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Federal Tax Update - Sept 22

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PROCESS:

Release of Tax Reform Framework and House Retreat on Tax Reform - Week of September 25: The “Big 6” are still scheduled to release their framework for tax reform the week of September 25. Additionally, House Republican lawmakers are scheduled to have a half-day retreat on September 27 to discuss the framework and tax reform legislation.

Senate Budget Resolution: Two senior members of the Senate Budget Committee, Bob Corker (R-TN) and Pat Toomey (R-PA), say they have agreed to write a budget resolution that would make it procedurally easier to pass tax-cut legislation. They have not said which taxes or tax breaks they intend to target. Bloomberg reports, “Corker, a self-described deficit hawk, said he’ll still insist that any tax bill pay for its cuts through economic growth, as determined by valid economic modeling. While he was silent on the size of the cuts, another Republican member of the budget panel, Senator Ron Johnson (R-WI), said the group is considering a budget allowing for tax reductions amounting to $1.5 trillion. If the panel accepts a budget plan that would add to the long-term deficit, at least some of the cuts in any tax-overhaul bill that follows the budget may have to be only temporary. That’s because Senate leaders want to use a procedure that would protect the tax legislation from a Democratic filibuster -- and that procedure requires that the legislation can’t add to the long-term deficit. The agreement represents a pronounced departure from McConnell’s position earlier this year. McConnell said during a Bloomberg interview in May that a tax overhaul would need to be revenue-neutral -- balancing cuts with provisions that broaden the tax base -- and can’t add to the nation’s “alarming” debt…Toomey, of Pennsylvania, said in the statement that the plan they’ve agreed to will give the committee the leeway "to write a pro-growth tax plan that reforms the code, causes the economy to surge, and ultimately results in reduced federal budget deficits."” Senate leadership has said that an agreement between Toomey and Corker is significant because they represent far ends of the spectrum.

SUBSTANCE:

Senate Finance Committee Hearing on Business Tax Reform: The Senate Finance Committee held a hearing on September 19 on business tax reform. Witnesses include representatives from The Tax Foundation, Urban Institute and Urban Brookings Tax Policy Center, American Institute of CPAs, and The Real Estate Roundtable. Strategies’ notes on the hearing are attached.

White House Repositioning on Tax Reform: The Washington Post reports, “White House and GOP leaders are considering major changes to upcoming tax legislation, including scaling back plans for large-scale tax cuts for the wealthy, as Republicans seek to win support from Democrats in Congress, three people briefed on the discussions said. The White House is considering, among other things, keeping the top tax rate for individuals at 39.6 percent, decreasing the benefits top earners would see in the tax package by scrapping an earlier proposal that would have cut that rate to 35 percent. White House negotiators are also considering giving up on a push to repeal the estate tax, which is levied on individuals who die with more than $5.49 million in their estates. Republicans have long called for repealing the tax, but Democrats have raised objections, saying repeal would benefit only the wealthy and would add to the federal debt. The White House and GOP leaders remain committed to reducing the corporate tax rate and delivering tax cuts for the middle class, the three people said. Senate Finance Committee Chairman Orrin G. Hatch (R-Utah), a key negotiator in the talks, said Tuesday that the plan as of now is “basically not cutting taxes very much for the wealthy.” Trump has sought to reframe the tax discussions as a way to help businesses and the middle class rather than just the wealthiest Americans…”

Corporate Integration: Senate Finance Chairman Hatch addressed his proposal for corporate integration at the Committee’s hearing on business tax reform this past week. As Hatch stated in his opening statement, “For the past few years, I have been working on a corporate integration proposal that, among other things, would allow businesses to deduct their dividends paid to help alleviate the double taxation problem. I view this as a complement to a statutory corporate tax rate reduction, not a substitute.” While no written proposals released yet, Hatch has been a champion for corporate integration. As reported by Tax Analysts, “A corporate integration proposal will likely be part of upcoming rounds of tax reform discussions, according to sources close to the “Big Six” group of Republican lawmakers and White House officials overseeing tax reform negotiations. A tax lobbyist told Tax Analysts that corporate integration is a good candidate for inclusion in the tax reform negotiators’ proposal, which is due to be released this month. Senate Finance Committee Member John Thune, R-S.D., told reporters that “partial corporate integration” could also appear in tax reform. Corporate integration also has some support from outside groups. Tax Foundation President Scott A. Hodge said in his written statement that his organization generally supports corporate integration. “There have been no fewer than a dozen corporate integration proposals that have come out of either Congress or the White House, and this is an issue of long-standing study. Unfortunately, we’ve yet to see the kind of action that I think is necessary to remove the double taxation of corporate income and make business taxation more equitable,” Hodge said during the hearing. “We believe that business income should be taxed only once and at the same rate.” He noted that it has “has the dramatic effect of lowering the effective corporate tax rate and having a substantial impact on long-term economic growth.” “I think a dividends paid deduction is a very thoughtful way to approach this,” Hodge continued. “After all, companies get to deduct their interest cost. Why shouldn’t they get to deduct the dividends that they pay to shareholders?””

Corporate Inversions: The Congressional Budget Office (CBO) released an analysis of corporate inversions. CBO states, “U.S. multinational corporations—businesses incorporated and operating in the United States that also maintain operations in other countries—can use a variety of strategies to change how and where their income is taxed. One such strategy is a corporate inversion, which can result in a significant reduction in worldwide tax payments for a company. U.S. companies have engaged in corporate inversions since 1983, and public and government attention to them has varied over the years. Concern grew most recently in 2014 because the group of corporations that announced plans to invert that year included some that were very large: Their combined assets were $319 billion, more than the combined assets of all of the corporations that had inverted over the previous 30 years…CBO projects that the U.S. corporate income tax base will be reduced because of further inversion activity and the expansion of strategies to move profits to lower-tax jurisdictions, causing corporate tax revenues in fiscal year 2027 to be approximately 2.5 percent ($12 billion in nominal dollars) lower than they would have been if tax-minimization strategies were effectively unchanged from those used in 2016.”

