INVEST) Act (S. 1144) — a bill that would, among other things, make permanent the 50% general cost recovery rule and expand Sec. 179 expensing limits. The provisions in the bill are designed to help businesses recover their investments faster and ease compliance costs for small businesses:

On Expensing and Cost Recovery:

  • Allow investments in business equipment and property to be written off immediately up to $2 million under Section 179 and start phasing out the benefit for investments over $3 million. Expensing would also apply to a broader range of property and equipment, including roofs, HVAC units, and property used in rental real estate.
  • Make permanent 50% bonus depreciation for big businesses.
  • Reduce the depreciation period for farm machinery and equipment from 7 years to 5 years.
  • Increase the amount that a company can deduct for a passenger vehicle, including a light truck or van, used for business purposes. Businesses would also be able to claim the full 50% expensing in the first year, up to $25,000.
  • Allow businesses that acquire intangible property, like a patent or customer list, to recover that investment over 10 years, rather than the 15-year period under current law.

On Start-up Costs

  • Increase the deduction for startup and organizational costs to $50,000 from $5000 – with additional costs deducted over 10 years instead of the current 15-year period.

On Simplified Accounting

  • Allow small businesses to use cash accounting instead of accrual accounting – applies to those with less than $15 million in average gross receipts over the last 3 years.
  • Simplify inventory accounting so small businesses can deduct the cost of their inventories rather than having to use complicated inventory accounting methods that can delay the recovery of those costs.
  • Allow more small construction companies to use the simplified completed-contract method of accounting.

The combination of policy in the INVEST Act should spur investments and substantially lower compliance costs. For small businesses, Sec. 179 and the expansion of cash accounting are critical tools for tax simplification. Combined with rate relief, this proposal would provide meaningful tax reform for small businesses. For big businesses, Thune’s bill preserves interest deductibility with current cost recovery rules. In short, this is the type of tax reform bill that will gain traction in the Senate.

The introduction of the INVEST Act comes at a critical time, as congressional Republicans are ready to shift into high gear for comprehensive tax reform. Since House GOP leaders unveiled its tax reform blueprint last summer, tax policy watchers have been waiting patiently for Senate Republicans to offer their own proposals.

Although the INVEST Act has been introduced as a standalone bill, it is intended to be included in the Senate’s broader tax reform legislation. A detailed section-by-section summary of the bill can be found here , and a copy of the bill is available here.

Oversight Committee Holds Hearing on Restructuring the IRS. On May 19, the Ways and Means Oversight Subcommittee, chaired by Rep. Vern Buchanan (R-FL), held a hearing on the need to reform the Internal Revenue Service (IRS) to better serve taxpayers. Buchanan called for bipartisan reforms for the agency, noting that the committee’s efforts should not be construed as a criticism of the agency’s employees. Instead, he noted that the IRS could benefit from a thoughtful review of the agency’s structure.

The National Taxpayer Advocate, Nina E. Olson, agreed with Buchanan, noting that it has been nearly two decades since Congress last reviewed and updated the laws governing IRS operations. Olson emphasized that Congress should change the laws governing the agency to ensure that taxpayers’ rights are protected first and foremost.

Olson also urged lawmakers to increase funding for the IRS, which has faced a series of budget cuts since 2010, negatively affecting taxpayer services. Olson went as far as to blame a lack of resources for the agency’s “enforcement first” approach, as opposed to a “service first” model.

This hearing is the first of many that the committee is expected to hold as it solidifies plans to restructure the agency. This initiative was originally part of the House GOP’s tax reform blueprint, but Ways and Means Chairman Kevin Brady (R-TX) has indicated that efforts to restructure the agency would be separate from tax reform.

