Republican leaders release tax reform update

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Republican leaders in Congress and the Trump administration released a joint statement Thursday on their progress on tax reform ahead of Congress’s August recess and the broad principles they plan to follow.

The leaders have been meeting behind closed doors in recent months to discuss tax reform. The so-called “Big Six” include Treasury Secretary Steven T. Mnuchin, Speaker of the House Paul Ryan, Senate Majority Leader Mitch McConnell, Senate Finance Committee Chairman Orrin Hatch, House Ways and Means Committee Chairman Kevin Brady, and National Economic Council Director Gary Cohn. However, the statement was vague and was mainly notable for indicating that the plan does not included the controversial proposal for a border adjustment tax, or border-adjusted tax, on imports (see Ryan gives up on border-adjusted tax on imports after attack).

“For the first time in many years, the American people have elected a President and Congress that are fully committed to ensuring that ordinary Americans keep more of their hard-earned money and that our tax policies encourage employers to invest, hire, and grow,” said the Republican joint statement. “And under the leadership of President Trump, the White House and Treasury have met with over 200 members of the House and Senate and hundreds of grassroots and business groups to talk and listen to ideas about tax reform. We are all united in the belief that the single most important action we can take to grow our economy and help the middle class get ahead is to fix our broken tax code for families, small business, and American job creators competing at home and around the globe. Our shared commitment to fixing America’s broken tax code represents a once-in-a-generation opportunity, and so for three months we have been meeting regularly to develop a shared template for tax reform.”

The Republican leaders credited the work of Congress’s tax committees in holding hearings on tax reform and said they planned further hearings.

“Over many years, the members of the House Ways and Means Committee and the Senate Finance Committee have examined various options for tax reform,” said the joint statement. “During our meetings, the Chairmen of those committees have brought to the table the views and priorities of their committee members. Building on this work, as well as on the efforts of the Administration and input from other stakeholders, we are confident that a shared vision for tax reform exists, and are prepared for the two committees to take the lead and begin producing legislation for the President to sign.”

The statement came out against the border adjustment tax, settling a question that has dogged policymakers in recent months.

“Above all, the mission of the committees is to protect American jobs and make taxes simpler, fairer, and lower for hard-working American families,” said the joint statement. “We have always been in agreement that tax relief for American families should be at the heart of our plan. We also believe there should be a lower tax rate for small businesses so they can compete with larger ones, and lower rates for all American businesses so they can compete with foreign ones. The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas. And we are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base. While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform.”

The Republican leaders indicated a willingness to allow Democrats to now join them in the deliberations within the formal committee setting and to use “regular order,” unlike the effort at repealing Obamacare.

“Given our shared sense of purpose, the time has arrived for the two tax-writing committees to develop and draft legislation that will result in the first comprehensive tax reform in a generation,” said the joint statement. “It will be the responsibility of the members of those committees to produce legislation that achieves the goals shared broadly within Congress, the Administration, and by citizens who have been burdened for too long by an outdated tax system. Our expectation is for this legislation to move through the committees this fall, under regular order, followed by consideration on the House and Senate floors. As the committees work toward this end, our hope is that our friends on the other side of the aisle will participate in this effort. The President fully supports these principles and is committed to this approach. American families are counting on us to deliver historic tax reform. And we will.”

Democratic Reactions

Democratic leaders expressed skepticism about Republicans’ willingness to work with them on tax reform. Rep. Richard Neal, D-Mass., the ranking Democrat on the House Ways and Means Committee, feels his party is being excluded. “It’s disappointing that Republicans are moving forward with a rewrite of our tax code by excluding Democrats from the process,” he said. “We all agree that the tax code isn’t working for middle-class families but the past has shown that for tax reform to be successful, it must be undertaken in a truly bipartisan manner. If Republicans continue this partisan process, they are doomed to repeat the same mistakes they have made trying to upend our health care system. It’s time we work together to produce tax reform that benefits the middle class, grows our economy, helps hardworking families, and ensures that the wealthy and big corporations pay their fair share. Tax reform needs to be built from the middle out, not the top down, and Democrats will be ready to work with Republicans to make this a reality – if they put aside the failed supply-side economics of the past.”

Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, called for more of a bipartisan approach. “Republicans are dripping tax ideas out like a leaky faucet with no specifics to back them up,” said Wyden. “This is a far cry from the last time Congress overhauled our tax code in 1986. Republicans worked with Democrats from the get go and knew that a long-term, bipartisan solution was necessary to create jobs and grow the economy. We need sustainable, comprehensive tax reform, not a massive tax cut for the wealthy. We need to bridge the gap between what hardworking Americans take home, and what they need to live the quality of life they deserve. That’s accomplished by ensuring our tax code is at least as progressive as current law, brings red, white and blue jobs to America and is fiscally responsible.”

