Press Room: Tax Release

August 01, 2017

August Has Arrived, But Tax Reform Details Remain Scarce

After months of closed-door meetings on tax reform, the Big Six—a working group of Republican leaders that includes Secretary of Treasury Steven Mnuchin, National Economic Council Director Gary Cohn, Speaker of the House Paul Ryan, Senate Majority Leader Mitch McConnell, House Ways and Means Committee Chair Kevin Brady and Senate Finance Committee Chair Orrin Hatch—expressed confidence that a shared vision for tax reform exists, but have not provided much insight as to the specifics. A Joint Statement released by the Big Six on July 27, 2017 affirms the White House’s prior stated goals and announces that a border adjustment tax will not be considered in order to advance other goals for tax reform.

Border Adjustability Off the Table in Favor of Other Reform Goals

The border adjustment was a key revenue-raising element of the House GOP’s A Better Way Blueprint for Tax Reform (Blueprint) issued in June 2016, which advocated a shift to a destination-based cash flow tax system. Under this system, a border adjustment would exempt exports from tax and subject imports to U.S. tax. Retailers and other import-heavy industry groups were strongly opposed to border adjustability and this was one of the most controversial proposals in the Blueprint. Expressing an appreciation for unknown factors associated with a destination-based tax, the Big Six decided to set aside border adjustability in order to advance tax reform discussions.

Congressional Republicans and the Trump administration have endorsed movement to a territorial-style tax system, which exempts foreign earnings from residual U.S. tax. The Joint Statement expresses confidence that there is a viable approach for protecting the U.S. tax base, but provides no details as to specific anti-base-erosion provisions.

Lower Tax Rates and Unprecedented Capital Expensing

The Joint Statement calls generally for simplification and lower rates for small businesses so that they can compete with larger ones, and for lower rates for all American businesses so they can compete with foreign ones. The White House’s April 2017 fact sheet on tax reform expressed a desire for lowering business tax rates to 15% and an individual tax rate of no more than 35%. The Blueprint proposed a 25% corporate tax rate, a 25% rate for pass-throughs and a 33% individual top tax rate. The Joint Statement does not reference specific rates but calls for rates to be reduced as much as possible.

The Big Six also reiterated support for unprecedented capital expensing, which is aimed at increasing economic growth—a key priority of the Trump administration. The Blueprint included a proposal for full expensing coupled with elimination of the deduction for net business interest expense (interest expense net of interest income). The disallowance of net interest expense was another controversial key revenue-raising proposal in the Blueprint. Although the Joint Statement supports capital expensing, it does not specifically address disallowance of the tax deduction for net interest expense.

The Joint Statement urges the two tax-writing committees to move forward with crafting legislation to be considered by committees this fall and then by the full House and Senate. Republican leadership has confirmed that they still intend to pass tax reform legislation using the budget reconciliation process—a special legislative process that allows for expedited Senate consideration of certain types of legislation by restricting filibuster and allowing for a simple majority vote. The Joint Statement places a priority on permanence, seemingly leaving the door open for some aspects of the legislation to be temporary. The 2001 and 2003 Bush tax cuts were temporary measures also passed through the budget reconciliation process.

The Joint Statement does not call for revenue neutrality or provide details on revenue offsets. For a discussion of the White House’s prior statement on tax reform, see our prior Tax Release. For an analysis of the House’s tax reform Blueprint and comparison to President-Elect Trump’s pre-election goals for tax reform, see our November 2016 Tax Release.

The Takeaway

Now that border adjustability has been taken off the tax reform discussion table, tax reform discussions will likely shift to rate specifics (individual, corporate, and pass-through), revenue impacts, capital expensing proposals, the shift to a territorial system with anti-base-erosion measures, and middle class tax relief. More details may emerge in late August or in September. In the meantime, businesses should take proactive measures to prepare for likely changes, including lower rates and a mandatory deemed-repatriation tax on previously untaxed foreign earnings. Accounting method changes can be made to accelerate deductions or defer income into a later period when a lower tax rate may be in effect. An earnings and profits (E&P) study should be considered for taxpayers who do not already have an accurate computation of foreign E&P. An accounting method change can also be made for E&P purposes for foreign subsidiaries and may reduce E&P subject to a deemed-repatriation tax. With Republican leadership still calling for a comprehensive tax reform bill to reach President Trump’s desk by the end of the year, the time is ripe to start planning ahead of potentially significant tax changes.