CONSISTENTLY DELIVERS

Jun 20, 2017

Tax Policy Update

SPEECH OF THE WEEK

Paul Ryan

Source: AP

The House GOP’s tax reform blueprint turns one this week. To mark the occasion, House Speaker Paul Ryan today dropped by the 2017 NAM Manufacturers Summit to deliver an update on the GOP’s efforts to overhaul the U.S. tax code. In the past six months, mixed messages from the White House and congressional Republicans on tax reform have injected confusion and dissension into an already difficult undertaking.

Ryan’s speech served to cut through the noise and remind everyone of the overall goals of tax reform. And although most of the speech was a repeat of what House GOP leaders have been saying for months, Ryan did provide clarity on what tax reform will look like: First, tax reform means moving the U.S. to a territorial system of taxation — this will help reverse the trend of corporate inversions. Second, tax reform will be comprehensive, addressing both the business and individual sides of the tax code. Third, tax reform must be permanent as temporary tax cuts will do little to help grow the economy.

As expected, Ryan did not wade into the policy details and questions that have divided Republicans, avoiding topics like the border adjustment tax and interest deductibility. The speaker recognized that “transformational” tax reform is difficult to do and that Congress will need the help of the American people to get it done. The speaker is confident that despite all the cynicism out there, Congress will get tax reform across the finish line in 2017.

In addition to tax reform, Ryan also spoke briefly about the GOP’s efforts to reform the federal regulatory system and the U.S. healthcare system.

LEGISLATIVE LANDSCAPE

Hey, Can You Send Me That Email Again? Senate Finance Committee Chairman Orrin Hatch (R-UT) has reached out to stakeholders once again to solicit input for comprehensive tax reform. If this little exercise seems familiar, it’s because the solicitation is a rehash of the committee’s tax reform efforts from two years ago. In March 2015, the committee issued a bipartisan call for ideas to overhaul the U.S. tax code. The public input was intended to supplement the work of the committee’s tax reform working groups, which were tasked to come up with recommendations to address …

Will They or Won’t They? Just like every rom-com couple, the Senate is caught in a seemingly eternal playback loop, leaving the country wondering whether the upper chamber will pass a health care reform bill before the July 4 recess. At this writing, a June 30 vote is unlikely for three reasons: (1) Senators have yet to reach a consensus on the major issues at play; (2) most of the members haven’t seen the legislative text; and (3) a CBO score is not yet available.

Senator Bob Corker (R-TN) noted that GOP senators have been promised that they will receive a summary, legislative text, and a preliminary score of the bill before June 22. Details on the legislative text are still scarce. One news source reported that the latest version of the bill includes a three-year glide path down to a state's traditional funding level beginning in 2020. However, negotiations are still ongoing and a three-year phase out of Medicaid expansion seems …

Bucket List. The House GOP continues to move forward on healthcare reform, striking items from its bucket list. On June 13, the House passed the first in a series of bills that make up the so-called “third bucket” of the GOP’s repeal and replace strategy.

The Verify First Act, H.R. 2581, passed 238-184 along mostly party lines and would require individuals to verify their income eligibility and citizenship or legal immigration status with the Social Security Administration before accessing premium tax credits to buy health coverage. Republicans said it is designed to close a loophole that protects taxpayer dollars from going to people who are not eligible for subsidies. Democrats maintained that the Treasury Department already has protections in place, arguing that the effort is designed to target undocumented immigrants. Other third-bucket bills that passed last week include:

  • H.R. 2372: Allow veterans to access Obamacare subsidies if they are not enrolled in health coverage at the Veterans Administration.
  • H.R. 2579: Allow the premium assistance tax credit to be used for unsubsidized COBRA continuation health coverage.

