CONSISTENTLY DELIVERS

Jun 27, 2017

Tax Policy Update

PICTURE OF THE WEEK

McGuireWoods' tax policy team lost one of our own last week. Some of you may have already seen our tribute to Danielle. But I want to take a moment in this week's Tax Policy Update (TPU) to share a few words about our friend.

It is fitting to do so here because there wouldn't be a TPU without Danielle. She created the update back when the tax-writing team was just a two-woman shop, setting the tone and format for this weekly distribution, which she once called her “baby.” In those early days, we’d throw around corny titles, trying to out-pun each other. We had our laughs (snorts, really) and cringes. This was Danielle — creative and engaging.

Danielle passed the TPU torch a couple of years ago when her client work demanded more time on Capitol Hill. I would not have had the confidence to take up the TPU without her encouragement and support. Danielle was my biggest advocate — she always had my back. A reader once took issue with the way a story was covered, and before I even had time to sputter out a defense, Danielle was already on the keyboard drafting a retort. This was Danielle — loyal and unafraid to speak up.

For those of you who did not get a chance to meet Danielle, what can I say except that this is your loss, too. She was a genuine soul — a rare find in this town and in this line of work. A good friend, a good colleague who always tried to make life a little bit better for those around her — this was our Danielle. And we miss her so.

Thank you for reading,
LKL

LEGISLATIVE LANDSCAPE

To the Windooooow – No, Come Back. House Speaker Paul Ryan (R-WI) really wants revenue-neutral tax reform. At the 2017 NAM Manufacturers Summit, Ryan argued that tax reform must be permanent as temporary tax cuts would do little to give businesses the certainty they need to help grow the economy. The quest for permanence has led Ryan to dismiss talks of extending the budget window beyond the standard 10-year period. The speaker reminded lawmakers that they cannot run from the revenue neutrality issue forever: Under reconciliation, the out-years in any given budget window must not add to the deficit.

Talks of budget windows and out-years are nice and make everyone sound smart. But Republicans must quickly decide how to proceed to the FY 2018 budget resolution, the designated vehicle to carry the reconciliation instructions for tax reform. The House Budget Committee has already missed its goal to mark up the budget during the week of June 19. With consensus on spending numbers still out of reach, committee action will likely have to wait until July, when lawmakers will be rushing to get it done before departing for August recess.

Wake Me Up When September Ends. And let me know if Republicans on both ends of Pennsylvania Avenue have produced a unified tax reform plan. September is the month that the White House is aiming for, according to National Economic Director Gary Cohn. Republicans will then spend the next three months moving the bill through the House and Senate and getting it signed by the president before the year runs out. Great plan! But will Republicans be able to stick to it? That will depend on how quickly the caucus can resolve their differences over those sticky policy questions that the Tax Policy Update highlighted a few weeks ago — for instance, revenue neutrality, border adjustment tax, and interest deductibility.

The House Ways and Means Committee is planning to hold two more hearings on tax reform in July. None of the hearings, however, will take on the controversial topics. One of the hearings will examine the impact of tax reform on small businesses, and the other will focus on how tax simplification will benefit taxpayers. Yawn.

Ready or Not. It’s go-time. Senate Majority Leader Mitch McConnell (R-KY) announced that he has every intention of moving forward with a vote prior to the July 4th recess. This gives Senate leaders little time to garner the necessary 50 votes for the legislation to pass. Let the vote-whipping commence!

McConnell’s office has outlined an ideal timeline for the passage of the Senate-version of the American Health Care Act. First, a “motion to proceed” on the bill is scheduled for June 28. If the vote is successful, it will allow the debate on the healthcare bill to begin. Senate reconciliation rules provide for 20 hours of debate, divided equally, giving both Democrats and Republicans a chance to offer amendments and air grievances on the bill.

Towards the end of the debate, a “vote-a-rama” will commence. This is a chance for all senators to offer amendments to the bill. Given that there is no time limit to vote-a-rama, Democrats may use this time to postpone the passage of the bill, filing amendments as a delay tactic. However, as of this writing, our sources indicate that Democrats do not have a cohesive strategy for amendments to offer during vote-a-rama. After vote-a-rama is complete, the Senate will vote on McConnell’s substitute amendment, which will allow the chamber to strip out the language of the House-passed AHCA and insert their own language. There’s talks of McConnell introducing a “wrap-around” amendment prior to the final vote. The final vote — if we get that far — will likely take place in the wee hours of the night of June 29 or June 30.

Haters Gon’ Hate. Of course, this timeline is largely aspirational. Sens. Dean Heller (R-NV), Susan Collins (R-ME), Rand Paul (R-KY), and Ron Johnson (R-WI) have already indicated that they will vote “no” on the procedural measure. Additionally, Sens. Shelly Moore Capito (R-WV) and Marco Rubio (R-FL) may also vote “no” on the procedural vote. Several senators, including Sens. Mike Lee (R-UT) and Ted Cruz (R-TX) have said they will not vote in favor of the underlying bill.