Rep. Lloyd Doggett, D-Texas, the ranking Democrat on the House Ways and Means Tax Policy Subcommittee, anticipates the Republican tax plan will mainly favor the wealthy. “Despite ongoing problems with their first tax cut for the superrich that masqueraded as health care repeal, Republicans are already preparing the sequel of ‘borrow and tax breaks’ for those at the top,” he said. “Any tax plan from the self-styled ‘big six’ widening income inequality and borrowing from abroad to reward large multinationals and the superrich should be ‘deep sixed.’ With today’s press release, Republicans are only throwing out the welcome mat for the Koch Brothers’ gathering next Wednesday in Washington. Their network will be launching a multi-million dollar push to jam through another round of tax breaks.”

Doggett also sees problems with the Republicans’ abandonment of the border adjustment tax, which was supposed to help pay for the tax cuts they had promised. “By finally abandoning their ill-advised border adjustment tax, Republicans have created a trillion dollar hole in their plan,” he said. “The claim that his multitrillion dollar tax cut will pay for itself is as incredible as the claim that Mexico will pay for President Trump’s border wall. Republicans should have learned that hiding a bill under lock and key won’t make it more popular when the American people eventually see what’s in it. Yet six months into this Administration, the elements of the tax plan Republicans are willing to reveal don’t even take up a page. With millions worth of Koch money behind them, they seem determined to jam through their second tax break bill at the expense of middle class and working families.”

Accounting Firm Tax Experts React

John Gimigliano, principal-in-charge of federal tax legislative and regulatory services in the Washington National Tax practice of KPMG LLP, a former senior tax counsel for the House Ways and Means Committee, sees parallels with past statements on tax reforms. “House and Senate leadership usually sends members home in August with a ‘recess packet’ of talking points and reading materials on key issues to prepare members for constituent meetings over the recess,” he said. “Today’s release of tax reform principles is part of this summer’s Congressional recess packet as well as a statement to tax reform stakeholders that progress is being made. The principles are short on detail and long on aspiration. But today’s release does indicate several design features of the tax plan, including a lower pass-through rate, expensing, repatriation and at least a nod toward revenue neutrality. Also, today’s release notably departs from key features of the House blueprint including a consumption-based system and border adjustability. The plan does not, however, indicate how Congress intends to ‘pay for’ these tax benefits. That’s likely because either those items still need to be negotiated or because there is no advantage to identifying them right now.”

Jon Traub, managing principal of the tax policy group at Deloitte Tax LLP, a former staff director at the House Ways and Means Committee, believes the joint statement sends a strong signal about the leaders intentions. “Today’s announcement of a unified commitment to tax reform is a strong signal from leaders in Congress and the administration of their shared desire to enact long-awaited tax reform,” he said. “The hard work will resume in September as the tax-writing committees in Congress attempt to address the myriad complexities presented by tax reform, which were just hinted at in today’s release. Taxpayers may be left wondering how to react to today’s statement. In this uncertain legislative environment, companies can use the time to do some situational modeling that weighs proposals against one another, scenario plan, and create customized alternatives in order to analyze the effects of the various tax reform proposals on the table.”

Michael Mundaca, co-director of Ernst & Young’s National Tax and co-director of the Americas Tax Center, a former Assistant Secretary of Tax Policy at the Treasury Department, is encouraged to see the border adjustment tax has been jettisoned. "The decision to move away from the BAT is a huge development as it removes a very controversial element from the House Republican plan and makes agreement on a comprehensive tax reform plan much more likely," he said.

His colleague, Eric Solomon, co-director of National Tax and co-director of the Americas Tax Center for EY, also a former Assistant Secretary of Tax Policy at the Treasury Department, added, "Now that border adjustments are off the table, the main focus of the debate will shift to whether tax reform will be revenue neutral, what cost recovery rules will be adopted, whether business interest deductions will be limited, what base erosion provisions will be included, and what middle class tax relief will be provided."

