In late May, Congress was faced with the expiration of the highway bill and postponed any long-term solution for two months with a new deadline of July 31. However, during the discussions leading up to the temporary funding of the highway bill, several ideas surrounding taxes were floated. House Majority Leader Kevin McCarthy (R-CA) proposed that the long-term highway bill also include an overhaul of the tax code. His tax reform proposal would essentially be focused on the corporate side through repatriation, a one-time tax holiday for firms with offshore funds to bring it back to the U.S. Only the general idea has been released, no details.
Also during the discussion, Senator John Thune (R-SD) proposed having tax extenders be included in any long-term highway legislation and was skeptical of the House proposal since he predicts that any tax overhaul is unlikely to occur. Senate Finance Committee Chairman Orrin Hatch (R-UT) also chimed in by saying that tax reform would not be included in any highway bill currently, but that could change before the end of the year. Senate Majority Whip John Cornyn (R-TX) echoed the same sentiment and added that any revenue for tax reform, such as repatriation, should be used to lower tax rates instead of funding the highway bill.
Any sort of tax reform effort, though, must reconcile the rate differential between the individual income tax rate and the corporate tax rate. This issue has become a major sticking point to any sort of big picture agreement of what “tax reform” will look like. The idea of “business-only tax reform” was floated in early May in the hopes of gaining traction toward an agreement of some sort of tax overhaul, signaling that Congress would start with businesses first. This creates a problem on the individual side of the tax code where small business and pass-through entities file as individuals. Since President Obama won the battle during the fiscal cliff when the top individual tax rate returned to its pre-2001 level of 39.6 percent, it is unlikely that President Obama would allow this tax rate to decrease during his remaining years in office. This is a major obstacle to any effort to decrease the individual income tax rate.
While the name of “business-only tax reform” sounds “business-friendly” to both large and small businesses, this reform would only focus on lowering the corporate tax rate, leaving pass-through entities with an even higher tax rate. Associations and coalitions representing small business and pass-through businesses were quick to extinguish any notion of “business-only” or “corporate-only” tax reform occurring without addressing the high individual income tax rate simultaneously. These groups fear that if “corporate-only” tax reform happens first, Congress will never get around to overhauling the individual income tax rate, and thus, leaving small businesses and pass-through businesses in the wind.
Speaking of tax reform, the Senate Finance Committee’s working groups are still plugging along with formulating their ideas and recommendations for tax reform. Senate Finance Committee Chairman Orrin Hatch indicated in early June that the working groups have until the June 26 to develop their plans and submit them to the committee for consideration. The original deadline had been May 31. Chairman Hatch is also deferring to the individual working groups as to whether they release their tax reform recommendations to the public.
In early May, House Ways and Means Chairman Paul Ryan (R-WI) hinted that this summer the House could take up a limited tax reform package that includes tax extenders, international tax reform and highway funding. No details have emerged on this plan to date. Additionally, the House continued its routine of passing stand-alone, permanent tax bills, including R&D, which will be further detailed in DEAN ZERBE’s COLUMN. However, it should be noted that Senate Majority Leader Mitch McConnell (R-KY) recently slammed the door on the likelihood of any comprehensive tax reform occurring this year, citing philosophical differences between Congress and the administration over the issue of revenue neutrality. In response to McConnell’s comments, Chairman Ryan hinted that tax reform could still be possible this year with a focus solely on international tax reform.
Looking ahead, the real action on the highway bill and tax extenders will heat up in July as Congress races to meet another deadline to fund the highway bill before adjourning for their month-long August recess. For the rest of the year, congressional action is likely to wrap up any remaining work, including possibly considering a continuing resolution to fund the government through the next fiscal year, since the presidential elections are beginning to dictate the congressional calendar and any agenda of work.