Although the prospect for comprehensive tax reform this year is dimming, debate on tax policy issues will continue to be prominent on Capitol Hill. Between election year dynamics, changes in committee leadership, the tax extender debate, the upcoming release of President Barack Obama’s FY 2015 budget, and finding tax pay-fors for various policy and tax administration initiatives, the tax-writing committees and the Administration will have a full plate. Additionally, the specter of tax reform will continue to loom over Capitol Hill—with ongoing staff work expected.
Changes in Leadership
Former Senate Finance Committee Chairman Max Baucus (D-MT) was confirmed to serve as the U.S. Ambassador to China on February 6, 2014. Although former Chairman Baucus was working aggressively to advance comprehensive tax reform, he had already announced he would not seek reelection to the Senate in 2014. As a result, his confirmation to serve as U.S. Ambassador merely accelerates transition plans that were already in place to name Senator Ron Wyden (D-OR) as the new chairman of the Finance Committee.
Meanwhile, across the Capitol, the race for the House Ways and Means Committee gavel is heating up. Current Chairman Dave Camp (R-MI) is term limited, but it is possible that he will seek a waiver from House leadership to retain his post next year. Meanwhile, House Budget Committee Chairman and former vice presidential candidate Paul Ryan (R-WI) is widely seen as the front runner to replace Chairman Camp, and he recently announced his intention to seek the Ways and Means gavel. However, he may face a challenge from Congressman Kevin Brady (R-TX), who has also expressed interest in the top spot. Additionally, it is possible that Congressman Ryan’s presidential aspirations may impact his decision to seek the chairmanship. Both Congressmen Ryan and Brady are strong proponents of comprehensive tax reform and Congressman Ryan has a history of collaboration with Chairman Wyden.
Chairman Camp has been working to advance comprehensive tax reform since he took over the House tax-writing committee. Although Chairman Camp has not yet released his proposal, reports indicate that he intends to unveil the package before the President releases his annual budget request on March 4. Despite Chairman Camp’s efforts, tax reform will be difficult to move with new Senate Finance Committee leadership and without White House buy-in.
On the other side of the Capitol, Chairman Wyden has shown a deep commitment to comprehensive tax reform during his time in office, having introduced four tax reform bills since 2005. His accelerated accession to the Senate Finance Committee chairmanship one year earlier than expected provides him flexibility on moving forward with tax reform.
Chairman Wyden might decide to move forward quickly if it becomes likely that Republicans will take control of the Senate, if only to establish a placeholder for his positions on tax reform. His previous work on tax reform would put him in a strong position to do so if he desires.
However, given the short legislative schedule in 2014 due to the November midterm elections, the “ramp up” time needed to hire staff and reorganize the Committee, and the number of must-do issues on the Finance Committee agenda, it is more likely Chairman Wyden will use this year to get his footing and wait until next year to engage more fully on tax reform. Regardless, the Finance Committee will have a full slate of issues to address this year, including tax extenders, reforming the Medicare “doc fix,” passing trade promotion authority legislation, and possibly identifying pay-fors for other legislation, such as the highway bill.
Waiting would also allow Chairman Wyden to hit the reset button on the tax reform process in order to put his own stamp on tax reform. If he adopts such an approach, the Finance Committee agenda could include new hearings, legislative drafts, and opportunities for input that could stretch into 2015 and beyond. Further, assuming Congressman Ryan takes the gavel on the Ways and Means Committee, this could propel tax reform, as Chairman Wyden and Congressman Ryan have a history of working well together.
Whether or not tax reform moves this year, any proposals that are released could serve as a basis for future tax reform legislation. For this reason, stakeholders should stay engaged in the process. As the saying goes, if you are not at the table, you are on the menu.
Extension of tax policies that expired at the end of 2013 is another “must do” item this year. The dwindling prospects for tax reform will segue in to a focus on expired tax policies, known as “tax extenders,” in the months ahead.
Shortly before the 2013 holiday recess, Senate Majority Leader Harry Reid (D-NV) attempted to move by unanimous consent the Tax Extenders Act of 2013 (S. 1859), which would have extended dozens of tax provisions that were set to expire at the end of 2013. The measure, as expected, failed, but it did increase momentum on tax extenders. Finance Committee staff has subsequently started reviewing the tax extenders package.
On the House side, Chairman Camp has repeatedly said that extenders should be considered as part of tax reform; as such, he has not engaged in a separate tax extenders debate. However, the House leadership may be spurred to action if the Senate begins to move legislation.
