While efforts at tax reform seem to crop up at fairly regular intervals in Washington — and just as routinely fail to produce any results — the current effort under President Obama has generated enough optimism that some are already attempting to pick potential winners and losers.
"There are a lot of different proposals, but it's too early to talk about winners and losers," said Marc Gerson, former majority tax counsel to the House Ways and Means Committee. The idea of who wins and who loses is based on the goals of the various proposals to reduce the corporate rate - one of the highest in the world - by base-broadening and the removal of deductions and credits.
"Yes, it will create winners and losers," said Gerson, a tax partner at Washington-based Miller & Chevalier. "You can start with the idea that there will be a reduction in rates, and a removal of deductions and credits, but it is a difficult exercise to say what industries gain or lose. On a more granular level, it's even harder to say which taxpayers would come out ahead, because we just don't know what shape the tax reform model would take."
A number of official, semi-official and private groups have put forth their own ideas on tax reform. These include the President's Economic Recovery Advisory Board and the Deficit Reduction Panel, as well as the National Taxpayer Advocate. And the House Ways and Means Committee has begun a series of hearings on tax reform, with the first one largely focusing on corporate and small- business issues.
FIRST, BE BIPARTISAN
Both Ways & Means Chairman David Camp, R-Mich., and ranking member Sander Levin, D-Mich., stressed the need for bipartisan effort. "We welcome the opportunity to discuss reforming our tax system," said Levin. "As was true in 1986, any tax reform will have to be bipartisan and bicameral and will require leadership from the administration."
"I don't think this can be, nor should it be, a partisan exercise," said Camp. "And it cannot happen just because one chamber passes a bill. It will require the active participation of all members of this committee. And yes, we will even have to talk to the Senate."
In its testimony before Ways & Means, the U.S. Chamber of Commerce urged Congress to focus on several "basic considerations."
"We believe that considerations of tax rates, taxation of foreign-source income, compliance burdens, the impact of uncertainty, revenue effects, and transition rules are essential components in the beginning of the conversation on fundamental tax reform," it stated.
THEN, BE PREPARED
Gerson advised talking to clients about their tax situation in terms of the various reform proposals. "We're asking our clients to do a review of their tax profile," he said. "What are the main drivers of their tax return, and where do they most benefit from certain provisions? That depends on what industries they are in, and how much of their business is domestic and how much is international."
Also, they should assess what items are important to them, Gerson said. "Do they benefit from provisions in the tax regime such as the allowance for deferral of U.S. tax on active foreign earnings, the domestic manufacture deduction, and the R&D credit? Are there things that are industry-specific? It's important for taxpayers to prioritize and think about their situation if the item most important to them is repealed. What reduction in the corporate tax rate would they want to see to be better off or just to stay even?"
Although Gerson recommended paying close attention to the tax reform process, he doesn't foresee it happening in the near future. "If you take the discussion about what's going on in tax reform, and layer on the split in congressional control, and layer on to that the concerns about the deficit, it looks like there will be a fairly modest tax agenda this year," he said. "There's a notion that if we're looking at overhauling the entire code, it may be inconsistent to be looking at shorter-term measures. Whatever gets enacted should be consistent with the long-term patterns of reform."
FINALLY, BE REASONABLE
In fact, Miller & Chevalier's 2011 Tax Policy Forecast Survey results point to an anticipated modest tax legislative agenda for 2011, despite indications that both the administration and Congress have an interest in pursuing fundamental tax reform.
"Expectations for significant tax legislation are low for the coming year," said Gerson. "The business community sees the split in congressional control, coupled with increased concern regarding the deficit and the anticipated focus on longer-term fundamental tax reform, as likely putting a significant damper on the tax legislative agenda for 2011."
Thomas Bloch, former chief executive at tax preparation giant H&R Block, agreed that the reform process would be difficult. "The Tax Code is not used just to raise money for our government to operate, but to achieve social and economic objectives," he said. "It will be very difficult to enact major simplification without disrupting those objectives."
Barry Fischman, tax partner at the New Haven, Conn., office of Marcum LLP, said that efforts in Congress would likely focus more on small-scale items. "We're seeing a very focused approach to targeted areas of recent legislation they don't like," he said.
One example he noted are the efforts to tailor the Form 1099 reporting mandate facing small businesses next year.
But Fischman sees some hope. "The president got a significant tax bill through during the lame-duck session," he noted. "It was more Republican in tone but was being driven by a Democratic president. To add to that, the president is focused on small business. For example, he's looking to raise the capital gains exclusion for sales of small businesses from a 50 percent exclusion to 100 percent."
"What they're doing collectively is to focus on generating business and spurring the economy," said Fischman. "The way they're doing it is to decide what incentives to give to businesses to increase their cash flow, to hire more people, and spend within their businesses."
