CONSISTENTLY DELIVERS

Jul 18, 2017

Tax Policy Update

NUMBER OF THE WEEK: 62

The percentage of people who oppose the Trump Administration’s tax reform proposal according to a July POLITICO/Harvard poll. Among the Republican survey respondents, 41 percent do not have a favorable view of the administration’s plan. That number rises sharply to 85 percent when the same question was posed to Democrats. In addition, about 60 percent of independents are against the Trump tax plan.

While a majority of the respondents doubt that the administration’s tax proposals will improve the economy and create jobs, they do support some type of reform to lower tax rates even if an overhaul of the tax code means the elimination of certain deductions and credits.

Fake news? You decide.

LEGISLATIVE LANDSCAPE

All the King’s Horses and All the King’s Men Couldn’t Put the Bill Back Together Again. After over 60 attempts to repeal Obamacare, the GOP is once again scrambling as its latest efforts to dismantle the 2010 healthcare law have fallen apart. Last night, Sens. Jerry Moran (R-KS) and Mike Lee (R-UT) announced their opposition to the latest version of the Better Care Reconciliation Act (BCRA). The opposition count now includes Lee, Moran, Sens. Susan Collins (R-ME) and Rand Paul (R-KY). With four senators stating their intent to oppose the motion to proceed to the revised bill, Senate Majority Leader Mitch McConnell (R-KY) pulled the bill, realizing that the GOP lacked the necessary votes to move forward with the current draft of the BCRA.

The Bill is Dead, Long Live Repeal. While the current version of the Senate healthcare bill may be dead, the GOP remains committed to repealing Obamacare — for now. After last night’s last-minute defections, Leader McConnell decided to shift gears and hold a vote on a straight repeal of major provisions of theAffordable Care Act with a two-year delay. H.R. 3762, the Restoring Americans’ Healthcare Freedom Reconciliation Act of 2015 will form the basis for a straight repeal of Obamacare.

So what does H.R. 3762 do? A quick refresher for those of you who may not remember the details of a two-year old bill that was going nowhere:

  • Repeals the following taxes and penalties:
    • Individual and employer mandates
    • Medical Device tax
    • Cadillac Tax
    • Health Insurance Tax (HIT)
    • Chronic Care Tax (CCT)
    • Medicare tax increase
    • Tanning tax
    • Net Investment Income Tax
    • Exclusion of reimbursement from HSAs, health FSAs and Archer MSAs of OTC drugs without prescription
    • Decreases the tax (from 20% to 10%) on HSAs and (from 20% to 15%) on Archer MSA distributions that are not used for qualified medical expenses
    • Annual limit on contributions to FSAs
    • Tax on pharmaceutical manufacturers
    • Elimination of Medicare Part D subsidy deduction
  • Medicaid expansion repeal beginning in calendar year 2018
  • Restore the Medicaid Disproportionate Share Hospital (DSH) cuts
  • Repeal of premium tax credit and cost-sharing subsidies starting in 2018 and recapture excess advance payments of the premium tax credit
  • Small business tax credit repeal
  • Repeals the Prevention and Public Health Fund (PPHF) and rescinds unobligated balances
  • Prohibits federal funding for Planned Parenthood for one year
  • Increases funding for community health centers by $235 million
  • Authorizes funding for state substance abuse and mental health programs for 2016 and 2017
  • All on-budget savings are transferred to the Federal Hospital Insurance Trust Fund (Medicare)

What are the budgetary effects of H.R. 3762 ? According to an Oct. 20, 2015 Congressional Budget Office (CBO) report, enacting the bill would:

  • Decrease deficits by about $130 billion over the 2016-2025 period. This number would be $78.9 billion if macroeconomic feedback were to be excluded.
  • Reduce the number of people with employment-based health insurance coverage by about 750,000 in most years after 2018, with roughly 5 million fewer people enrolling in employment-based coverage.
  • Cause roughly 7 million fewer people to obtain coverage through the non-group market.
  • Cause about 4 million fewer people to enroll in Medicaid or CHIP.
  • Cause about 16 to 17 million more nonelderly people to be uninsured, compared to the ACA.

