March 1, 2017
by Dean Zerbe, former Senior Counsel to the U.S. Senate Finance Committee and alliantgroup National Managing Director
Forbes

The Endless Summer was the surfing movie for boys when I was growing up in Southern California in the 1970s – a 1966 movie about two surfers following the Summer Sun around the world in search of the perfect wave – with the prospect of Summer never ending.

I was reminded of The Endless Summer when Treasury Secretary Mnuchin in a recent interview with the Wall Street Journal stated that he looked to having tax reform completed by Summer.  Then, Secretary Mnuchin quickly amended that statement, or maybe by Fall.  Hmmm.

Are Republicans on a path to The Endless Summer of Tax Reform?

Where We Are Now

The President’s State of the Union speech certainly was a shot in the arm for Republicans to move forward.  But now, the details.

The House Better Way blueprint for tax reform put forward by Speaker Paul Ryan (R-WI) and Ways and Means Committee Chairman Kevin Brady (R-TX) has commanded most of the attention – in part because it is the only comprehensive plan that has been put forward and also due to the leadership and drive of the Speaker and Chairman Brady.

The main focus of discussion in Congress as to the Better Way plan has been the provisions regarding the border adjustment tax – which (very much in a nutshell) is meant to allow for exported goods to be exempt from the tax and imported goods sold domestically are subject to the tax.  Supporters of the new tax policy view that an increase in the value of the dollar would translate to making the new policy neutral as to exports and imports.  In addition, the revenue raised (estimated at $1 trillion dollars over ten years) would pay for a significant reduction in the corporate rate (and potentially lowering taxes on pass-thrus as well) and allow for the tax reforms to be permanent law (as opposed to expiring after ten years – ala the Bush tax cuts).  Certainly, some business owners (especially importers) are not as sanguine about what this proposal will mean for their company.

The House Republicans seem, in general, content to going forward with the Better Way proposals on tax reform.  While there is certainly broad agreement on pursuing tax reform – the Senate Republicans and the White House are not on board, at this time, with the border adjustment tax.

The Senate Republicans have not coalesced around a single tax reform proposal and Finance Committee Chairman Orrin Hatch (R-UT) is still considering corporate integration as a tent pole for his tax reform proposal.  Corporate integration has its fans and its nay sayers – but I suspect that Senator Hatch can craft a proposal that gets (some) Senators in a happier place.  Note:  at the moment the Democrats aren’t really part of the discussion – but that may possibly change (at least in the Senate) down the road.

Hanging over all these discussions of tax reform is the issue of deficits and revenue neutrality.  As mentioned, revenue neutrality (or at least neutrality after year 10) is of interest so that the tax reform can be permanent law (this, in short, deals with the rules regarding budget reconciliation – which will most likely be the vehicle used for tax reform – to provide for a 50 vote rule in the Senate as opposed to the normal 60 votes – a must with the Republicans only having a 52-48 majority).

Time To Catch A Wave

The White House has recognized that for tax reform – there is a strong need to “go, go, go.”  While the expectation was to first deal with the Affordable Care Act repeal/replace and then move to tax reform – that ordering seems less certain at the moment.  The administration (like any administration) has only a small window to go forward on its big proposals – and has been right to bang the drums for action now.

For the Congressional Republicans, the navel gazing sessions are soon going to end – they have to.  There is something about moving actual tax legislation through Finance/Ways and Means Committee (and then onto the floor) that gets people clear-eyed.  Getting scores on provisions from Joint Committee on Taxation – and dealing with actual proposals and amendments makes elected officials ready to look at, weigh and consider the tradeoffs that will make tax reform happen.  The key will be for Senators and Congressman to recognize they can’t sit on their board all day waiting for the perfect wave.

What Is Going To Happen

The House will move forward and pass its blueprint by late Spring – including some version of border adjustment tax (perhaps phasing it in).  The Senate will follow with its own proposal that will have international reform (ala Senators Portman (R-OH) and Schumer (D-NY)) including revenues from a deemed tax on overseas earnings; a corporate/business tax reduction; individual rate reduction and other bells and whistles.  Perhaps some version of corporate integration as well.  I suspect the Congress will finesse, in part, the issues of revenue neutrality with more robust projections for economic growth – but at the end of the day will accept as a necessary tradeoff a certain amount of deficit spending for tax reform (a lot more winners than losers is going to be vital to getting the necessary votes) – and maybe phase-in tax increases (including even a version of border adjustment) so that in year 10 and on the bill is revenue neutral.

The framework of the final deal will rest on a House/Senate conference starting in mid-Summer. The critical piece will be crafting a deal that will keep 50 Republican Senators in line (fun with a capital “F”). Sounds daunting, but it has been done before, example in the 2001 and 2003 tax bills.  I anticipate the administration will get some love on some issues – ex. addressing carried interest; some cap/limitation on deductions for the wealthiest; tax relief for working families (highlighted in the State of the Union); etc.

The administration has been good at putting forward aspirational goals for tax reform – we want it, want it now – without needlessly drawing lines in the sand on specifics.  That strategy has served them well and if they go into conference with a focus on the big picture of realizing tax reform that will encourage economic growth within a broad framework of reducing tax rates for businesses and individuals – they should get tax reform home this Fall and actually see The End Of Summer.

sb-d-zerbe[1]Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington, D.C. office. Prior to joining alliantgroup, Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman of the Finance Committee, Senator Charles Grassley, on tax legislation. During his tenure on the Finance Committee, Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law, including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform) and the Pension Protection Act. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill.

 

 


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