Following the Path to Tax Reform
The future of tax reform is a topic on everyone’s mind and is certainly the focus of many of our lawmakers in the nation’s capital. Our continuous monitoring of the dialogue, conflicts, and rhetoric surrounding the future tax changes is focused on certain actions that have already taken place and many more that are still in the planning and negotiation stage. To evaluate the expectations and ultimate impact of the pending tax reform we can start with both the White House and the House GOP tax reform plans and consider similarities and difference between the two. We have seen and heard much about President Trump’s tax plans during his campaign and the early months of his presidency. We must also consider what is known about a tax reform blueprint provided by the GOP, which now has control of Congress. See “Tax Reform Highlights” in the watch list for a comparison of the two plans. What Americans still don’t know for sure is how or when these plans will come together and how tax reform will be funded in the end. Interject into this mix the President’s promise to repeal and replace the Affordable Care Act (ACA) while also adding in the Democrats wish list – which may need to be negotiated – in order to acquire the necessary votes for revenue neutral and/or a permanent tax reform bill. The current promise for significant tax reform certainly could lead us down the path to the far reaches of the tax code.
And so the journey begins…..
As we follow the path to tax reform, Americans are beginning to wonder if it is a path to a tropical paradise, highway to hell, or perhaps a yellow brick road to a strange place where we have never been? Most Americans have different perspectives on where the path will lead us. Let’s take a quick look back and follow what has happened so far.
Initial presidential actions
Everybody freeze! Those were the words from the new administration regarding any recently released tax rules. The president issued a presidential memorandum on January 20th that institutes a 60 day moratorium on all federal rulemaking until the new administration can review all regulations in process.
There are many areas that are currently awaiting further guidance from the service, which include but are not limited to the following:
- Centralized partnership audit regime (2018 law guidance)
- Transfers of certain property by U.S. persons to partnerships with related foreign partners (Proposed Rules)
- Qualifying income for master limited partnerships (Final rules)
- Recognition, deferral of foreign currency gain or loss under Section 987 (Proposed Rules)
- Earnings stripping rules under Section 385 (2018 documentation requirements)
- Employer health insurance reporting
- Dividend equivalent payments for foreigners who own contracts that reference U.S. source dividends (Final Rules)
The broadness of the memo also applies to IRS CCA’s and revenue procedure, possibly delaying guidance and final rules related to various tax code sections.
For more thoughts on this topic, please read our tax insight dated February 15, 2017, “Trump Issues Executive Order to Halt Implementation of Tax Changes”.
What about our borders – Should we build a “tax wall”?
There has already been much debate over a very controversial provision known as border adjustability. In its simplest terms, it would impose a 20% tax on imports by not providing a deduction for the cost of the imported good and assuming a 20% tax rate. Conversely, the measure would exempt the sale of exported goods from US tax. This is a methodology that is part of the GOP tax reform plan and was not originally supported by President Trump. Although where he stands on the issue now is unclear. What is clear is that there are sizeable and very influential constituents lining up on both sides of this issue. As this issue becomes a hot topic, we have seen the creation of the Americans for Affordable Products coalition that is strongly opposed to the border adjustments. This coalition consists of various industries and many powerful and well-known retailers, such as Walmart, Nike, Walgreens, and Best Buy.. Their argument against the import tax is the belief that the extra costs will ultimately cause US consumers to have to purchase goods at a higher cost. A coalition in support of the border adjustment regime, the American Made Coalition, was created by some of the largest US manufacturers, such as General Electric, Boeing, Dow Chemical, Eli Lilly and others. Their belief is that more US jobs would be created with this policy because the costs of US exports would be reduced and US goods would ultimately become more price-competitive with imported goods. They also believe that this eliminates the incentive for US companies to shift operations abroad. The border adjustment originates from the house GOP tax plan in which it provides additional tax revenue to help pay for other tax cuts in the corporate and perhaps individual income tax rates. Another complicating factor is the potential response from the World Trade Organization (WTO), which is comprised of many of our worldwide trading partners. It is possible that the WTO would take exception to the border adjustment regime and possibly retaliate. We have seen push back from the WTO in other export favorable tax regimes in the past. Other countries may also retaliate by either modifying their taxing structure in a similar fashion or increasing certain tariffs on US goods. If this retaliation occurs, then the tax revenue generation from the regime will be less than anticipated. We have seen statements from leaders in other countries, including Canada and Germany in recent months, warning that they are expecting the US to do the “right thing” with respect to this type of taxation. Border adjustability is a pivotal piece of the House GOP plan. The significant increase in revenue is targeted to pay for the many other tax cuts, and without it many other tax revenue raisers may be on the table in the ultimate reform package.
ACA – Repeal and replace, and reform?
The president has promised to repeal and replace the Affordable Care Act (ACA) and replace it with something better. The administration also desires to incorporate this process into the overall tax reform process. This approach makes sense because there are many tax related portions of the ACA and to accomplish overall tax reform and ignore the tax provisions of the ACA is not a complete process.
However this is not as easy as it once appeared. The administration and republican leaders suffered a setback recently when the much anticipated vote on the new health care bill to replace the ACA was cancelled. Apparently there was not enough support to pass the bill in the house with certain factions of the republican majority in disagreement over the latest version of the bill.
The president and Speaker of the House, Paul Ryan, both indicated at the time that they would move on from health care and focus now on tax reform. There have been indications in recent weeks that both the administration and certain members of congress expect that healthcare talks will continue while the main focus is now targeting tax reform measures.
The repeal of the ACA was expected to provide significant government savings, estimated at over $300 billion, which could be used for funding many of the desired tax cuts in both the presidential and the house GOP plans.
Although we should expect tax reform to move forward, many political leaders recently indicated that it will be more difficult without the repeal of the ACA.
What lies on the path ahead?
As discussed above, there are still many uncertainties in what the eventual tax reform will provide in regards to corporate and individual taxes, destination based taxing regimes, etc. President Trump has stated that he will unveil a plan relative to tax reform. This will provide the initial wish list from the administration, while understanding that it could still have many hurdles ahead. Ranking members of the senate have indicated that they should not be expected to simply pass the house plan without some senate input and changes. Some remaining issues that must be considered are whether it will be a revenue neutral change, passed through a reconciliation process, and/or whether or not democratic votes are necessary to pass the new tax reform rules and related regulations.
There will be ongoing negotiations throughout the process, which is expected to take several months. Our tax advisors will continue to monitor the process and provide updates on the latest news to our tax reform webpage.
Update: Subsequent to the posting of this letter, President Trump has released his updated tax plan. Please see the article “The Trump Administration Reveals its Fundamental Principles for Tax Reform” for our commentary.