Taxation & Representation - June 2019 #3

Brownstein Hyatt Farber Schreck

TAX TIDBIT

Five Takeaways and a Falsehood: Test Your Knowledge of the Ways and Means Tax Markup

On Thursday, the House Ways and Means Committee marked up and approved the following four bills, largely along party-lines: the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (H.R.3301), the Promoting Respect for Individuals’ Dignity and Equality (PRIDE) Act of 2019 (H.R.3299), the Economic Mobility Act of 2019 (H.R.3300) and the Child Care Quality and Access Act of 2019 (H.R.3298).

The price tag on the extenders package is well over $130 billion—currently, the bill includes an offset that accelerates the sunset of the increased estate tax exemption from 2025 to 2023. A previously discussed 1% increase in the corporate income tax rate was not included in the package.

It is unclear whether these bills have enough support to pass the House. During Thursday’s markup, several Democratic budget hawks expressed concerns with the $130 billion price tag on the Economic Mobility Act. Chair Richard Neal (D-MA) promised Rep. Brad Schneider (D-IL) and other members that he would find at least $100 billion in offsets before the bill reaches the House floor. However, this was not enough to satisfy some members—Reps. Lloyd Doggett (D-TX), Ron Kind (D-WI) and Stephanie Murphy (D-FL) all voted against the Economic Mobility Act because it would increase the deficit.. In order to get support from a majority of the Democratic caucus, lawmakers will need to include pay-fors, to comply with the House Democrats’ recently imposed pay-as-you-go rule for all spending measures. Other House Democrats, primarily on the left flank of the caucus, are concerned that passing an extenders bill only provides more benefits to corporations—a common complaint against the Tax Cuts and Jobs Act (P.L.115-97) (TCJA).

Even if these bills clear the House, they await a less certain fate in the Republican-controlled Senate. While there is strong bipartisan support to address tax extenders, the Senate is unlikely to approve large increases to incentives like the Earned Income Tax Credit and the Child Tax Credit included by the Democrats on Ways and Means. On extenders, the Senate has a bipartisan version bill—Tax Extenders and Disaster Relief Act (S.617), introduced in February by Senate Finance Committee Chair Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR). A number of the provisions in the House bill mirror those in the Senate version, suggesting lawmakers could reach an agreement during bicameral negotiations. Finance Committee staff has indicated that these provisions are a tough sell on the Senate side. It is still unclear as to whether the Senate will markup an extenders package this summer.

The most likely scenario is that an extenders bill will be negotiated behind closed doors and attached to a must-pass piece of legislation sometime this fall. Despite an uncertain future, Chair Neal has managed to establish a starting point for House Democrats in negotiations for a tax package later this year.

Read on for former Senate Finance Committee Staff Director, Russ Sullivan’s, takeaways from the extenders markup.

One of the following statements does not belong, can you identify it? Click here for full analysis of the five takeaways that do ring true.

LEGISLATIVE LOWDOWN

Technical Corrections

Amidst the back-and-forth concerning the permanency of expiring tax provisions, the fiery debate over the intersection of immigration and tax and the discussion over the gender-neutrality of the Internal Revenue Code, House Ways and Means Committee Chair Richard Neal (D-MA) found time to make the June 20 tax markup even more exciting. During the nearly half-day marathon, Neal announced he “intends to move a technical corrections bill” this year to address some of the drafting errors in the Tax Cuts and Jobs Act (P.L.115-97), such as the qualified improvement property (QIP), also known as the “retail glitch”.

Technical corrections legislation is largely supported by House Republicans, who see it as an opportunity to fix errors in the TCJA and reinforce the original congressional intent of the legislation. On the other hand, House Democrats—who were unanimous in voting against the tax reform bill in 2017—are largely opposed to technical corrections legislation because they do not want to give Republicans an opportunity to alter policy they claim was rushed through the Congress without regard to process or garnering bipartisan support. Despite the partisanship, there are some provisions that both parties agree should be altered because they would lead to significant economic growth.

Tax Prep is VITA[L]

On June 17, Congress passed the Taxpayer First Act that now awaits the president’s signature. Although the bill passed only after the controversial Internal Revenue Service (IRS) Free File program was ousted, the final legislation does include the bipartisan Volunteer Income Tax Assistance (VITA) Permanence Act. Originally introduced by Sen. Sherrod Brown (D-OH) and Reps. Danny Davis (D-IL) and Brad Wenstrup (R-OH), the statute would make the IRS-administered matching grant program for volunteer tax preparation sites permanent. The goal of supporting these sites is to better help individuals and families file their income tax returns. Davis called the initiative a “smart federal investment that helps people and communities, doubling outreach through public-private partnerships.” The VITA program provides tax preparation aid to people who make $54,000 or less, persons with disabilities, the elderly, and limited English speakers. During the 2019 tax season, the VITA program filed over 1.5 million federal income tax returns nationwide.

In addition to VITA permanence, the Taxpayer First Act also: establishes the IRS Independent Office of Appeals for the purpose of resolving federal tax issues without pursuing litigation; includes a transition to an automated income verification express system (IVES); lays out requirements for identity and cybersecurity protections, and; prohibits the IRS from rehiring individuals who were terminated for misconduct.

Doubting Charles

This week, Senate Finance Committee Chair Chuck Grassley (R-IA) questioned the validity of a Congressional Research Service (CRS) report on the Tax Cuts and Jobs Act (P.L.115-97) released in May. The CRS report found the law had minimal effect on the economy in the past year, a conclusion Grassley took issue with. Grassley requested to meet with Mary Mazanec, director of the non-partisan CRS, and also sent her a letter on June 21. In the letter, Grassley said, “If CRS wishes to produce original research analysis that takes a position and tone that is favorable to one side of a debate, without balancing it with alternative objective views, then CRS ought not to present its analysis as objective, nonpartisan, and authoritative.” Senate Finance staffers drafted an alternative analysis, reporting increased investments and wage growth among the positive economic impacts of the law. Grassley was encouraged to act by Assistant Treasury Secretary for Tax Policy David Kautter, who penned a letter to Grassley expressing concerns surrounding the objectivity of the report. Meanwhile, Democrats have used the report as fodder to further criticize the 2017 tax legislation. Read our previous analysis of the report here.

