Seeking a consensus around comprehensive tax reform: the latest developments in Congress

by DLA Piper

Amid the intense dispute over federal spending and debt, the chairmen of the tax writing committees in the US Senate and the House of Representatives continue their efforts to build a consensus among their members for tax reform.  Both have pledged to move forward with comprehensive proposals this fall.

On the House side, Ways and Means Chairman Dave Camp (R-MI) is engaged in a series of closed briefings with his Republican members on various aspects of his anticipated reform proposal.  Because he has asked his members not to discuss the content of the meetings, and because the members’ staffs are neither invited to the meetings nor given advance notice of the topics to be discussed at each meeting, there is little reliable information regarding the nature of the discussions, or for that matter, the content of his proposals.

Nonetheless, it seems likely that the comprehensive reform bill Chairman Camp may soon release is likely to at least reflect the proposals in the detailed white papers that he has issued in some areas over the past year or so - most notably on the international side.

In various settings, Chairman Camp has reiterated that his overall goal is to bring both the highest individual and corporate rates down to no more than 25 percent and that a number of tax expenditures as well as allowances more in the  nature of “costs of doing business” are likely to be traded off in favor of the lower rates.

However, little has been suggested officially regarding which tax preferences are likely to be traded away, and the staff simply have advised stakeholders to assume that virtually everything is on the table and caution that final decisions in some respects have not been made.

Although Chairman Camp had originally indicated his intent to release the proposal and begin committee action by the end of September, there are indications that the timing for release of the proposal and committee action may be slipping well into late October or early November.

There are various possible reasons for the delay.  The current focus of the Congress on budget and debt legislation may be taking up the time of professional staff who are needed as well to draft and score the revenue impact of the tax proposal, and, with the looming deadline for a possible government shutdown on October 1 and the risk of a government default in mid-October, the completion of what is likely to be a massive tax reform bill has been delayed.  And, while there is a very tight lid on the discussions between the chairman and his staff and his Republican members, there are reports that some members are seeking detailed guidance on the impact of the potential tradeoffs of tax preferences for lower rates.

However, despite these challenges and indications that Democratic members of the committee may be unlikely to support the proposal, Chairman Camp has indicated that he fully expects to release his proposal this fall and that after a period of one to two weeks for the consideration of amendments, it is likely to be approved by his committee.

Tax reform efforts continue intensively within the Senate Finance Committee as well, amid indications that the process there is not as advanced as in the Ways and Means Committee.   In July, Chairman Max Baucus (D-MT), along with his ranking Republican member, Orrin Hatch (R-UT) invited all senators to submit written statements to them outlining their goals and priorities for tax reform, starting with the assumption that the Finance Committee would begin the process with lower rates and a blank slate.  In their statements, members seeking to add tax preferences back into the Tax Code were asked to justify doing so on policy grounds and would also need to justify the additional cost, given that preferences added back would jeopardize the Finance Committee’s ability to lower the rates.

Finance Committee staff report that 75 senators filed statements and that drafting has begun following a full review of the submissions.  Chairman Baucus has said that he expects the committee to consider his tax reform  proposal before the end of the year.

While the chairmen have considerable control over the agenda within their committees, it is less clear when and how tax reform will be taken up on the House and Senate floors following committee action, especially given the amount of time that has been and will continue to be taken up by the contentious debate over spending and debt.  In that regard, both chairmen appear to be searching for alternative ways to move tax reform forward.

It is possible, for example, that House Republicans will include a set of instructions for the consideration of tax reform as part of an offer they may soon propose to the President for an increase in the federal debt limit.  Under that approach, the debt limit bill would include general principles for tax reform (i.e., lower rates, base broadening, simplification, the implementation of territoriality) as well as a timetable for committee and floor action and for a House-Senate conference.  Under this approach, tax reform would be one of a series of policy initiatives that would be included in the debt ceiling proposal, although the President has stated repeatedly that he will not accept conditions as part of a debt ceiling increase.

For his part, Chairman Baucus has hinted at several approaches to moving tax reform, including the possibility that his proposal could be included in a larger spending proposal that could be taken up at the end of the year.  In that regard it appears likely that any funding bill that will be agreed to in the next week or so will be temporary (the Senate-passed measure only funds the government through November 15), setting up a larger debate on spending before the end of the year.

Baucus has also suggested that there are major areas of reform in which there is common agreement, including international tax reform and lowering corporate rates, and has suggested that, if nothing else, the Senate could adopt smaller measures in those areas in order to negotiate a larger agreement with the House, assuming that the House ultimately adopts a comprehensive proposal.   Although the position of Senate Democrats is in line with the President’s position that the debt ceiling should be increased without conditions, Baucus might favor having tax reform included as part of a larger spending deal.

One of the areas being discussed within the Finance Committee is the issue of transition, which deals with concerns that the immediate reduction or elimination of tax preferences could in the near term cause economic harm.  Reform advocates hope that a generous approach to transition relief would address concerns in the business community over the possible impact of moving too quickly to implement major tax changes.

Both chairmen are hoping to show their colleagues at large that despite the contentious debates over spending and debt issues, their committees were able to come together to adopt tax reform plans that  deal with many of the aspects of the current system which are believed to impede economic growth and global competiveness.  This would send a positive message about the ability of Congress to accomplish major objectives.  Both chairmen are working very closely together to move forward.   Reportedly, Chairman Camp has argued to his colleagues that tax reform will give them a positive initiative to advocate for.   In fact, both chairmen have indicated that they will not entertain tax proposals outside of the context of comprehensive reform; this is their sole objective.

Public acceptance of tax reform will depend in large measure on the details of what is being proposed. It is possible that within a few weeks Chairman Camp will release his proposal,  schedule Committee consideration and give the public its first opportunity to evaluate tax reform in its entirety.

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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