The state of comprehensive tax reform in Congress – a work in progress

by DLA Piper
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Although the political world in Washington is focused almost entirely on the impending October 1 deadline for an agreement over spending for fiscal year 2014 and the mid-October deadline for the President’s requested increase in the authority for the United States to borrow, the tax writing committee chairs continue their efforts to move comprehensive tax reform legislation in the coming months.  And, within the past few days, tax reform, at least in concept, has entered the larger fiscal debate.

Tax reform efforts on the House side appear, as they have for the past month or so, to be much further along than in the Senate.  The House Ways and Means Committee staff reportedly are far along in drafting a comprehensive tax reform proposal, although there are areas of the tax code which are still open and in need of additional work.

The drafting effort has been facilitated by the fact that the staff over the past two years have drafted legislative language and vetted it with stakeholders in some key and very complex aspects of tax reform, most notably international.   Staff sources indicate that in some aspects of reform that have had less vetting or prior public review, such as the exempt organizations area, the language which may be drafted will be “soft” and potentially open to substantial change as it is reviewed by the members of Congress and the public.  Committee Chairman Dave Camp (R-MI) has stated his intent to hold a lengthy committee mark-up process to consider amendments, possibly for as long as two to three weeks, in contrast to the more recent committee practice of providing a relative short period for the consideration of tax proposals.

Shortly after Congress returned from its August recess on September 9, Chairman Camp began a series of briefings on his reform proposal with Republican members of the Committee, and these briefings are expected to continue into next week.  In order to minimize leaks, Committee member staff have not been included in the meetings, and the chairman has asked his colleagues not to disclose the substance of their discussions.  So far, the briefings have been only for Republican members, but the chairman has indicated that in the not too distant future he will begin briefing Committee Democrats as well, with the intent of bringing the proposal before the Committee sometime in mid-October, although that target date could slip.

Because the Committee has issued detailed proposals in some areas of the Tax Code and held numerous hearings, the basic outline of the proposal appears set. The goal is to:

  • reduce the highest corporate and individual rates to 25 percent
  • simplify the Tax Code by consolidating duplicative provisions and
  • establish a territorial-type international tax system which will allow the foreign operations of US companies to bring profits earned overseas back into the US at a highly reduced tax rate, while imposing some minimum taxes on some of those operations to prevent erosion of the US tax base.

It is generally assumed that the Camp draft will offset the cost of reducing the rates by eliminating or capping a great many tax expenditures and, potentially, some expenses in the nature of “costs of doing business,” but the precise nature of what might be given up to reach the lower rates may not be known until the chairman’s proposal is finalized and released to the public.  Committee staff continue to describe the proposal as a work in progress.

The expectation is that the Camp proposal will be “bare bones” and members will have the opportunity to try and restore tax preferences by amendment , although the impact of adding provisions back could jeopardize the ability to lower the rate.

Although House Majority Leader Eric Cantor (R-VA) did not mention tax reform specifically in his September 6 letter to Republican members outlining the fall legislative agenda, there are indications that a mandate to undertake tax reform may be included in a House Republican proposal to raise the debt ceiling among other policy initiatives.    In effect, House Republicans would offer to agree to a debt ceiling increase if the President agreed to a number of other initiatives.  In the case of tax reform, the agreement would be to a set of principles that would be incorporated in a reform plan and a set deadline for its consideration.  The President has reiterated on numerous occasions that he will not negotiate the debt ceiling issue, but has indicated that he might be willing to negotiate on the spending side.  Given the likelihood that any deal reached to fund government operations past the September 30 expiration of the current fiscal year will be temporary (probably only through mid-December), efforts to force tax reform into a larger deal will likely continue.

Although there are indications that Senate Finance Committee Chairman Max Baucus (D-MT) and his ranking member, Senator Orrin Hatch (R-UT) may soon issue a document outlining some common principles for tax reform, indications are that the Finance Committee is not as advanced in the drafting process as its House counterpart.   There were rumors in the spring that the two chairman would try to mark up tax reform proposals simultaneously or nearly so, but indications now are that Chairman Baucus may wait for his House colleague to move forward first, hoping that House Ways and Means Committee approval of a tax reform bill could spark some momentum among Finance Committee members.   Conventional wisdom suggests that even if Chairman Camp is unable to attract Democratic support within his Committee, he should be able to pass a reform proposal on Republican votes alone if needed.

Both chairmen have said that any consideration of the many provisions that will expire at the end of the year must be undertaken in the context of tax reform, with the goal of making any of these that are retained permanent, given that one of the key principles of tax reform is to end the practice of having provisions in the tax code expire regularly.  Nonetheless, in recent days several Finance Committee members have been quoted in the tax media as suggesting that if tax reform is not completed by year end, they would advocate that the traditional tax agenda, notably the tax extenders, be taken up before the year is over.

The outcome of the debate on federal spending and debt eclipses all other issues in the near term and will likely continue to be the focus of attention well into the fall.  In the meantime, Chairmen Camp and Baucus are hoping to convince their colleagues that tax reform should be an essential component to getting the Nation’s fiscal house in order.   Their ability to make that argument depends on how successful they are in moving reform proposals through their committees. For the time being, that is their singular focus and where they intend to commit their resources.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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