Ryan says tax reform will happen in 2017

Speaker Paul Ryan speech on tax reform, 6/20/17

On June 20, 2017, Speaker Paul Ryan spoke to the National Association of Manufacturers about tax reform. He has a 1 minute YouTube video of highlights here. The tag line is "Tax reform is happening. Not next year or next Congress. It is happening now, in 2017."

Per his email message of 7/5, "We're not talking about some rinky-dink, watered-down version of reform where the status quo basically remains as is. No, instead, imagine transformational tax reform that closes decades of loopholes, shakes up the IRS, and actually encourages businesses to stay and grow here in America."

His email message of 7/6 includes: "America is losing good-paying jobs as businesses move offshore to foreign competitors with more competitive tax systems. Trillions of dollars—literally, trillions—are being stranded overseas as a result. And hardworking families continue to struggle under a tax code that is far too confusing and expensive. ... This unified Republican government—the House, the Senate, and the White House—are putting together a plan that will grow our economy and create jobs.

Our plan will simplify the code so you can file your taxes on a form the size of a postcard. And it will overhaul or corporate tax system—the worst in the industrialized worlds—in order to stop the drain of American businesses overseas."

Meanwhile, as I noted in my blog post of 7/2, Senator Hatch, chair of the Senate Finance Committee is seeking public input on tax reform ideas by July 17. He also has given assignments to some of the committee members and wants to work with others including Democrats. 

That statement along with Ryan's suggestion of transformational change sounds like they want a plan that can get bi-partisan support so it can be permanent rather than only a 10-year plan accomplished via budget reconciliation.

It would be nice to hear more about the progress of the House Republican blueprint released in June 2016. Is the Senate Finance Committee seeking input because they want something different or just to be sure everyone had an opportunity for input?  What about Senator Hatch's work on corporate integration? What about suggestions to pay for lower tax rates for corporations? Will the House Republican import tax (border-adjustable tax) remain? Which "loopholes" is Speaker Ryan referring to to close? How low can rates go in a revenue neutral manner by closing them?

Timing? The House and Senate are scheduled to be in recess for July 31 to September 4 (Labor Day). But that still leaves lots of days for hearings and markup sessions and conferences. And this process really kicked off in January 2011 with over 90 hearings held since then (see Congressman Camp's "First in a series ..." hearing link), lots of reports, working groups, discussion, etc.  That's more time that was spent on the Tax Reform Act of 1986 which kicked off in January 1984 with President Reagan's state-of-the-union speech and the Treasury issuing its 3-volume, 800+ page report on tax reform (including volume 3 on a VAT!). [See article on the history of TRA'86 and link to old Treasury reports on tax reform.]

What do you think? Will bi-partisan, transformational tax reform occur in 2017? What do you think it will look like?

Senator Hatch and Tax Reform

Senator Orrin Hatch (R-UT)

Senator Hatch, chair of the Senate Finance Committee, has done the following regarding tax reform:

• Study and hearings on corporate integration as a way to reduce the corporate tax burden. The proposal (per statements rather than a report) is a dividends paid deduction with withholding.
• Hearing on 5/24/16 - Debt vs. Equity: Corporate Integration Considerations (+ JCT report).
• Hearing on 5/17/16 - Integrating the Corporate and Individual Tax Systems: The Dividends Paid Deduction Considered (+ JCT report).
• 6/16/17 – Press release asking for people to submit suggestions for tax reform by 7/17/17. He seeks recommendations in four areas:
• “1. Providing much-needed tax relief to middle-class individuals and families through reforms to the individual income tax system;
• 2. Strengthening businesses – both large and small – by lowering tax rates and broadening the relevant tax base in order to put the economy on a better growth path and create jobs;
• 3. Removing impediments and disincentives for savings and investment that exist in the current tax system; and
• 4. Updating our international tax system in order to make our nation more competitive in the global economy and preserve our tax base.”
• 6/27/17 – In a speech on the Senate floor, Hatch said he is “committed to ensuring a robust process in the Senate for developing, considering, and passing any tax reform package.  That is how the Senate functions best, and that is what I intend to see happen.” He also noted that he has “been working to involve all the Republican members of the Senate Finance Committee in this effort.  We have a number of great senators on the committee, many of whom have put in years of work on different areas of the tax system.” 
• He also noted he had given assignments to some SFC members, such as:
• ·         Enzi and Portman – international tax
  ·         Grassley – individual tax
  ·         Thune – business and estate taxes
  ·         Heller and Cassidy – energy tax policy
  ·         Roberts – agriculture tax issues
• Senator Hatch noted that tax reform would not be a “closed-door exercise” in the Senate. He also wants members outside of the Senate Finance Committee to be involved and he wants “to see Democrats at the table” and a “bipartisan process that renders a bipartisan result..
• His final remarks:

“At the end of this process, no one should be able to credibly claim that they were unable to participate or that they didn’t have enough information about the bill.  So, I hope this puts to rest any claims or suppositions that the tax reform process is going to be secretive in nature.  Because, if I have my way, this process will be both open and bipartisan. 

