Press Room: Tax Release

November 06, 2014

Looking Ahead to a Republican Majority 114th Congress

November 4th Was a Big Night For Republicans – What Does It Mean For Taxpayers?

 

Shakeup and Continuity In the Congressional Tax Writing Committees

The shift in Senate control means that Orrin Hatch (R-Utah) is poised to take over the chair of the Senate Finance Committee from Ron Wyden (D-Oregon), while Wyden becomes the ranking member. In the House, Paul Ryan (R-WI) and Kevin Brady (R-Texas) are both vying for the chair of the House Ways and Means Committee. Despite the turnover in leadership, we can expect there to be some continuity on both committees as most Senate and House tax writers up for reelection retained their seats.

Extenders In the Lame Duck Session

Now that the election is over, will Congress finally pass a tax extenders package? Competing proposals came out of the Senate Finance Committee and House Ways and Means Committee earlier this year.  The Senate would pass a two-year extension of virtually the entire set of traditional tax extenders, including popular items like 50% bonus depreciation, research credit (with modifications), active financing exception, small business expensing, and the 100% exclusion for gain from small business stock, at a cost of $85 billion over the 10-year budget window. The House has taken a different approach:  addressing only select extenders and making them permanent, including 50% bonus depreciation, research credit (with modifications), small business expensing, five-year built-in gain period for S corporations, CFC look-through treatment, active financing exception, and basis reduction rule for S corporation charitable contributions, at a cost of over $300 billion over the 10-year budget window.

The budgetary cost is an open question. Neither side has proposed any revenue offsets for the tax extenders legislation. Some have argued that permanent extension is too costly. Republicans who support permanent extension argue that current policy is that these items will continue to be extended every year, and that the revenue baseline on which tax reform is based should be adjusted accordingly.

Businesses would like to see extenders passed by December 31, 2014 so that the impact of the legislation can be taken into account in their 2014 financial statements. Likewise, IRS would like to avoid any delay to the 2015 tax-filing season. While extenders legislation is very important to the business community, the stakes are not as high as they were during the fiscal cliff debate in 2012. Now that individual tax rates and the alternative minimum tax (AMT) patch have been made permanent, a much smaller constituency is affected by the expiration of these items.

Tax Reform

Tax reform will be a high priority for the Republican majority in the 114th Congress. Current Ways and Means Chairman Camp’s draft is an important piece of draft legislation that laid the groundwork for future tax reform and made stark some of the tradeoffs involved in a revenue-neutral and distributionally-neutral tax reform. Camp’s plan has many areas of overlap with President Obama’s framework for business tax reform.

Some optimists have argued that Republicans and the Obama Administration could come together in 2015 and pass revenue-neutral, business-only tax reform, where they share common ground. As always, the devil is in the details. Once corporate tax departments had a chance to evaluate Camp’s detailed plan, many found the impact on their companies to be neutral or undesirable. No one likes the AMT, which the plan repeals, but many found that the new regular tax to be similar to the old AMT. Revenue raisers such as lengthening depreciation periods and capitalization and amortization of research and advertising expenditures are unappealing to corporate tax departments. In addition, the tough anti-base-erosion measures included in the international portion of Camp’s draft would raise the overall tax bill for multinationals with mobile intellectual property or other tax-shifting structures. Many found that the lower corporate tax rate did not compensate for these base broadeners.

Another fundamental problem with the idea of business-only tax reform is that the majority of business income in the United States is earned through passthrough entities, taxed at individual rates. Trying to accomplish business-only tax reform raises the question of how to handle the business income earned through passthroughs. Passthroughs come in all sizes, large and small, but corporate-only reform would leave out these business owners, many of whom are the small businesses and job creators cherished by the Republican Members of Congress.

While it remains unclear whether any kind of tax reform can pass in the 114th Congress, we expect that the Republican majority will continue to lay the groundwork for tax reform in anticipation of the ability to pass tax reform legislation following the next Presidential election. We can expect Ryan or Brady to build on Camp’s work. The Hatch staff may be hatching a tax reform plan of their own.

Tax Cutters Win In the States

Republicans building platforms around tax reform and lower taxes won state races in this election.  Republican Gov. Scott Walker walked away with a victory in Wisconsin. Illinois businessman Bruce Rauner defeated incumbent Democrat Gov. Pat Quinn based in part on a battle over the future of a temporary state income tax hike. Renowned tax-cutting Republican Gov. Sam Brownback was reelected in Kansas.

The Takeaway

Whether it be this year or after the next Presidential election, the time to prepare for changes in tax legislation is upon us. It is critical for the taxpayer community to be involved in the short-term and long-term debates on the federal budget and deficit reduction.