What We Know About The Tax Reform
This year there has been a lot of anticipation as to what the new tax reform will be, although there has not been much accomplished on it. Congressional Republicans in the Administration have yet to agree on basic tax reform parameters, including:
- Whether the legislation must be revenue-neutral or if it can be a net tax cut (which revenue offsets should be included); and
- Whether the tax reform must be permanent
House and Senate Republicans in the Administration are currently in negotiations, which they hope will result in legislation to be released in September.
Administration officials have said they no longer believe a 15% rate is achievable for corporate taxes; instead, they are aiming between 20% to 25%. Congressional Republicans in the Administration used the August recess to try to sell their vision of tax reform. Their desire to release legislation in September is optimistic, as there are other critical contentious measures that must be enacted. Some of the measures include appropriations for the 2018 Fiscal Year, an increase in the federal debt limit before mid-October, and Hurricanes Harvey and Irma disaster relief.
Congressional Republicans remain divided on a proposed budget resolution, with Conservatives seeking additional non-defense spending cuts, and Moderates objecting to the proposed budget. Without an agreed-upon budget resolution, Congress cannot use the budget reconciliation procedures it needs to move the tax reform to the Senate.
House Republican Ideas
The tax blueprint said it “will continue tax incentive retirement savings,” but has not promised to leave them unchanged. The blueprint assumes the elimination of all itemized deductions for individuals except the home mortgage interest and charitable contributions deductions (both of which would be modified in unspecified ways). The blueprint “will continue the current tax incentive for savings” but “other exemptions, deductions and credits for individuals,” characterized in the blueprint as “special – interest provisions,” would be eliminated. For large businesses (C Corporations), the blueprint would lower the corporate tax to 20%. In general, the business interest expense would only be deductible against interest income. Although, there would be special rules for financial service companies that take into account the role of interest expense and interest income in a business model.
Senate Finance Committee
Senate Finance Committee Chairman Orrin Hatch (R-UT) has not advanced any tax reform proposals this year. The Finance Committee Staff has been watching activity in the House and are focusing on past tax reform proposals. This includes the tax reform proposal, Former House Ways and Means Committee Chairman Dave Camp (R-MI), released in 2014. The Camp Proposal, however, had little support when it was released and has items that would not be applicable now.
Timing of Tax Reform
The Republican leaders continue to suggest tax reform is imminent but would not be surprised if it happens to be discussed next year, since there is no apparent consensus on key issues. When Congress returns in September, it will be occupied with other matters, leaving a short time for tax reform consideration for the end of the year. However, seemingly impossible tax reforms have come together in the past, and one should not be completely surprised if Congress pushed for tax reform later this year (possibly in December).
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