So how does McConnell plan to get to 50 votes? The majority leader’s strategy is simple, though not foolproof. Senior staff has indicated that leadership will not negotiate with individual offices before the procedural vote. Instead, McConnell will employ a similar approach to the one used by House Speaker Paul Ryan: calling senators’ bluffs, betting that they will vote “yes” on the procedural vote. Individual senators will have a chance to amend the bill during vote-a-rama. Additional amendments will also likely be included in a “wrap-around amendment,” or a final manager’s amendment that includes various provisions to grab last-minute votes. A similar strategy was employed by Democrats before the passage of the Affordable Care Act in 2010.

Should McConnell’s strategy fail, the Senate will use July to come to an agreement on health care reform. Sen. John Cornyn (R-TX) has identified Aug. 1 as the “drop deadline” for the Senate to pass its bill.

Oops I Did it Again... Once again, the Congressional Budget Office (“CBO”) is playing with the GOP’s heart. On June 26, the CBO released an analysis of the Senate’s discussion draft of its health care reform bill. A few of the top-line numbers from the report are below:

  • Revenue Effects
    • The bill would reduce the federal deficit by $321 billion – $202 billion more than the estimated net savings for the House-passed version of the AHCA.
    • Reduce revenue by $701 billion.
    • Provide the largest increases in deficits come from repealing or modifying tax provisions in the ACA that are not directly related to health insurance coverage, including repealing the net investment income tax and repealing annual fees imposed on health insurers.
    • Reduce direct spending by $1 trillion.
    • Cut Medicaid spending by 26 percent over the next 10 years.
  • Effects on Coverage and Premiums
    • Increase the number of people who are uninsured by 22 million, relative to current law estimates.
    • Increase average premiums in the non-group market prior to 2020 by about 20 percent in 2018 and 10 percent in 2019.
    • Lower average premiums by about 30 percent by 2020 – the reduction in premiums is a result of fewer services being covered under a benchmark plan. In current-law terms, the benchmark plan will go from being a “silver” plan to a “bronze” plan.
    • Increase deductibles to $6,000 for a benchmark plan versus $3,600 under Obamacare.

It’s Beginning to Look a Lot Like Christmas. Yes, we know it’s July. While the CBO score may have dealt a major blow to the GOP, there is a silver lining: the Senate discussion draft saves $202 billion more than the House-passed version of the American Health Care Act. This gives McConnell some wiggle room when negotiating with senators who are currently planning to vote “no” on the bill. McConnell may be able to cut a deal with Sens. Capito, Rob Portman (R-OH), and Cory Gardner (R-CO), who want to see more money on the table for treating opioid addiction. Others, like Sens. Lee and Cruz, are hoping to raise the limit on how much taxpayers can put away in Health Savings Accounts. Staffers close to the negotiations have indicated that leadership is seriously considering this request to bring conservatives back on board.

A Quick Refresher. For those of you who need a quick review, the Senate released a discussion draft of the AHCA on June 22 and a slightly revised version on June 26. A summary of the draft is below:

  • Major Changes to Medicaid.
    • Termination of Medicaid Expansion.
    • Convert the traditional Medicaid program to a per-capita-cap.
    • Starting in 2020, states may choose block grants or per-capita-caps.
  • Obamacare Subsidies. The Senate draft continues Obamacare’s premium tax credit subsidies for two years. However, starting in 2020, premium subsidies will be reduced and available to those who are 350 percent below the Federal Poverty Line (FPL). In a departure from the House-passed AHCA, the Senate draft bases premium subsidies on income, similar to Obamacare.
  • State Waivers. Includes the option for states to elect a Section 1332 state innovation waiver. These waivers allow states to opt out of major parts of Obamacare and create their own health care rules, including redefining what benefits insurers must cover.
  • Pre-Existing Conditions. Maintains protections for those with pre-existing conditions.
  • Age-Rating Band. Allows insurers to charge older customers five times more than younger enrollees for the same health plan. The ratio under Obamacare was three-to-one.
  • Coverage. Includes a six-month “lock out” period during which people who were uninsured for at least 63 days may not obtain coverage.
  • Obamacare Taxes. The Senate draft repeals most Obamacare taxes.

