The changing dynamics of tax reform

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The failure to repeal and replace the Affordable Care Act may have changed the shape of tax reform, according to Marc Gerson, a former majority tax counsel to the House Ways & Means Committee, and current member and Tax Department vice chair at law firm Miller & Chevalier.

“The immediate reaction when the health care bill failed was to push it aside and get on to tax reform, but over the weekend [President Trump] suggested that the administration will revisit health care first,” Gerson said. “That takes time and focus away from tax reform, and may change the dynamic of tax reform.”

Prior to the failure of ACA repeal, the focus was on the House Republican Blueprint, Gerson explained. “Now, the administration is thinking of taking more of a leadership role,” he said. “The failure of the health care bill has caused some uncertainty in the tax reform space.”

The timing of the two efforts is still uncertain, according to Gerson. “The president’s comments over the weekend suggest that they will still try to do health care first. Even if they decide they can’t, we still might see some health care elements in the tax reform package. So it’s really changed the dynamic.”

Initially, it was felt that any reform proposals had to be enacted by the August congressional recess. However, Treasury Secretary Steven Mnuchin recently indicated in an interview with The Financial Times that the August timetable may be unrealistic – though he maintained that Congress would still be able to pass something by the end of the year.

Gerson agreed. “The pressure point in timing will be by the end of the year,” he said. “With midterm elections coming in 2018, it will be a lot harder to get done when the calendar changes.”

“There is a lot of enthusiasm for tax reform this year, but healthcare adds a lot of uncertainty with the timing and the process,” he added.

Mixed reactions

Citing a recent survey of business leaders by Miller & Chevalier and the National Foreign Trade Council, Gerson noted that for the first time since the survey began 11 years ago, there is significant optimism for comprehensive tax reform from leading tax executives at U.S. and foreign-based companies, with 84 percent of respondents believing it will happen this year or next.

“Nevertheless, our respondents are still uncertain as to the net impact of a comprehensive tax reform package on their businesses in light of the significant revenue-raising provisions, such as the border adjustment tax, that are being considered,” he said. “A lot of the survey was on the assumption that ACA repeal would be done separately, and there would be a stand-alone tax reform bill.”

The most important measure tax executives say they are watching with respect to reform is the border adjustment proposal in the Blueprint, followed closely by an insufficient reduction in the statutory rate and limits on interest deductibility, according to the survey.

Another survey, this one by Top 100 Firm Friedman LLP, found mixed reactions among many business leaders toward the border tax proposals in the House Blueprint; specifically, they question whether the policies will ultimately produce the intended net benefits to the U.S. economy, with 24 percent saying they would export more, and 28 percent saying they would use locally sourced goods. Nearly a third – 32 percent – said that they would take actions that could be detrimental to the economy, such as passing higher costs to consumers or reducing their business in the U.S. market. An additional 9 percent thought their businesses would face a shortage of imported goods needed for business.

“The border adjustment proposal is probably the largest revenue raiser in the Blueprint,” Gerson noted. “It’s an underpinning of the entire package, so if it came out there would have to be different revenue offsets, or potential increases in the targeted tax rates.”

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