Do the Math. On June 14, during the Senate GOP weekly luncheon, Sen. Bill Cassidy (R-LA) distributed a handout breaking down the factors that have contributed to the higher cost of coverage under Obamacare. Sen. Cassidy’s handout shows what levers the Senate may pull in order to lower premiums. Key takeaways from the handout include…

Leave Carried Interest Alone! A group of House Republicans led by Rep. Richard Hudson (R-NC) wants the leaders of the House Ways and Means Committee to maintain the current tax treatment of carried interest, nudging them to look elsewhere for offsets to pay for tax reform. “In your effort to offset the costs of those rate reductions, we urge you not to increase taxes on long-term investment income […],” the letter said.

While the group supports the elimination of tax loopholes to help pay for lower rates, the members reject the characterization of carried interest as a tax loophole, arguing that it is “a long-term capital gain […] realized from an entrepreneurial investment of expertise.” The signatories urged the tax-writing committee to oppose any changes to the treatment of carried interest as capital gains.

A Really Exciting Tax Topic: Pass-through Rates. While President Donald Trump has put forth a 15-percent rate for pass-throughs, House Republicans have proposed a 25-percent rate—both have yet to fill in the blanks on the specifics. Eric Solomon and Pamela Olson, two former Treasury officials, suspect that only certain types of income will qualify for the pass-through rate.

Former Treasury assistant secretary for tax policy, Eric Solomon suggested income will be separated into buckets. This would allow active business income to qualify for a lower rate, while passive income, such as “interest and dividends – would be separately accounted for and would be subject to their own rate.” But the bucket method has its …

Tax Bills in da House. House lawmakers are gearing up to approve the following tax bills on June 20:

  • H.R. 1551 – a bill to modify the nuclear production tax credit. The bill would extend the availability of the nuclear production tax credit beyond the 2020 deadline for nuclear power plants. Under the measure, the credit would also be transferable.
  • H.R. 1393 – the Mobile Workforce State Income Tax Simplification Act would limit the authority of states to tax certain income of employees whose employment duties are performed in other states.

The measures have been placed on the suspension calendar, and swift passage is expected for both.

REGULATORY WORLD

Pass the Collection Plate. The Internal Revenue Service is contemplating alleviating requirements for banks and withholding agents to collect foreign taxpayer numbers on forms that agents use to determine the rate that applies to a foreigner’s U.S. income. The deadline for this requirement is Jan. 1, 2018. However, banks and agents have noted this doesn’t give them enough time to comply and have asked for relief.

IRS officials are considering giving agents the opportunity to gather numbers in a “staggered” way on legitimate forms aside from this single provision. The other two provisions the agency is taking into consideration are …

Don’t Fix It, Reorganize. Former Internal Revenue Service officials have recently spoken out against the reorganization of the IRS. The House GOP tax blueprint proposed an IRS reshuffling that would divide it into three main units: (1) families and individuals; (2) businesses; and (3) an independent “small claims court.”

The last time the organization was restructured was 1998, which replaced a geographical structure with units that serve groups of taxpayers with particular needs. Yet, former IRS practitioners have said that these restructurings can cause coordination issues, slow productivity for months, and be distracting as well as expensive. Also, former Department of Justice officials have said in order to provide information related to criminal investigations, communication is the number one priority.

INTERN INTERVENTION

Hey…the Tax Policy Update team got an assist this week from one of McGuireWoods’ summer interns. Check out the blurbs below by our own William Chadwick.

House Ways and Means to Focus on Higher Education Tax Reform . This week, tax reform with regard to revamping higher education tax breaks is a significant bipartisan focus. Both sides of the aisle wish to alter higher education tax credits: Democrats want to increase college accessibility while Republicans want to simplify the tax code, making education one of the few areas of tax reform that both parties can agree on.

Several members of the House Ways and Means Committee have introduced proposals to create new tax credits and improve two existing tax credits introduced in 2016, the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Tax Credit (LLTC). Ranking member Richard E. Neal (D-MA) noted, “It’s clear: more tax credits, more complication […] I think there’s room for streamlining for sure.”

The House GOP tax reform blueprint emphasizes the importance of simplifying the higher education tax benefits that families have access to, as it would help provide a more effective package that covers both college and vocational training programs.