State and Local Tax Deduction: Bloomberg BNA reports, “The National Governors Association plans to team up with other organizations on a new public-private coalition to press congressional Republicans not to eliminate the federal deduction for taxes paid to state and local governments. The White House and House Speaker Paul Ryan (R-Wis.) have proposed ending the deduction to free up money to pay for a broader tax-reform plan that would involve lower rates on corporate and individual incomes. NGA Executive Director and CEO Scott Pattison said the group will be called Americans Against Double Taxation. “It’s a coalition of state and local groups that’s officially launching Thursday,” Elena Waskey, NGA spokesperson, told Bloomberg BNA.

Retroactive Tax Reform: Some Congressional Republicans have been considering the idea of retroactive tax provisions. Bloomberg BNA reports, “Normally, federal tax legislation is prospective, applying only to the future. But some Republican members of Congress are looking at doing it a little differently this time. Rep. Mark Meadows (R-N.C.), chairman of the ultra-conservative House Freedom Caucus, and some others want parts of the bill to apply retroactively to Jan. 1, 2017, or another past date, so that taxpayers see an immediate benefit during the 2018 tax filing season. The retroactivity idea comes as some Republican lawmakers fret privately about the lack of a clear legislative victory so far and how it might affect their re-election prospects. But retroactive changes are difficult to administer and would make a tax reform bill more expensive, while the economic benefits from such a move aren't clear-cut, several lobbyists and former staff members told Bloomberg BNA. Meadows will have a very difficult time getting approval for retroactive provisions, and many states, including North Carolina, probably won't be inclined to follow in the footsteps of Congress if that means reduced revenue, a staff advisor to a ranking GOP member of the House told Bloomberg BNA on the condition of anonymity because he isn't authorized to speak amid ongoing tax-reform negotiations. “States might go along with revenue raisers if Congress were to apply them retroactively,” the staff member said…”

INDUSTRY:

Veteran’s Perspective on 2017 Tax Reform: Morning Consult Op-Ed Contributor Byron Dorgan states, “As someone who helped write the last successful tax reform bill in 1986, let me make two predictions about the tax reform effort in 2017. First, it’s a heavy lift and it won’t succeed without bipartisan support. With the support of both political parties this can succeed. If only one party is writing the bill, it will fail. Tax reform needs the best ideas from both parties. Second, I think it has to be revenue neutral. That was one of the first decisions then-President Ronald Reagan and the leaders of a Democratic Congress made when they began work to reform the tax code in 1986. That decision is even more important now. We should not be adding to the burden of a large federal debt as we reform the tax code…The Constitution requires tax legislation to start in the House Ways and Means Committee. If a core group of congressmen from both political parties are dedicated to working together to develop a revenue-neutral tax reform plan, they, and the U.S. Senate, can make real tax reform happen. It is a pattern we know can be successful. This is the time to finally get it done.”

Business Roundtable Releases Study on the US Tax Code and Cross Border Mergers and Acquisitions: Bloomberg reports, “The U.S. lost $510 billion in business assets that were acquired by foreign companies from 2004 to 2016 in part because its corporate income tax rate exceeds other countries’, according to a study released Tuesday by a group of top U.S. business leaders. Cutting the U.S. corporate rate to 20 percent from the current 35 percent would have meant a net gain of $1.2 trillion in such assets and would have kept 4,700 companies in America over that period, said the study from the Business Roundtable, a group of chief executive officers from dozens of corporations. The group includes the heads of Apple Inc., JPMorgan Chase & Co., Exxon Mobil Corp., Boeing Co. and others. The study, which was conducted for the group by accounting firm EY, comes as the Washington-based lobbying group is pushing for Congress to overhaul the U.S. tax code -- with a focus on reducing the corporate tax rate. Congressional leaders and officials in President Donald Trump’s administration say they’ll be releasing more details of proposed legislation next week. “The United States is losing business headquarters along with good-paying jobs, assets and innovation because of its outdated, anti-competitive tax code,” said EY CEO Mark Weinberger, a BRT board member, in a prepared statement. “This study is more compelling evidence that Congress and the administration must enact tax reform to keep and attract companies, jobs and investment.” The study examined 97,500 cross-border mergers and acquisitions among 68 countries and found that U.S.-headquartered companies were at a competitive disadvantage in the global market for mergers and acquisitions because of the tax code.”

GOP Group American Action Network Launches Pro-Tax Reform Ads Before Release of Tax Framework: The Hill reports, the American Action Network (AAN) on Tuesday announced that it is launching a new $500,000 digital ad blitz to promote tax reform, one week before key GOP lawmakers and administration officials are expected to release a framework to overhaul the tax code. The ads feature a Wisconsin couple who argue that a simpler tax code could benefit working families…AAN, which is aligned with Speaker Paul Ryan (R-Wis.) has been investing heavily in recent weeks on radio, television and digital ads that advocate a tax-code revamp. The latest ads bring the group's total spending on its tax efforts to $8 million. The ads are being targeted in 41 congressional districts, including those held by House GOP leaders, House Freedom Caucus members and GOP lawmakers who could be vulnerable in the midterm elections, AAN said. Many of the targeted districts are in California, New York and Illinois.”

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