The goal of everyone in this body with respect to tax reform ought to be to help the American people by providing tax relief to American families, simplifying the tax system, improving our business tax system to allow American businesses to compete in the global economy, and create stronger growth in the economy, wages, jobs, and opportunity.  

I hope more of my colleagues will join me in supporting this important effort.”

What do you think? Will we see permanent, comprehensive tax reform this year?

One Year Anniversary of House Republican Tax Reform Blueprint

On June 24, 2016, the House Republicans released their "A Better Way" blueprint for tax reform. Obviously as part of an election strategy. On November 9, 2016, with Republican victories all around, I thought there would be fast track activity to draft legislative language to be released early in the 115th Congress.  We haven't seen any legislative language yet although I suspect some exists.

The details of the plan can be found in the full report of the Republicans and a July 2016 article I have on it. The blueprint seems to have hit a few roadblocks, most notably the tax on imports. Note that this is not a tariff. Instead, imports are taxed by not allowing a deduction for them. Likewise, exports are tax-free by removing export revenue from the tax base. The goal is to make the business tax a consumption tax that can be border-adjustable (per the report).

Many taxpayers are not in favor of the import treatment, most notably retailers with lots of imports, as well as oil companies (and others). For example, see the National Retail Federation's website on "BAT is a Bad Tax." [BAT = Border Adjustable Tax]

The import tax though generates a lot of revenue to help pay for lowering the corporate tax from 35% to 20% and the maximum tax on passthrough business income from 39.6% to 25%.  So, it is an important part of tax reform.

The blueprint includes several simplifications and several open questions to be resolved. Drafting legislative language is difficult as changes have effects on several other parts of the law, transition rules must be addressed, and there were several questions left open in the report.

Meanwhile, it it not identical to President Trump's plan and the Senate doesn't yet have a formal plan. However, this past week, Senate Finance Committee Chairman Hatch formally asked for suggestions - due by July 17.

Also, on June 20, Speaker Ryan delivered a speech on tax reform to the National Association of Manufacturers. He would like to see tax reform by the end of 2017 [CNBC, "Speaker Paul Ryan tries to save 'crown jewel' of GOP agenda: Tax reform," 6/20/17.]

There are additional agenda items for Congress and President Trump for this year, including work on the Affordable Care Act, passing a budget, and dealing with the debt ceiling.

What do you think? Will we see tax reform by the end of the year?

Tax Reform in 2016?

While we are unlikely to see tax reform this year, there continues to be a lot of work going on in the tax committees on it.  And President Obama updated and released his framework for business tax reform this month (first report was released in Sept. 2012). I think the main impetus for the update was to address inversions to tie to the recent activities of IRS and Treasury.

At a speech to the U.S. Chamber of Commerce on April 15, Congressman Brady, chair of the House Ways and Means Committee stated:

"By June, we intend to produce a consensus blue print for comprehensive pro-growth tax reform."

There have been more hearings on tax reform including hearing proposals of members of Congress.

Senator Hatch, chair of the Senate Finance Committee, continues to work on his report on corporate integration (taxing corporate income once only).

As part of his April 15 speech, Congressman Brady also laid out his principles of tax reform.  Here they are along with those that Senator Hatch released in December 2014.

Congressman Brady:

1.Make tax code “simpler, fairer, and flatter.”

2.Close loopholes and “special interest provisions” to lower rates for all.

3.Make system competitive.

4.Encourage business activity in US & move from worldwide to territorial system.

5.Pro-growth tax reform.

6.Reform to improve tax system, not to address spending problem.

Senator Hatch (wants broader base, lower rates and territorial system):

1.Economic growth.

2.Fairness.

3.Simplicity.

4.Permanence.

5.Competitiveness.

6.Promote savings and investment.

7.Revenue neutrality.

