Bipartisan efforts to rewrite the Tax Code are gaining traction. Sen. Max Baucus and Rep. Dave Camp, chairmen of the Senate Finance Committee and the House Committee on Ways and Means, completed their national tour during the August recess, seeking to drum up support for reform. And President Obama has offered his own plan for corporate tax reform.
"It's probably the most serious concerted effort at tax reform in decades," said Ed Karl, vice president of tax at the American Institute of CPAs. "There's a possibility that a bill could be marked out of one of the committees this year, but I don't expect it to be passed immediately. The debate will likely move into 2014, despite the effort by both chairs to come together. They are truly trying to get something done. It may be the last opportunity for both of them to move something as chairs of their respective committees."
Montana Democrat Baucus isn't running for re-election, and will leave the Senate Jan. 3, 2015. Michigan Republican Camp has said that he may run for the vacant seat in Michigan of Sen. Carl Levin, who is also retiring. Moreover, he would be barred from chairing the Ways and Means Committee under term limit rules, unless they are waived.
DIVIDED OVER THREADS
The common thread in the multiple tax reform proposals is to broaden the base and lower the rates. Major hurdles are questions as to whether reform should be revenue-neutral or a revenue-raiser. The parties are divided, with Democrats generally supporting raising additional revenue, and Republicans aiming for revenue neutrality. A reform that doesn't raise revenue has been labeled a "non-starter" by Senate Majority Leader Harry Reid, while Minority Leader Mitch McConnell takes the opposite position.
"They're still scoping the issues," said Marc Gerson, former majority tax counsel to the Ways and Means Committee and vice chair of the tax department at law firm Miller & Chevalier. "The big questions are whether or not it will be revenue-neutral, and will it be comprehensive or just limited to business or corporate reform. The president's proposal suggested a corporate-only approach."
And heading into the fall there is the question as to where tax reform fits in with other legislative priorities, Gerson indicated: "There are a lot of outstanding issues. There's the continuing budget resolution, entitlement reform, the debt limit increase, and possible interest in doing a replacement for the sequester. There is the possibility that some of these might be viewed in combination with tax reform, as a vehicle for tax reform or an alternative to tax reform viewed on a stand-alone basis."
"But despite all the legislative uncertainty, both chairmen of the tax-writing committees have stated repeatedly that they intend to mark up a tax reform bill in the fall, which is in and of itself very significant," Gerson said. "Whatever comes out will be the base for tax reform and whether it's enacted this year or in the future, whatever gets put out as the initial proposal is significant in shaping the final bill."
Chairman Baucus and Ranking Member Orrin Hatch, R-Utah, asked their Senate colleagues to submit ideas about what should be included in reform legislation. In the letter they were asked to assume a blank slate, and voice which expenditures should be retained in the code, observed Karl.
The AICPA submitted a number of its own recommendations to the committee. Jeffrey Porter, chair of the AICPA Tax Executive Committee, stated that, "While we believe that taking a thorough and substantive review of each and every expenditure is an essential part of tax reform, we also encourage you to examine other aspects of the Tax Code to improve the current rules. We stand for a code that is simple, practical and administrable."
Specifically, the letter highlighted the following areas that the AICPA has targeted for inclusion in tax reform legislation:
- Repeal of the Alternative Minimum Tax;
- Simplification of the "Kiddie Tax;"
- Consolidation and simplification of multiple types of tax-favored retirement plans;
- Harmonization of education incentives;
- Re-ordering of due dates for certain tax returns;
- Reform of civil tax penalties; and,
- Modification of existing rules to allow taxpayers to report de minimis changes in their income from a corrected Form 1099 or amended Schedule K-1 in the year of receipt of the amended form.
ONE STEP AT A TIME?
Although piecemeal reform remains a possibility, there have been a number of negative reactions to the president's corporations-only approach.
"Corporate-only rate reduction does not amount to business tax reform," said Geoff Burr, vice president of federal affairs at Associated Builders and Contractors, a trade association. "The president's plan not only widens the existing gap between Main Street and the Fortune 500, but would actually mean billions of dollars in increased taxes for construction contractors."
National Federation of Independent Business president and chief executive Dan Danner agreed. "Over 75 percent of all small businesses in the United States are taxed at the individual rate," he said. "By focusing on corporate-only reform, the president will disadvantage the innovators, the job creators, and the leading pillars of local communities. Any discussion of tax reform must include both corporate and individual rates so that there is a level playing field for businesses of all sizes."
"Once again, small businesses are being left out of President Obama's economic plans," said Sam Graves, R-Mo., chair of the House Small Business Committee. "Small businesses commonly file as individuals and often face steeper tax rates than larger companies, yet it is these firms that will create the jobs necessary for a full and robust economic recovery. Tax reform must be comprehensive so that all businesses, both large and small, can see relief from the burdensome Tax Code."
Corporate-only reform can work as a separate piece of legislation, according to Karl. "The big discussion over the last three years has been on corporate reform. But the problem is that the vast majority of businesses operate on some kind of flow-through basis," he said. "If we just focus on corporate reform and leave rates high at the individual level, it creates a disparity."
"The bottom line is that there is strong interest in reform, but there are still a number of issues to solve and a lot of partisanship, so the ability to enact legislation will be a challenge," he warned.
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