An updated Jan. 2017 CBO report on the effects of H.R. 3762 indicated that enacting the bill would lead to an 18 million increase in the number of uninsured one year after implementing the bill. That number would increase to 32 million by 2026. Additionally, premiums in the non-group market would increase by 20 percent to 25 percent — relative to projections under current law — in the year following enactment. The increase would reach about 50 percent in the year following the elimination of the Medicaid expansion and the marketplace subsidies, and premiums would about double by 2026.

Did everyone vote in favor of the 2015 bill (H.R. 3762)? While most GOP senators voted in favor of a straight repeal of Obamacare, Sen. Susan Collins is the only senator still in office who opposed the bill.

Sens. Susan Collins and Lisa Murkowski (R-AK) already indicated that they will not support moving forward with the plan to repeal Obamacare with a delayed replacement. Sen. Shelley Moore Capito (R-WV) also said that she could not vote in favor of a plan to repeal Obamacare without a replacement plan in place.

With Collins and Murkowski opposing the motion to proceed, what will Leader McConnell do next? Here are a few ways that the healthcare debate could play out.

While passage of a straight repeal is highly unlikely (Options 1-3), it remains unclear what Leader McConnell will do if his latest strategy fails. Below is a quick analysis of the other options …

Tax Reform: They’re Further Ahead Than You Think. That’s what administration officials and congressional tax staffers are telling folks behind closed doors. GOP tax writers believe they are making real progress in identifying the necessary offsets for comprehensive tax reform. Not surprisingly however, they are keeping their tentative list of pay-fors under wraps. But those who have been paying close attention in recent months already know that they ought to …

Re-visitation Rights. The Senate Finance Committee’s Ranking Member Ron Wyden (D-OR) believes that the idea of linking infrastructure to tax reform is still alive. In a speech last week, Wyden told the audience that the idea may see a revival, noting that Republicans haven’t completely said no to the infrastructure component. Ah…hope springs eternal.

Another provision getting a second look is the interest deductibility proposal in the House GOP tax reform blueprint. According to Ways and Means Tax Policy Subcommittee Chairman Peter Roskam (R-IL), lawmakers are looking to modify the provision so that small businesses can continue to take the interest deduction on their loans.

The topic of full expensing also made the news last week when the conservative group Freedom Partners asked House Republicans to drop the full expensing provision from their tax reform blueprint, arguing that it actually won’t do much to help a majority of U.S. businesses. The group noted that “[f]ull expensing has very high costs in the first ten years — more than $2 trillion”— thus, it would be better to use that money to lower tax rates, as rate reductions can “substantially increase after-tax profits.”

Camp’s Option C is Plan B . Senate Finance Republicans are reportedly looking at the option of establishing a foreign minimum tax. The idea of a minimum tax came up during former Ways and Means Chairman Dave Camp’s tenure. When it was first proposed, the tax was politically unpopular as companies were used to paying lower rates on overseas profits. After multiple revisions based on taxpayers’ feedback, the Camp Draft landed on “Option C” that had varying minimum tax thresholds depending on the type of income. While opposition against a minimum tax regime may crop up again, it may not be quite as vicious as the opposition to the border adjustment tax (BAT).

Although a minimum tax may not achieve all the objectives of the BAT, it is a viable alternative that would help to prevent base erosion. The minimum tax regime falls in between the destination-based cash flow tax system and the current worldwide taxation system. Under the current worldwide taxation system, any income earned, whether in the U.S. or not, is subject to U.S. taxation. With a minimum tax, any income earned in foreign countries with a tax rate below a specified threshold would be …

There’s Something ‘Bout That Work, Work, Work… Sen. John Thune (R-SD) introduced the New Economy Works to Guarantee Independence and Growth Act of 2017 or NEW GIG Act (S. 1549) — a bill that would create a safe harbor, based on objective criteria, for workers to be treated as independent contractors and not as employees. Additionally, the bill would ensure that customers of these services would not be treated as an employer. For Internet platforms or applications that facilitate transactions and payments, third parties would also not be treated as employers.