A lot of the principles can be met by removing or cutting back the roughly 250 special tax rules in our tax system such as the exclusion for employer-provided health insurance, the mortgage interest deduction, fringe benefits, credits, preferential rates, and more. That makes the law simpler, more equitable and transparent and neutral. It also allows for lower rates. Today's high rates exist because of so many special rules.

What do you think? Do you have any principles to add to the lists of Congressman Brady and Senator Hatch?

Tax reform for 2015? Seems unlikely

Tax reform looked like a possibility when at the end of 2014, the new tax committee chairs spoke positively about it. For example, Senator Hatch issued his seven principles of tax reform and Congressman Ryan noted it might be doable by summer.  The Senate Finance Committee has held a few hearings on the topic. But ...

• There is still insufficient consensus on what tax reform should look like and how to pay for it.
• New ideas continue to be issued.
• Congress continues to propose and even pass lesser reforms, such as making the sales tax deduction permanent, even though tax reform will most likely involve repealing the itemized deduction for all state taxes.

I've got a short article in the AICPA Tax Insider - Tax reform for 2015: One step forward, two steps back? (6/11/15).  It summarizes what has happened from December 2014 through May 2015 on tax reform, as well as summarizes some bills passed in the House and a sampling of those introduced that seem to indicate more that it is business as usual. For example, do we need the Hearing Aid Assistance Tax Credit Act (I have nothing against hearing aids, but why bog down the tax law with a subsidy for them and why have a subsidy for them at all)?  Also, it is contrary to tax reform of broadening the base and lowering rates.

What do you think about the tax reform agenda and timetable?  [article link]

Better identity theft efforts - S. 2736

On 7/31/14, Senators Wyden and Hatch proposed a comprehensive identity theft bill to reduce identity theft related to federal tax filings. This addresses a serious issue. Individuals should not have to worry that federal tax filings may lead to theft and costly use of their tax identification number. While tax reform bills have also included provisions to lessen identity theft, such proposals should not have to wait for a full tax reform bill to be enacted (which will likely take until at least 2016).  The IRS has also ramped up its efforts to reduce identify theft, but needs more assistance.

S. 2736, Tax Refund Theft Prevention Act of 2014, includes new rules for the following areas:

Sec. 2. Safe harbor for de minimis errors on information returns and payee statements - basically, no need to correct such a form if the error is $25 or less. Apparently, the goal it to reduce unnecessary filings, all of which increases the possibility of identity theft.

Sec. 3. Internet platform for Form 1099 filings.

Sec. 4. Requirement that electronically prepared paper returns include scannable code.

Sec. 5. Single point of contact for identity theft victims.

Sec. 6. Criminal penalty for misappropriating taxpayer identity in connection with tax fraud - up to $250,000 or 5 years in prison or both.

Sec. 7. Extend Internal Revenue Service authority to require truncated social security numbers on Form W-2 - modifies 6051(a)(2) by replacing "his social security number" with "an identifying number for the employee."

Sec. 8. Improvement in access to information in the National Directory of New Hires for tax administration purposes.

Sec. 9. Password system for prevention of identity theft tax fraud - calls upon Treasury to create a program where any individual may elect to obtain a "unique password" to include on his/her return. So, if a return with your social security number is filed, but without the password, it is not processed.

Sec. 10. Increased penalty for improper disclosure or use of information by preparers of returns.

Sec. 11. Increase electronic filing of returns.

Sec. 12. Increased real-time filing.

Sec. 13. Limitation on multiple individual income tax refunds to the same account.

Sec. 14. Identity verification required under due diligence rules - modifies the penalty under §6695(g) by adding at the end: "Such due diligence requirements shall include a requirement that such preparer verify (in  such manner and with such documentation as the Secretary shall provide) the identity of the taxpayer with respect to such return or claim for refund." This is the penalty that requires return preparer to take extra verifications when the return includes the EIT.

Sec. 15. Report on refund fraud - due from the IRS one year after enactment.

Per Senator Hatch's press release of 7/31/14:

“Tax refund fraud is a one-two punch for taxpaying individuals,” Hatch said. “Millions of taxpayers’ identities are compromised, and all taxpayers have their tax dollars wasted.  Our bill aims to address such fraud by enhancing the IRS’s capabilities in detecting fraud and by giving victims the assistance and safeguards they need to repair the damage done by tax theft criminals.  In order to further deter this crime, we make tax refund fraud a specific category of a felony offense and enhance security features for filers.  Hard-working American families deserve a government that protects both their tax dollars and their sensitive taxpayer information.” 