Retroactively Repealed:

  • Individual and Employer Mandate . Repealed after Dec. 31, 2015.
  • Net Investment Income Tax. Repealed for tax years after Dec. 31, 2016.
  • OTC Medication. Repeal of tax on amounts withdrawn from HSAs, Archer MSAs, FSAs, and HRAs used to purchase OTC medication, effective for tax years after Dec. 31, 2016.
  • Elimination of Medicare Part D Subsidy Deduction. Reinstate the tax deduction for employers who receive Part F retiree drug subsidy (RDS) payments to provide creditable prescription drug coverage to Medicare beneficiaries. Effective for tax years after Dec. 31, 2016.
  • Repeal of the Chronic Care Tax. Tax lowered from 10 percent to 7.5 percent, for tax years after Dec. 31, 2016.
  • Health Insurance Tax (HIT). Repealed for tax years after Dec. 31, 2016 .
    • HSA and Archer MSA Contributions. Decreases the tax (from 20% to 10%) on HSA and (from 20% to 15%) on Archer MSA distributions that are not used for qualified medical expenses. Repealed for tax years after Dec. 31, 2016.
    • Remuneration. Limitation on deductibility of salaries to insurance industry executives. Repealed for tax years after Dec. 31, 2016.

Effective Date of Repeal in 2017 or 2018:

  • Tax on tanning beds. Repeal effective Sep. 30, 2017.
  • Medical Device Tax. Repealed for tax years after Dec. 31, 2017 .
  • Tax on Pharmaceutical Manufacturers. Repealed for tax years after Dec. 31, 2017.
  • FSA Contributions. Repeal of limitations on contributions to a Flexible Spending Account (FSA) for tax years after Dec. 31, 2017.are Payroll Tax. Repealed after22.
  • Cadillac Tax. Postpones effective date of Cadillac tax until tax/plan years after Dec. 31, 2025.

REGULATORY WORLD

I’m Just Saying You Could Do Better. On June 22, a report by the Treasury Inspector General for Tax Administration (TIGTA) found that there were over 800,000 people who have been affected by the agency’s ineffective process for identifying victims of identity theft in 2015. Upwards of half of these victims were not identified because they did not have an account with the IRS, which prevented the agency from issuing an employment identity marker at the time. TIGTA suggested 10 improvements the IRS can make to ratify the employment identity theft process. The IRS has agreed to some of those recommendations, including:

  • Amending programming so that theft markers are on all victims accounts
  • Putting markers on victims listed in the report
  • Expanding policies for identifying mismatches
  • Adding an identity marker to the valid account.

The IRS did not agree to some of the other recommendations for fear of exposing taxpayers’ personal information.

IRS Accepts ITIN Renewals. As a part of the IRS’s efforts to improve its renewal program, taxpayers with expiring Individual Taxpayer Identification Numbers (ITINs) can start renewing their information this month instead of in October. The IRS generally issues ITINs, a nine-digit tax-processing number, for individuals who are required to file a federal tax return but are not eligible for a Social Security number. This includes foreign nationals, resident aliens, and undocumented workers. The Protecting Americans from Tax Hikes (PATH) Act automatically expires any ITINs that have not been used for a federal tax return at least one time in the previous three years on December 31, 2017. Additionally, ITINS with middle digits 70, 71, 72 or 80 will also expire December 31, 2017. The IRS continues to expand its education efforts on better informing taxpayers so that they can comply with tax laws.

Get It While It’s Hot. The IRS’s attempt to regulate private tax preparers continues. On June 21, the IRS reactivated its preparer tax identification number (PTIN) system — however, this time around, getting a PTIN is free (at least for now). The IRS briefly shut down its PTIN system after a group of tax preparers won a class action against the agency ( Steele v. United States) for charging taxpayers a fee to obtain these identification numbers.

While the IRS has not announced whether or not it would attempt to appeal the court decision, Commissioner John Koskinen stated that PTINs are vital in providing individual protection when dealing with tax preparers, and the IRS should “have authority to actually be able to run this program without eroding further the resources we [the IRS] have.” President Trump’s FY 2018 budget proposes to increase the agency’s oversight of tax return preparers. As tax reform legislation begins to move this year, the IRS hopes to regain its ability to charge a fee for acquiring PTINs.

We Never Ask for Your Password. Tax criminals have long focused their efforts on scamming individual taxpayers to file fraudulent returns. However, as a result of the IRS’s renewed efforts to combat identity theft, scammers have shifted their attention to stealing private identifier information from tax preparers. This scam targets victims via email, in which criminals pose as a tax software education provider. These emails ask tax professionals to provide identifiers such as e-Services credentials, personal identification numbers, and Centralized Authorization File numbers — all of which would allow the scammers to steal client data and file fraudulent returns. The IRS has responded to this scam by reminding tax preparers that legitimate businesses never ask for private information via email.

ROAD WORK AHEAD

Cleared for Takeoff: FAA Reauthorization. Last week Congress made progress toward reauthorizing Federal Aviation Administration (FAA) programs when House and Senate committee leadership introduced long-term FAA bills. Currently, FAA programs are operating under a short-term extension that will expire at the end of September. In order to prevent a shutdown of the FAA, Congress must pass a reauthorization bill (or another extension) in the next three months.