Lobbying Groups Weigh In

The advocacy group Americans for Tax Fairness believes the joint statement points the way to tax breaks for the wealthy and corporations. “The statement of the Big Six today revealed little about their true intentions, which is to craft a plan that will give massive tax breaks to millionaires and wealthy corporations at the expense of the middle class and working families,” said Frank Clemente, executive director of Americans for Tax Fairness. “As we know from the Republican budget proposals, the tax cuts will mostly be paid for by cutting Social Security, Medicare, Medicaid, education and other critical services. We need real tax reform that makes the wealthy and big corporations pay their fair share of taxes, not giant tax cuts for the rich and powerful while services for everyone else get slashed.”

On the other hand, industry lobbying groups expressed support for the joint statement on tax reform. The BUILD Coalition, short for Businesses United for Interest and Loan Deductibility, includes real estate, telecommunications, manufacturing, agriculture, healthcare, finance, and small businesses who want to maintain the full deduction for business interest expense in the tax code. “The BUILD Coalition appreciates the administration and Congressional leaders working closely to establish a sound foundation for tax reform in advance of the legislative process,” the group said in a statement. “Today's announcement shows that they are taking a fresh approach to this critical issue. As policymakers turn to the details, the BUILD Coalition encourages them to remain focused on achieving their goal of pro-growth tax reform. Essential to this effort is maintaining the full deductibility of interest expense for all businesses, regardless of size or sector, so they can continue to make the long-term investments that create U.S. jobs and help drive growth. We look forward to working with Congress and the administration on tax reform that helps American companies grow and compete in the global economy."

Another lobbying group, the RATE Coalition, has been pushing to lower the corporate tax rate. “We agree that fixing America’s broken tax code is a critical priority for the economic strength of our country," said the group. "It begins with lowering the corporate tax rate to a globally-competitive level: it is the most important action we can take to grow our economy, create jobs and put more money in the pockets of American families and workers. We believe that enactment of once-in-a-generation, comprehensive tax reform consistent with the principles detailed today will both spark an economic boom of investment and hiring here at home, and halt the steady erosion of America’s corporate tax base.”

FreedomWorks, which advocates for smaller government, lower taxes, free markets and personal liberty, issued a statement of support. "It's time to get our economy growing again,” said FreedomWorks president Adam Brandon. “We need tax reform that fundamentally overhauls, not just tweaks, our current tax code. The tax code is a mile long with exceptions and carve-outs for everything under the sun. It's inaccessible and hard to follow. FreedomWorks and our activist community have waited a long time for this moment, and we're ready to get started to make tax reform a reality.”

The Financial Services Roundtable, which represents the banking industry, welcomed the joint statement. “Today’s announcement reflects Republican leaders have a unified purpose,” said FSR CEO Tim Pawlenty, a former Minnesota governor. “They agree on key principles necessary to enact tax reform that will help jumpstart economic growth and create quality jobs for the American people. FSR looks forward to being a constructive partner as this process moves forward this fall.”

The National Association for the Self-Employed, also expressed support. “The small business community applauds the broad principles laid out today in a joint statement by policy leaders from the Administration and Congress on tax reform,” said Katie Vlietstra, vice president of public affairs and government relations for the NASE. “While the devil is in the details, we are particularly pleased that small businesses will be treated like their corporate counterparts at home and abroad. We look forward to working with the Trump Administration and Congress to ensure all of the business community—large and small—remains strong. This is a once-in-a-generation opportunity to secure comprehensive tax reform. Therefore, let’s do it right and work in a bipartisan and transparent way reaching across the aisle and following the regular legislative order.”

The Borderplex Alliance, a regional economic development organization that aims to integrate and promote the economies of El Paso, Texas; Juarez, Mexico; and Southern New Mexico, was pleased the border adjustment tax proposal has been dropped. “Today's announcement from House, Senate and White House leaders on dropping the border adjustment tax from tax reform efforts is a relief for American businesses and families who live and work in the Borderplex region," said CEO Jon Barela. "We are deeply supportive of House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady, as well as the rest of the Republican and White House leadership, on the decision to no longer pursue this policy."

GOP Lawmaker Reacts

Sen. Charles Grassley, R-Iowa, a former chairman of Senate Finance Committee, stressed the need for job growth in tax reform. “One of the biggest goals of reforming the federal tax code is job creation," he said. "Companies make decisions based on their bottom line, so it’s up to us as lawmakers to create conditions that are likely to encourage job creation in Iowa instead of India or China. Small businesses are responsible for a majority of net new jobs since the 1970s, yet some small businesses experience tax rates exceeding 40 percent. This burden should be lifted. Another key goal is lowering individual tax rates and making the tax code simpler and fairer. People generally should have the choice to use more of their money as they see fit. I look forward to continuing to listen to Iowans on their ideas for tax reform in the weeks ahead.”

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