The safe harbor test focuses on three areas …

Budget Budges a Little. The House Budget Committee today unveiled its FY2018 budget resolution, which sets discretionary spending at $1.1 trillion. The GOP’s budget proposal aims to balance the budget within 10 years via a combination of spending cuts and projected economic growth. Most importantly, the resolution contains reconciliation instructions directing 11 House committees to produce at least $203 billion in mandatory savings and reforms. The House Ways and Means Committee will use the instructions to pursue deficit-neutral tax reform.

Here is a quick overview of the reconciliation savings by committee:

Source: FY2018 House Budget Resolution

The House Budget Committee will hold a markup of the FY2018 budget resolution on July 19. The panel is expected to approve the resolution, but it remains unclear whether it will see floor action before the start of August recess. House GOP moderates are still unhappy with the steep level of cuts proposed in the budget, while members of the ultra-conservative House Freedom Caucus would like to see more spending cuts. Even if House Republicans manage to pass this budget, their counterparts in the Senate are expected to propose significant changes.

A list of the budget-related documents can be viewed here.

REGULATORY WORLD

IRS Readjusts Rules on Corporate Reorganization. On July 12, the IRS pulled part of the 2005 rules on corporate reorganization with insolvent companies and issued new guidance. The old rules required solvency as a necessary condition for a Section 332 liquidation, to which the IRS and Treasury said is not consistent with case law. Practitioners disagree about what is permitted under current law. Some believe the proposed rule formalized the IRS’s requirement for acquired entities to be solvent. However, others disagree, claiming that Norman Scott Inc. v. Commissioner holds that solvency is not a necessary condition. The new proposed rules do not point to specific guidance.

COMMANDER-IN-TWEET

LINE ITEMS

  1. A bipartisan group of senators led by Sen. Heidi Heitkamp (D-ND) reintroduced a bill that would extend and expand the 45Q tax credit to promote carbon capture technologies. Read more here .

IN THE QUEUE

Congressional Activity

Tuesday, 7/18

Senate Finance Committee
Full committee hearing on “Comprehensive Tax Reform: Prospects and Challenges.”

Senate Finance Committee
Full committee hearing on the nomination of David Kautter to be assistant secretary of the Treasury for tax policy.

Senate Banking Committee
Full committee hearing on the following nominations:

  • Mr. J. Paul Compton, Jr. to be General Counsel, U.S. Department of Housing and Urban Development
  • Ms. Anna M. Farias to be Assistant Secretary for Fair Housing and Equal Opportunity, U.S. Department of Housing and Urban Development
  • Mr. Neal J. Rackleff to be Assistant Secretary for Community Planning and Development, U.S. Department of Housing and Urban Development
  • Mr. Richard Ashooh to be Assistant Secretary for Export Administration, U.S. Department of Commerce
  • Ms. Elizabeth Erin Walsh to be Assistant Secretary for Global Markets and Director General of the United States and Foreign Commercial Service, U.S. Department of Commerce
  • Mr. Christopher Campbell to be Assistant Secretary for Financial Institutions, U.S. Department of the Treasury

House Ways and Means Committee
Subcommittee hearing on the “Modernization of NAFTA.”

House Financial Services Committee
Subcommittee hearing on “The Cost of Being a Public Company in Light of Sarbanes-Oxley and the Federalization of Corporate Governance.”

House Financial Services Committee
Subcommittee hearing on “Managing Terrorism Financing Risk in Remittances and Money Transfers.”

Wednesday, 7/19

House Education and Workforce Committee
Markup of the Affordable Retirement Advice for Savers Act (H.R. 2823), a bill to overturn the DOL’s Fiduciary Rule.

House Ways and Means Committee
Subcommittee hearing on how tax reform will simplify the tax code and help individuals and families.

House Financial Services Committee
Subcommittee hearing on “Congressional Oversight of Independent Regulatory Agencies.”

Thursday, 7/20

House Financial Services Committee
Subcommittee hearing on “Monetary Policy v. Fiscal Policy: Risks to Price Stability and the Economy.”

Senate Banking Committee
Full committee hearing on “Housing Finance Reform: Maintain Access for Small Lenders.”


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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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