White House signals flexibility on tax bill as Congress gets to work

alliantgroup’s Dean Zerbe Quoted in The Washington Examiner
The Trump administration negotiated with congressional Republicans for nine months over a shared platform for an overhaul of the tax code. With Congress finally moving toward legislation, however, the White House last week signaled that it would be willing to accept big changes to get a bill passed as soon as possible.

The must-haves for the administration are that the bill cuts taxes for the middle class and includes a 20 percent corporate tax rate, top Trump economic adviser Gary Cohn said at a meeting of international bankers. Trump will be “very flexible on everything else, ’cause he knows the importance of getting tax reform done.”

Ultimately, there may even be wiggle room on the corporate tax rate, which would still be below the average of advanced nations if it rose a percentage point or two from the 20 percent target.

“That is more them signaling a priority than a line in the sand,” said Dean Zerbe, national managing director for Alliantgroup and a former tax counsel for the Senate Finance Committee.

Senate Republicans already individually have a significant amount of leverage over the final tax bill. President Trump can lose only two Republicans and pass legislation without Democratic votes, meaning that every senator likely could demand significant concessions.

Furthermore, Trump and Republicans are desperate for a legislative victory after the failed effort to repeal Obamacare. The exact terms of victory are not as important.

When the GOP tax reform framework was revealed, Rep. Peter Roskam of Illinois, the chairman of the House Ways and Means tax subcommittee, said Trump has “a disposition, in my view, that he’ll sign anything reasonable we get on his desk.”

That framework included many lofty goals besides the 20 percent corporate rate, such as doubling the standard deduction and creating an expensive new special tax rate for partnerships, S-corporations, and other businesses that file through the individual side of the tax code. Meeting them would force congressional Republicans into a tough choice of adding significantly to deficits or eliminating many of the most popular credits, deductions and loopholes in the current tax code.

Getting rid of those tax breaks won’t be easy. Last week, House Republicans from blue states tried to force leadership to back away from eliminating the state and local deduction. That break, which allows individuals to deduct property and income or sales taxes at the state and local levels from their federal taxable income, is worth $1.3 trillion over a decade. Its elimination would be the biggest revenue raiser in the GOP tax plan. Yet, Republicans from New York, New Jersey, and other high-tax states are expected to continue fighting it in the coming weeks.

“I think there’s an amount of the framework that is in negotiations to be altered in some way or another,” said Brandon Arnold, executive vice president of the National Taxpayers Union, a group that favors comprehensive tax reform.

Most concerning, Arnold said, was the possibility that the elimination of the state and local tax deduction could be scaled back, forcing some of the tax breaks on the individual side to also be reduced. Another possibility: That Republicans could lower their ambitions for implementing “expensing,” the policy of allowing businesses to deduct investments in equipment from their taxable income in the year those purchases are made.

Or Republicans could go in a different direction altogether. Sen. Orrin Hatch, chairman of the Senate Finance Committee with oversight of taxes, has expressed interest in including a measure he’s been working on for years, a provision to integrate the taxation of corporate profits and dividends.

Other senators have other priorities. Sens. Mike Lee of Utah and Marco Rubio of Florida, for instance, have been calling for a much larger child tax credit than the one hinted at in the framework. A bigger child tax credit likely would ensure that middle-class families would get tax breaks in the bill, but would cost significant money, forcing concessions elsewhere in the package.

Meanwhile, Sen. Ron Johnson, a conservative Wisconsin Republican, has continued to raise awareness of his own proposal to dramatically lower corporate tax rates by raising tax rates on dividends and capital gains.

“That’s been my disappointment — where is our tax plan? You know, I’ve got Plan B,” Johnson said of his bill Thursday in an interview with conservative radio host Hugh Hewitt. “If the Senate Finance Committee and the House Ways and Means can’t get their act together and actually tell us what the full plan is, I’ve been working on one for months.”

Inevitably, the bill’s final form will be hashed out on the Senate floor, as members sort out which tax cuts are worth finding offsets for and how much moderate senators are willing to add to deficits.

“It’s kind of the tension of: How do you pay for things,” Zerbe said. “What’s your offset, what’s your raiser?”

For his part, Trump appears to already be looking beyond the tax battle.

In an appearance in the Rose Garden with Senate Majority Leader Mitch McConnell Monday, the president opened the door to a tax bill passing in 2018, rather than 2017, as long as legislation gets passed.

Then, he referred, for a second time, to a mysterious “economic development bill” that he hasn’t spelled out but has suggested would include tax incentives for companies to stay in the U.S. and penalties for those that ship jobs overseas.

Even McConnell, he said, doesn’t know anything about the bill.

alliantgroup is a leading tax consultancy that assists U.S. businesses and their CPAs in properly identifying and claiming all available federal and state tax incentives. To date, alliantgroup has helped more than 20,000 businesses claim over $5 billion in government-sponsored tax credits and incentives. alliantgroup’s headquarters is in Houston and the firm has offices in New York, Chicago, Boston, Sacramento, Irvine, Orlando, Indianapolis and Washington, D.C. For more information on alliantgroup and our R&D tax credit services, please visit alliantgroup on LinkedIn, Facebook and Twitter.

 
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.