It’s Like They Are Getting Ready for Tax Reform or Something. The House Ways and Means Committee has expanded its tax policy staff. The following additions were announced yesterday. Here is the committee’s tax team roster:

  • Loren Ponds serves as a Tax Counsel for the Ways and Means Committee. Prior to this, Loren worked in Ernst & Young’s National Tax Department. Loren received an A.B. from Davidson College. She received a J.D. from American University – Washington College of Law and an LL.M from Georgetown University Law Center.
  • Aaron Junge serves as a Tax Counsel for the Ways and Means Committee. Prior to joining the Committee staff, he worked in the national tax office of PricewaterhouseCoopers. Aaron received a B.S.B.A. from the University of Nebraska at Omaha, a J.D. from the Creighton University School of Law, and an LL.M. with an international tax certificate from the Georgetown University Law Center.
  • Randy Gartin serves as a Tax Counsel for the Ways and Means Committee. Prior to joining the Ways and Means staff, Randy worked in the Houston office of KPMG. Randy earned a B.S. from the University of Utah, a J.D. from Southern Methodist University Dedman School of Law, and an LL.M. in Taxation from Georgetown University Law Center.
  • John Schoenecker serves as a Tax Counsel for the Ways and Means Committee. Prior to this, he worked with Tax Executives Institute. Before that, he was a trial attorney with the Department of Justice’s Tax Division. He received both his J.D. and his bachelor’s degree from Northwestern.
  • Victoria Glover serves as a Tax Advisor for the Ways and Means Committee. Prior to this, she worked for Senator Dean Heller and previously worked in Washington National Tax at Deloitte. Victoria earned a B.A. from the University of Georgia and an M.S. in Public Policy from the Georgia Institute of Technology and is a CPA.
  • John Sandell has served as a Tax Counsel for the Ways and Means Committee for the past five years. He received a B.A. from the University of Tulsa and a J.D. from George Mason University with a tax concentration.
  • Aharon Friedman serves as Senior Tax Counsel for the Ways and Means Committee. Prior to joining the Committee staff in 2007, Aharon worked at Covington & Burling. He received a B.A. from Brooklyn College, City University of New York, J.D. and M.P.A. degrees from Harvard Law School and the Kennedy School of Government, and an LL.M. from New York University Law School.
  • Barbara Angus serves as Chief Tax Counsel for the Ways and Means Committee. Prior to joining the Ways and Means staff, Barbara was leader of Strategic International Tax Policy Services at Ernst & Young. She previously served as the International Tax Counsel for the Department of the Treasury and as the Business Tax Counsel for the Joint Committee on Taxation. Barbara received an A.B. from Dartmouth College, a J.D. from Harvard Law School, and an M.B.A. from the University of Chicago Graduate School of Business.

ROAD WORK AHEAD

Turning Billions into Trillions. President Trump’s budget proposal for FY 2018 is a mixed bag for the Department of Transportation. The proposal calls for discretionary cuts while making billions of dollars appear for infrastructure investment. After much anticipation and several hints from Transportation Secretary Elaine Chao, the first semblance of a plan from the administration on infrastructure investment has revealed itself in the form of a proposal to invest $200 billion over 10 years in roads, bridges, airports, rail and more.

The proposal attempts to perform a magic trick by turning $200 billion into a $1 trillion public-private investment in America’s infrastructure. In the FY 2018 budget request, President Trump includes a $5 billion plus-up for infrastructure investment overall. In addition, the budget proposes to cut discretionary spending at the Department of Transportation by 13 percent — consistent with what was proposed in Trump’s “skinny budget.” Also consistent with the president’s skinny budget is continued support for shifting air traffic control functions to an “independent, non-governmental organization beginning in 2021.”

House Democrats Doing All the Heavy LIFT-ing. Democrats of the House Energy and Commerce Committee introduced theLeading Infrastructure for Tomorrow’s America Act (or “ LIFT America Act”) — a comprehensive infrastructure package that provides five years of funding for essential infrastructure projects. The legislation includes provisions for broadband, drinking water, healthcare, the electric grid, and renewable energy infrastructure.

