Tough choices remain for tax reform

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Another big step toward tax reform was made Thursday as the House passed the Senate Budget resolution – but it also brings the difficult choices that much closer.

“It’s a significant step, because the resolution calls for $1.5 trillion of additional deficit, which will translate to tax cuts,” said Todd Simmens, a partner at BDO and a former staff member of the Joint Committee on Taxation. “The House is slated to release legislative language next week that will contain more much more detail. Up to now we’ve had the House Blueprint, the proposal in April, and the framework. This is will be the first time we’ll see any granular detail.”

It should fill in the blanks on items such as the rate brackets, the elimination of the state and local deduction, and a fourth bracket, according to Simmens.

“The deduction for state and local taxes is very controversial,” he observed. “It’s not clear whether it will be addressed right out of the gate or held for later negotiation. And a fourth bracket may be held as an item necessary to win over some on-the fence members. The resolution passed in the House by a very narrow margin – some Republican members are queasy about the level of debt.”

“This makes us one step closer to tax reform,” agreed Dustin Stamper, a director in the Washington National Tax Office of Grant Thornton. “It adds momentum to the process.”

“The biggest sticking point is the proposal to repeal the state and local tax deduction,” he said. “Tax writers need it as a revenue-raiser, but a lot of Republicans in high-tax states hate it. It’s going to be critical to find a common middle ground. We’ve heard various options, one of which might be to allow the deduction for property taxes but not for state income taxes.”

Another sticking point is the elimination of the interest deduction, Stamper indicated. “That would be one of the toughest for public companies to swallow because full expensing has a timing benefit that doesn’t show up on the financial statement, but a limit on the interest deduction would be a permanent loss of the deduction. There will be many businesses that don’t consider that a good tradeoff.”

“The next step will be to release a whole bill, which they promise to have out next Wednesday,” he continued. “Markup would be the following week, with the goal to pass it in the House the week after that.”

“There are three key things everyone is watching,” said Howard Wagner, managing director at Crowe Horwath. “How will the pass-through rate apply to professional service firms; how will the interest expense disallowance rules ultimately apply to corporate and non-corporate entities; and what will be the fate of the state and local tax deduction?”

“We’re still in ‘hurry up and wait’ mode,” he said. “The budget resolution gives the parameters of how much they can add to the deficit. Now they have to make the tough choices as to who will win and who will lose to make the numbers work.”

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Tax reform Tax deductions Tax cuts