Is Congress postponing the tax reform debate?

by DLA Piper

Although the chairmen of the tax writing committees, Representative Dave Camp (R-Michigan) and Senator Max Baucus (D-Montana), are thoroughly committed to enacting comprehensive tax reform and are devoting the considerable resources of their committees to that end, recent developments suggest that the bulk of the tax reform debate will have to wait until the second session of this Congress in 2014.

There are outward indications that the staff of the Ways and Means is very close to the completion of a comprehensive reform draft following several years of hearings on various aspects of reform, the publication of various Committee white papers in various complex areas of the Code and an extensive process earlier this year to obtain input from stakeholders. 

Since the end of the Congressional summer recess, Chairman Camp has held numerous briefing sessions with his Republican members and a number of one-on-one discussions with various Committee Democrats.  Chairman Camp has also had a number of briefings with his Republican leadership, the most of recent of which took place yesterday.

Until this week, Republican House members generally assumed that Chairman Camp would release his bill before Thanksgiving and schedule a Committee markup before the end of the session in mid-December, but recent developments suggest otherwise.  On Wednesday, Chairman Camp hinted to reporters that the schedule might slip into 2014 after a meeting with Committee Republicans, and yesterday, there were indications following a meeting between Camp and his leadership that tax reform, while still a priority for House Republicans, would not be considered even in Committee in the short amount of time left before Congress likely adjourns for the year in mid-December.  Chairman Camp has cautioned, however, that no definitive decision has been made in this regard.

Senate Finance Committee Chairman Max Baucus indicated more than a month ago that his next step towards the enactment of tax reform would be the release of various detailed working papers, and this appears to still be his plan.  The first of these are likely to be in the areas of tax administration, international tax reform and cost recovery.  However, there are indications that the Committee’s ranking member, Senator Orrin Hatch (R-Utah), and other Committee Republicans are hesitant to sign onto the working papers at this time.  The Finance Committee has  a long tradition of bipartisanship and the chairman reportedly would prefer to issue the papers with his ranking member’s concurrence.  There are signs that the chairman is hoping to release the first of these papers, on tax administration, as early as next week, and that he remains hopeful he will have Senator Hatch on board, but it also is possible that the chairman will move unilaterally, or hold back for a time to continue negotiations with his Republicans colleagues.

Some common issues appear to be at the core of the delay in tax reform.

Although with some differences, the basic approach in both the Camp and Baucus reform models is to reduce corporate and individual rates (Camp’s goal is rates no higher than 25 percent) while eliminating most tax expenditures to offset the cost of the rate reduction.  On the international side both Chairmen favor a territorial tax system that provides a far lower rate on the repatriation of foreign profits along with provisions to prevent base erosion and profit shifting, in large measure by imposing tax on foreign profits earned in very low tax jurisdictions.  One of the reported reasons for the delay in moving forward is concern among Republicans that their Democratic colleagues would try to use the revenue achieved through the elimination of tax expenditures as a way to reduce the budget sequester that is being discussed in the budget negotiations mandated in the temporary spending agreement reached in October.  The budget talks are scheduled to complete their work by December 13.   Given how late it is in the year in any event and given the very tight legislative schedule through mid-December, little is lost by putting tax reform off until early 2014 after the budget conference is scheduled to complete its work.

There are indications as well that further education efforts on the core principles of tax reform are needed with many members in both chambers.  Although most members of Congress tend to agree that the US tax system requires substantial updating and simplification, and there is bipartisan support for lower rates, especially in the corporate area, many members are concerned about giving up some tax expenditures that have widespread support in their states and Congressional districts.

For example, members of Congress from New York and other high tax jurisdictions from both parties tend to be concerned about the impact of tax reform on the deductibility of state taxes, while members from states with a robust technology sector, such as Texas, are wary of the potential elimination of the research credit.  And these concerns tend to be become even more pronounced in light of various analyses in the tax press which suggest that the tax writers will need not only to eliminate provisions generally understood to be tax expenditures (i.e., tax credits and special rules) as well as deductions used to arrive at economic income (costs of doing business) including depreciation, the interest deduction, and the advertising deduction, to arrive at a 25 percent rate on a revenue neutral basis.  Lower rate advocates believe that by lowering the rate dramatically many tax expenditures are not necessary.

Some of these concerns may be addressed by phasing some of the popular tax breaks out at high income levels rather than eliminating them, and through the enactment of very generous transition rules.

Another issue that has yet to be resolved is the persistent disagreement over whether tax reform should raise additional revenues.   Republicans generally agree that tax reform should be both revenue and distributionally neutral, and argue that under tax reform the percentage of revenues as a share of GDP should remain at around 17.4 percent, the current average of revenues to GDP.  Democrats, noting that the only recent period during which the federal government did not run deficits was in the late 1990s, when revenues averaged 19.5 percent of GDP, generally argue in favor of raising more revenue as a result of tax reform.  The fiscal year 2014 budget that passed the House does not raise new revenues in tax reform; the Senate-passed budget calls for additional revenues of close to US$1 trillion.

Despite these differences, there are strong indications that the chairmen intend to proceed aggressively with tax reform, and on Wednesday, Jason Furman, the President’s chief economic adviser, stated that corporate tax reform is a high priority for the Administration and that he believes a bipartisan consensus is growing in Congress for it as well.  

In fact, although Chairman Camp takes the position that tax reform must be comprehensive, there is a greater degree of  bipartisan consensus at least in concept in Congress for corporate and international reform than on the individual side.  There are indications as well that while Republican Finance Committee members may not be ready to sign onto Chairman Baucus’s working papers while the budget conference is under way, there is support for tax reform generally, and a widespread view that the current system is broken and is holding back economic growth and the global competitiveness of the US economy.

Until recently, because of the focus on possible tax reform in 2013, there has been very little discussion outside of that context of the fate of the considerable number of provisions that will expire at the end of the year.  The delay in tax reform has resulted very recently in a discussion among the business community and on the Hill of the expiring tax provisions, which are likely to face expiration long before tax reform is ready for consideration.  A number of Senate Finance Committee Members have begun to suggest that a one-year extension of the expiring provisions, which earlier in the year was considered very unlikely, should be considered, possibly as part of an omnibus spending bill for the remainder of the fiscal year that will be taken up in January.  The so-called Medicare doc-fix will also expire at the end of the year and there is some discussion of linking the tax extenders to the doc-fix.

Despite the slowdown in this process, considerable and very detailed work is being done by the staffs of the tax writing committees and the Joint Committee on Taxation on tax reform, and at least on the Senate side, by the staffs on a bipartisan basis.  Chairman Camp and Baucus consult with each other regularly, as do their staffs.

While there often are surprises in Washington, these developments suggest that there are likely to be few advances in tax reform between now and the end of the year, and that the chairmen, neither of whom will be in that position after 2014, will move aggressively early in 2014 to try and capitalize on the widespread belief among their colleagues, at least in concept, that the tax system is badly in need of change.  Whether they succeed in achieving tax reform by the end of this Congress in late 2014 will depend on many factors, including the impact of the elections on the legislative process.   


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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