With the tax reform debate heating up, I thought now would be a good time to examine what the major players want, including areas of agreement and contention between the White House and Senate and House leadership.
What the White House Wants
Simply put, growth—and the White House is willing to live with a deficit increase of around $1 trillion to jumpstart the economy, believing that sum will be made up in the long run through economic growth.
As a CEO, the president sees a direct connection between lowering taxes on businesses with growth and new jobs. Business is what he cares about as he believes it is the first domino to stand or fall in the cycle of growth. As such, the White House supports a huge corporate tax cut from the current 35% down to 15%, believing that the lower business taxes are, the higher the growth in the U.S. This is the president’s anti-inversion plan—make the tax rate so low that no one wants to leave and companies will domicile in the United States. It is an alternative to the House’s border adjustment tax (BAT), which the administration hasn’t publically bashed, but is not on the White House’s wish list.
The president would also love to see any bill passed have retroactivity to the beginning of 2017.
What Senate Leadership Wants
Senate leadership is in line with the White House’s thinking on reducing the corporate rate, but the chances of passing a bill at a rate of 15% is not likely. With 60 votes needed to overcome a Democratic filibuster, and with only 52 Republican Senators, the math is not with the GOP if it comes down to a party-line vote. If any significant tax legislation is to see the light of day, it will need to be passed through budget reconciliation, a procedure that allows a bill to pass through a simple 51 vote majority—with the caveat being that the legislation must be revenue neutral.
It is revenue neutrality that separates the Senate from the White House at the moment, with a 15% rate and the anticipated spike in the deficit taking budget reconciliation off the table—and in all likelihood, the ability to get a tax bill through the Senate.
What House Leadership Wants
Like the administration and the Senate, the House supports pro-growth driven policy reform, believing that anything that reduces the cost of doing business is pro-growth. Using the House blueprint as its starting point, GOP House leadership is proposing to cut the corporate rate to 20% and collapsing marginal tax rates into three new brackets of 12%, 25% and 33%. Additionally, House leadership is also looking to alleviate the high tax rate placed on pass-throughs by lowering their rate to 25%. Such a reduction for pass-throughs however will require strong anti-abuse provisions to prevent individuals from gaming the system, with one idea being a formula to determine wages vs. the business income of a pass-through entity.
The major details separating the House and the administration at the moment is the difference in the corporate rate and the House leadership’s support of the BAT (a key pay-for mechanism for their tax reform bill)—and the administration’s current resistance to this tax.
The Bottom Line: What it Means Going Forward
Negotiations between the administration and House and Senate leadership have been happening for weeks to the point where they are past discussing principles. Now is the time to start putting meat on the bone, with these concepts needing to be fleshed out to create a bill that can pass both the House and Senate:
- Lowest corporate rate possible
- Pass-throughs have parity with C corp rates
- “Guardrails” for pass-throughs so there is no gaming of the system a la “carried interest and hedge funds”
- Implementing a territorial system
We will keep you posted as negotiations progress over the coming months.
Dawn Levy brings a wealth of high-level experience in tax policy, including pensions, transportation tax, and energy tax to D Squared Tax Strategies, a Washington, DC tax policy firm. Dawn is known throughout Washington for her solid understanding of Senate and House procedures. As Tax Counsel to the Senate Finance Committee, Dawn supported the tax team, working energy issues, pension concerns, corporate tax matters, and other tax expenditures. She worked with professional staff and Congressional members, putting amendments together, writing legislation, working with different committees and liaising with the Joint Tax Committee on taxation and the Department of Treasury (including the IRS) on a daily basis. Dawn previously served as Staff Director for the Senate Environment and Public Works Subcommittee on Infrastructure; Executive Vice President of Tax at Cassidy and Associates; and lobbyist and committee director for the National Conference of State Legislatures.