It remains unclear how an extenders package will be structured. Will it be a “clean” extenders bill, containing no extraneous provisions or substantive changes in law? Will it incorporate any items from tax reform? How will it be paid for, if it’s paid for at all? Will they cull any provisions? Since the fate of any particular expenditure is in limbo, it shouldn’t be taken for granted and the extenders debate should be monitored closely throughout the year.
One-Off Tax Bills
Since the beginning of the 113th Congress, Chairman Camp has imposed a moratorium on Republican Committee members introducing tax bills, with few exceptions. If the tax reform process slows down in the House this year, however, Chairman Camp may give his members leeway to pursue individual tax priorities. For instance, last October, Congresswoman Diane Black (R-TN) and Congressman Danny K. Davis (D-IL) introduced the Student and Family Tax Simplification Act (H.R. 3393). any other majority members are expected to pursue their own pent-up tax priorities and likely have bills ready to introduce if and when the moratorium is lifted.
President Obama is expected to begin releasing the Administration’s FY 2015 budget request on March 4. The budget is expected to contain most of the tax proposals that appeared in last year’s budget, including: repeal of carried interest, international base erosion protections, energy and fossil fuel proposals, LIFO repeal, and capping itemized deductions. New additions are expected as well, for example, the President may draw from proposals in his most recent State of the Union address and his jobs framework, including: a minimum tax on foreign earnings, an expanded Earned Income Tax Credit to cover individuals without children, and a new retirement account dubbed “myRA.” It is also likely the President will incorporate ideas from Chairman Camp’s and former Chairman Baucus’ tax reform drafts.
Oversight of Internal Revenue Service (“IRS”)/Treasury
The IRS and Department of Treasury will have a full agenda in 2014 including: the Affordable Care Act implementation, fall-out from the tax-exempt targeting scandal, Foreign Account Tax Compliance Act (“FATCA”) implementation, and handling an influx of Foreign Bank and Financial Account Reports applications.
Recent hearings on the Hill suggest that the increased scrutiny and congressional oversight of the IRS will continue throughout 2014. This will strain the resources of both the investigating committees and the IRS. Given Chairman Wyden’s historical interest in tax administration and reforms, he also could conduct significant IRS oversight in his new role as Finance Committee chairman.
Additionally, the recently released FY 2014 omnibus appropriations bill cut the IRS’ budget by 4.4%. This could impact taxpayer services and the ability of the IRS to timely process private letter rulings, tax-exempt applications, and other guidance.
Last November, former Chairman Baucus released a technical corrections package as part of his tax administration staff discussion draft. The draft addresses a host of issues, incorporating most of the items included in a 2009 technical corrections proposal by then-Chairman of the Ways and Means Committee Charles Rangel (D-NY) and then-Ranking Member Dave Camp, as well as technical corrections to legislation enacted after 2009, and other provisions. Similar to all other tax legislation, the timing is unknown, but a technical corrections package could be incorporated into other moving legislation like a tax extenders bill.
Ongoing budget talks and the need for revenue to fund non-tax proposals, such as emergency unemployment insurance and the highway bill, will tempt lawmakers to seek tax pay-fors. As part of this process, tax expenditures will be at particular risk; for example, several Senate Democratic proposals in 2013 were paid for by limiting various corporate provisions. In particular, the work Chairman Camp and former Chairman Baucus have done on tax reform could provide a menu of scored and known options that members could choose from.
International Efforts to Mitigate Tax Avoidance
The debate on U.S. international tax policy will continue to be impacted by the work of the Organisation for Economic Cooperation and Development (“OECD”) and other countries around the world to clamp down on tax evasion and base erosion and profit shifting.
The OECD is leading the charge with its Base Erosion and Profit Shifting Plan, focusing on issues such as double non-taxation and transfer pricing rules. Further, throughout 2014, we expect the OECD to release a series of discussion documents on topics such as the impact of the digital economy on the international tax framework.
Efforts to enhance multinational transparency and information sharing will continue. As foreign financial institutions around the world prepare to comply with FATCA this year, several other countries have decided to implement their own information reporting regimes based on FATCA. The European Commission is working on a similar regime and it is expected that Asian jurisdictions, including China, will take similar steps.
With a number of tax issues on the horizon, tax policymakers have a full plate in 2014. Stakeholders should engage with congressional tax-writers now before their issue ends up as the main course.