“We have to better protect lawful taxpayers from this nightmare issue,” Wyden said.  “Earlier this year, I made it clear that taxpayer consumer protection must be at the heart of improving the American tax system.  This bill offers a comprehensive, common sense solution to a growing problem that will help prevent fraud and also provide assistance to those who have been victimized.”

A one-page summary of the bill from Senators Wyden and Hatch was also released.

What do you think?

Summer hearings on comprehensive tax reform

 

On June 5, 2014, Senators Wyden and Hatch of the Senate Finance Committee announced three hearings for the summer on comprehensive tax reform. The topics:

June - Education incentives

July - (1) Identity theft and taxpayer privacy protection
          (2) Modernizing corporate taxation

They also mention:

• Simplification
• Promoting economic prosperity
• Innovative ways to fix the depleted Highway Trust Fund

A few observations:

• Education incentives - there are over ten today. There really is no need for any. Any government subsidy can take place through existing systems such as Pell grants. Also, a lower rate would help people save for higher education.  The existing provisions are for college, not for vocational training, so are limited. Also, they benefit higher income taxpayers more than lower income taxpayers.
• Modernizing the corporate tax - ideally, this should include some effort at integration, but that is unlikely. I'm guessing that they are mostly looking at a lower rate and a changed international taxation scheme.  If the result includes longer life for intangibles (such as 20 rather than the current 15), we are not really modernizing. The Camp and Baucus proposals included extending the life to help pay for a lower corporate tax rate.
• How to fix the depleted Highway Trust Fund.  While they are studying it, why not raise the rate from 18.4 cents per gallon, where it has been since 1993, to at least the inflation adjusted amount (30 cents).

What do you think?

Time to justify your favored tax breaks - if you can

On June 27, 2013, Senator Baucus, Chair of the Senate Finance Committee and Senator Hatch, Ranking Member of the committee issued a call to everyone asking them to submit justification for keeping any tax break they believe should be in the federal tax law. They refer to this as a "blank slate" approach. That is, assume that none of the 200+ special tax breaks ("tax expenditures") are in the tax law. If you believe any should be there, send them the reasons why. House Ways and Means Committee Chairman Camp called this idea "welcome news" (6/27/13 press release).

The senators refer to the Joint Committee on Taxation tax expenditure report to define what a tax expenditure is. The Joint Committee on Taxation does not count rules tied to the basic design of a type of tax as tax expenditures. For example, the JCT states in its February 2013 report:

"Under the Joint Committee staff methodology, the normal structure of the individual income tax includes the following major components: one personal exemption for each taxpayer and one for each dependent, the standard deduction, the existing tax rate schedule, and deductions for investment and employee business expenses." (page 3)

The JCT also notes that the carryover of net operating losses is a normal part of an income tax. (page 8)

I can't think of any deduction, exclusion, credit or special rate that is crucial to our tax system. The provision that likely saves me the most tax dollars is the exclusion for employer-provided health insurance.  But, I should be paying income and payroll taxes on that benefit - it is income and something that not all individual filers get benefit of.  This is also the largest tax expenditure - over $110 billion per year. Removal of this special tax rule ought to allow for a drop in the individual tax rates. Some will argue that people will drop their employer-provided health insurance if it becomes taxable. I doubt it because the tax you pay on it is likely to still be far less than if you get your own insurance and pay for 100% of its cost. And, this change might also lead to a drop in insurance costs when the policy holders actually know the cost of that coverage.

The research tax credit is an incentive to conduct research in the US which is a good idea. And it also helps cover some of the spillover benefit others get from a company's research. So there is some justification for this credit even in the blank slate approach to tax reform, but it needs to be weighed against a lower tax rate and a simpler system. A simpler credit is likely still a good idea, as is expensing R&D rather than capitalizing and amortizing it (and simpler, and it is just a timing difference).

Ok - I'd also argue for allowing small businesses, even those with inventory to use the cash method rather than accrual because it is easier for them. This is just a timing item, so really not a significant cost. Also, the term "tax expenditure" is not viewed by everyone the same way. The JCT treats use of the cash method of accounting by a business to be a tax expenditure, but the Treasury Department does not (see page 21 of the JCT February 2013 report).  For more on this topic, please see Rethinking the Income Tax Calculation - A Look At Tax Expenditures, AICPA Tax Insider, 2/10/11.

What special tax rules can you justify keeping - and what is the justification?