Ways and Means members are also focused on increasing accessibility to benefits and considering tax breaks that impact retirement savings. Committee Chairman Kevin Brady commented, “We are in a general sense looking at how we could simplify and consolidate the education savings approach, making it simpler and more customer-friendly […] I don’t know if a decision has been reached yet.”

No August Recess (for Tax Criminals). Fraudulent tax return activity continues to be a nationwide problem as scammers change their schemes to victimize taxpayers. Despite the end of the tax season, scammers are not taking the summer off. “A new twist to an old scam,” IRS Commissioner John Koskinen said. Fraudsters impersonating the IRS are now using falsely certified letters from the Electronic Federal Tax Payment System (EFTPS), a system that allows federal taxes to be paid online or over the phone. To execute the scam, impersonators would allege that the payment-request letters sent by the IRS have been returned as undeliverable and that the victim will be “arrest[ed] if a payment is not made through a prepaid debit card.” Koskinen advises that people “should stay vigilant against IRS impersonation scams.”

COMMANDER-IN-TWEET

The fight for HHS Secretary Tom Price’s 6th district seat in Georgia concludes on June 20. It’s a close one, and Democrats are hoping to flip this seat to their column. President Donald Trump made a last-minute plug for Republican candidate Karen Handel.

Donald Trump Tweet

LINE ITEMS

  1. The Treasury Department released its first report on the financial regulatory regime. The report specifically addresses regulatory changes to the U.S. depository system, calling for, among other things, regulatory relief for community banks and modifications to the Volcker Rule. Subsequent reports will address regulations affecting capital markets, asset management, and non-bank financial institutions.
  2. At a House appropriations subcommittee hearing, Transportation Secretary Elaine Chao told lawmakers that the push to have infrastructure be a part of tax reform has “receded.” In a separate hearing, Treasury Secretary Steven Mnuchin confirmed that the administration does not intend to link the two issues.
  3. Foreign investors will be a critical part of the Trump Administration’s infrastructure plan, Treasury Secretary Mnuchin said in his opening remarks at the SelectUSA Investment Summit. “Public-private partnerships are crucial to ensuring that the American taxpayer does not bear the full cost of any proposed program,” he added.

IN THE QUEUE

Congressional Activity

Wednesday, 6/21

Senate Finance Committee
Full committee hearing on the proposed budget request for FY2018 and the trade policy agenda.

Thursday, 6/22

House Ways and Means Committee
Full committee hearing on U.S. trade policy agenda. USTR Lighthizer will be testifying.

Senate Banking Committee
Full committee hearing on “Fostering Economic Growth: Regulator Perspective.”

Agency Activity

Tuesday, 6/20

Internal Revenue Service
Meeting of the Taxpayer Advocacy Panel Taxpayer Assistance Center Improvements Project Committee.

Wednesday, 6/21

Internal Revenue Service
An open meeting of the Taxpayer Advocacy Panel Toll-Free Phone Line Project Committee will be conducted. The Taxpayer Advocacy Panel is soliciting public comments, ideas, and suggestions on improving customer service at the Internal Revenue Service. Due to limited conference lines, notification of intent to participate must be made with Fred Smith.

Thursday, 6/22

SEC
Meeting of the Investor Advisory Committee. Agenda includes a discussion of capital formation, the declining number of IPOs, and certain provisions of the Financial CHOICE Act.

Internal Revenue Service
An open meeting of the Taxpayer Advocacy Panel with the Internal Revenue Service for strategic planning. The Internal Revenue Service is seeking the Taxpayer Advocacy Panel's input for this project.

Other Activity

Tuesday, 6/20

2017 Manufacturing Summit
National Association of Manufacturers (NAM) 2017 Manufacturing Summit in Washington, D.C., June 20–21. Join manufacturers from across the country to meet with legislators and advocate policies that play a critical role in our nation’s economic growth.

Wednesday, 6/21

Financial Services Roundtable
FSR hosts a discussion on what to expect next from the administration and Congress on financial regulation.


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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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