Here are some highlights from the bill:

  • $40 billion for the deployment of secure and resilient broadband to expand access for communities nationwide while promoting security by design;
  • $22.56 billion for drinking water infrastructure to protect public health and create jobs, including increased investment in drinking water State Revolving Funds and additional funding to replace lead service lines, address lead in school drinking water, and prepare for the impacts of climate change;
  • Over $17 billion for energy infrastructure ,
    • $4 billion for modern, secure, efficient, and resilient electric grid infrastructure
    • $9 billion for resilient and renewable energy supply including methane pipeline replacement
    • More than $4 billion for energy efficiency efforts and smart communities;
  • More than $3 billion for healthcare infrastructure to revive the successful Hill-Burton hospital infrastructure program, fund medical facilities in Indian Country, support state labs on the frontlines of fighting Zika and other infectious diseases, and expand community based health care facilities;
  • $2.7 billion for Brownfields redevelopment to revitalize communities and create jobs by returning valuable land to productive use.

A copy of the LIFT America Act (H.R. 2479) is available here. A section-by-section summary of the bill can be viewed here.

LINE ITEMS

  1. Rep. Pat Tiberi (R-OH), a member of the House Ways and Means Committee, has decided not to challenge Sen. Sherrod Brown for his senate seat in 2018.
  2. Senate Majority Leader Mitch McConnell has fallen in line with House Speaker Paul Ryan and House Ways and Means Chairman Kevin Brady when it comes to the question of revenue-neutral tax reform. In an interview with Bloomberg, McConnell said, “We have a $21 trillion debt […], so we’ll have to be revenue neutral.”
  3. On May 17, HHS released a new checklist to help states apply for innovation waivers through Obamacare. Some have expressed concerns that the checklist will help Republican-led states undermine elements of Obamacare. Others believe that the checklist will encourage states to apply for waivers and develop programs (like Alaska’s reinsurance plan) that help stabilize the individual market.
  4. On May 17, the Centers for Medicare and Medicaid Services (CMS) announced that it will let people enroll directly in Affordable Care Act coverage for 2018 using third-party websites. CMS administrator Seema Verma noted that this should make it easier for people to enroll in Obamacare exchanges. Critics of the proposal have cited privacy concerns, noting that sensitive information might be compromised in the process.
  5. On May 22, the Trump Administration announced that it plans to ask a federal court for another 90-day delay in a lawsuit over Obamacare insurance subsidies (House v. Price). The lawsuit focuses on Obamacare’s cost-sharing payments, which helps insurance companies cover the costs of care for low-income individuals. As a result of this delay, the future of the health care marketplaces will remain in flux through late August.

IN THE QUEUE

Congressional Activity

Tuesday, 5/23

House Ways and Means Committee
Full committee hearing on “Increasing U.S. Competitiveness and Preventing American Jobs from Moving Overseas.”

House Ways and Means Committee
Joint oversight hearing: “Protecting Americans’ Identities: Examining Efforts to Limit the Use of Social Security Numbers.”

Senate Banking Committee
Executive Session: Vote on the following nominations:

  • Sigal Mandelker, Under Secretary for Terrorism and Financial Crimes
  • Mira Radielovic Ricardel, Under Secretary of Export Administration
  • Marshall Billingslea, Assistant Secretary for Terrorist Financing
  • Heath Tarbert, Assistant Secretary, Department of the Treasury

Thursday, 5/25

Senate Finance Committee

Full committee hearing on FY2018 budget proposals for the Treasury Department and tax reform.

Other Activity

Tuesday, 5/23

Axios
Discussion on infrastructure in 2017 with Sen. Jim Inhofe and Atlanta Mayor Kasim Reed.

American Enterprise Institute
Assessing the CHOICE Act: A Conversation with House Committee on Financial Service Chairman Jeb Hensarling (R-TX).

Federal Housing Finance Agency
Director Mel Watt to address 2017 FHLBanks Annual Directors Conference.

Wednesday, 5/24

Axios
Discussion with Speaker Paul Ryan and Pulitzer Prize winning author Bob Woodward.

Thursday, 5/25

Bipartisan Policy Center
Discussion with Mark Calabria, assistant to Vice President Pence, on regulating the financial services sector.


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

Harold Hancock
Partner

Charlie Iovino
Vice President

Jessica Monahan
Vice President

Danielle Dellerson Hayes
Vice President

Radha Mohan
Assistant Vice President

Assistant Vice President

Daniel Chung
Associate