In the House, Transportation and Infrastructure Committee Chairman Rep. Bill Shuster (R-PA) unveiled a six-year bill called the 21st Century Aviation Innovation, Reform, and Reauthorization Act . The bill title may seem familiar, as will most of the bill text because the committee previously made an attempt to advance a similar bill in 2016.

While there are obvious similarities, the 2017 legislation does differ in a few key areas. Principally, the bill includes an amended version of a proposal to transfer air traffic control (ATC) operations to a nonprofit corporation, a concept promoted by President Trump in recent weeks (although the House and White House versions differ).

House ATC Proposal Highlights

  • The House bill splits up the FAA, transferring ATC services to a new non-profit corporation, which would be financed by user fees instead of federal excise taxes. However, the Ways and Means Committee would still need to weigh in. The FAA would remain in charge of safety regulation and airport grants.
  • The newly established “American Air Navigation Services Corporation” (as coined by the bill) would receive all FAA ATC assets and all ATC-related spectrum for free.
  • The American Air Navigation Services Corporation would be governed by a 13-member Board of Directors, which would include board seats for the corporation’s CEO, major passenger airlines, regional passenger airlines, cargo airlines, general aviation, business aviation, air traffic controllers, airports, commercial pilots, aerospace manufacturers, two members appointed by the secretary of transportation, and two board members selected by the board itself.

Other Highlights from the House Bill

  • Includes several provisions intended to facilitate the integration of drone operations into the national airspace.
  • Directs the U.S. Department of Transportation to put out regulations banning passengers from making in-flight cellular phone calls.
  • Rolls back a 2011 rule requiring airlines to advertise the total price (base fare, fees and taxes) of tickets when quoting a price to customers.
  • Offers some consumer protection provisions in response to the controversial bumping incident on a United flight last spring.
  • Permits the FAA administrator to allow for the use of an unleaded aviation gasoline in an aircraft as a replacement for a leaded gasoline with some qualifications.

The Senate version differs from its House companion in several ways. Most notably the Senate’s bill does not remove air traffic control operations from the FAA. Another distinguishing factor is the bill’s length – unlike the House’s six-year bill, the Senate’s legislation only provides a four-year authorization.

Highlights from the Senate Bill

  • Includes a number of consumer protections and air travel enhancements in response to high-profile airline incidents.
  • Includes several provisions intended to facilitate the integration of drone operations into the national airspace while addressing safety and privacy issues.
  • Includes funding for airport infrastructure and authorizes a study to develop recommendations on further upgrading and restoring airport infrastructure.

The House Transportation and Infrastructure Committee is holding a markup today, Tuesday, June 27, and the Senate Commerce Committee will hold its markup on Thursday, June 29. If both bills make it through the committees as expected, floor action will likely commence after the July 4th recess. A conference committee would convene in September making it possible for a final bill to clear both chambers before the current authorization expires (September 30). Then again, the significant differences between the two bills could result in the need for another short-term extension of FAA programs.

A copy of the House bill and additional resources can be found here. A copy of the Senate bill and additional resources can be found here.

COMMANDER-IN-TWEET

LINE ITEMS

  1. The House passed, by voice vote, H.R. 1393 – the Mobile Workforce State Income Tax Simplification Act , which would limit the authority of states to tax certain income of employees whose employment duties are performed in other states.
  2. The House passed, by voice vote, H.R. 1551 – a bill that would extend the availability of the nuclear production tax credit beyond the 2020 deadline for nuclear power plants. Under the bill, the credit would be made transferable.

IN THE QUEUE

Congressional Activity

Tuesday, 6/27

House Transportation Committee
Markup of the FAA reauthorization bill.

House Financial Services Committee
Capital Markets, Securities and Investments Subcommittee hearing on "U.S. Equity Market Structure Part I: A Review of the Evolution of Today's Equity Market Structure and How We Got Here."

Senate Appropriations Committee
Subcommittee hearing to review the FY 2018 budget request for the Labor Department.

Senate Appropriations Committee
The Senate Appropriations Financial Services and General Government Subcommittee hearing on budget estimates and justification for fiscal 2018 for the SEC and the CFTC.

Wednesday, 6/28

House Financial Services Committee
The House Financial Services Financial Institutions and Consumer Credit Subcommittee holds a hearing on “Examining the BSA/AML Regulatory Compliance Regime.”

House Financial Services Committee
Monetary Policy and Trade Subcommittee hearing on "The Federal Reserve's Impact on Main Street, Retirees, and Savings."

Thursday, 6/29

Senate Commerce Committee
Markup of the FAA reauthorization bill.

House Ways and Means Committee
Social Security & Oversight Subcommittees’ joint hearing on the “Complexities and Challenges of Social Security Coverage and Payroll Tax Compliance for State and Local Governments.”