Olson, Out

In her final report to Congress, Taxpayer Advocate Nina Olson criticized the Internal Revenue Service (IRS) for “woefully inadequate” taxpayer services and its “enormous gap” between the agency’s current customer service and the “world-class customer service to which it aspires.” The IRS has noted that the issues it faces with customer service are partially attributable to a lack of funding. The agency claims that it has not prioritized investments in outdated information technology (IT) systems and hiring in certain departments due to resource constraints.

In the report, Olson also recommended the agency better leverage its internal taxpayer data to identify those at risk of hardship and offer collection alternatives before placing levies on personal property. She also suggested that the agency should consider releasing a series of “roadmaps that depict a taxpayer’s journey through the tax system” in an effort to answer questions about changes to the code after the passage of the Tax Cuts and Jobs Act.

Olson is scheduled to retire at the end of July after 18 years of service as the National Taxpayer Advocate.

REGWATCH

Grain Glitch Fixed

An error in the Tax Cuts and Jobs Act (P.L.115-97) (TCJA) gave farmers a tax advantage for crop sales to agricultural cooperatives, as compared to sales to a company. Specifically, the tax law as written allowed farmers a 20% deduction off gross sales to agricultural cooperatives and only 20% off total net income for all other companies. Following near-immediate backlash, a correction was included in the March 2018 omnibus spending bill which retained the non-cooperative deduction and added a complicated calculation for co-op sales. Treasury regulations issued on June 18 include reporting requirements aimed at helping farmers calculate their taxes under the new statute. The IRS also released guidance to help impacted taxpayers in calculating their wages for the purposes of the deduction. The proposed regulations are similar to previous guidance on the pre-TCJA domestic productions activities deduction (DPAD).

1111 CONSTITUTION AVENUE

Report: Data Bandits on the Loose

The Electronic Tax Administration Advisory Committee (ETAAC) published its annual report on Wednesday, arguing the partial government shutdown and the demands of implementing the 2017 tax law have limited the IRS’s progress on improving security for tax professionals. During the 2018 filing season, the IRS received five to seven reports per week from tax firms facing data theft, amounting to a 29% increase from 2017. The same report suggested requiring that tax professionals complete two hours of training on data security annually, and urged Congress to grant the IRS authority to develop and enforce security standards in tax administration. Recently, the ETAAC Committee instructed the IRS to prioritize cybersecurity and protecting tax data and said “limited progress” on previous recommendations from 2018 has resulted in taxpayer information being more vulnerable to cybercriminals than it should be.

Recommendations from 2018 also hit roadblocks over questions of legal authority. The committee suggested the IRS should move past informing tax professionals on the dangers of the cybercriminal threat and pursue more concrete steps, like implementing a common security standard and mandating security education. Leadership at the IRS balked at the proposals, uncertain they have the ability to set and enforce such steps. This year, the committee called on Congress to provide the necessary authorization for the agency to move forward and encouraged the IRS to find workarounds in the interim. On a positive note, the report found the IRS prevented $24 billion in false refund payouts and the rate of taxpayers reporting their identities stolen has fallen by 71% from 2015 to 2018.

GLOBAL GETDOWN

No Digital Tax - C’est Compris?

U.S. Trade Representative Robert Lighthizer urged France on Wednesday not to pursue a digital services tax, warning the United States may take strong action against such a move. France’s proposed measure would apply a 3% tax to the profits multinational companies make from certain digital activities in the country. Lighthizer explained, “I think it’s a tax that’s geared toward hitting American companies disproportionally.” Additionally, Reps. Suzan DelBene (D-WA) and Darin LaHood (R-IL), co-chairs of the Digital Trade Caucus, sent a letter to Lighthizer and Treasury Secretary Steven Mnuchin, pushing them to take action in response to France’s new tax. In the letter, they cautioned, “The French tax on digital services will disproportionately affect U.S. technology exporters by setting a threshold that effectively carves out all French competitors.” The members also pointed out that France’s proposal constitutes double taxation, which is outlawed under the Double Taxation Treaty between the U.S. and France, and expressed concern that should France move forward with the tax, other nations—including Italy, Spain and Poland—may follow.

This digital services tax is the latest attempt by France and other countries to tax the revenue of companies like Facebook and Google, despite their limited physical presence there. Bills to enact the tax are in the French National Assembly and Senate, with a vote to seal the final version expected by the end of the summer.

The G-20 Finance Ministers also recently released a two-pillar digital tax plan earlier this month. It is unclear whether France’s approach will conflict with the G-20’s plan to address a digital tax.

2020 VISION

President Klobuchar's First 100

On Tuesday, Sen. Amy Klobuchar (D-MN), who is vying for the Democratic presidential nomination, outlined more than 100 steps she would take in her first 100 days if elected president. The plan covers a range of topics Klobuchar would address, including health care, climate change and international relations. And, of course, it included the following tax proposals:

Tax Reform. The Klobuchar administration would address some Democratic concerns with the Tax Cuts and Jobs Act (P.L.115-97), including an effort to “repeal the regressive portions of 2017 Republican tax reform, equalize tax rates for capital gains and ordinary income, put the Buffet rule in place, and close the carried interest and big oil loopholes.”

End Dark Money. In July 2018, the Internal Revenue Service (IRS) removed a rule requiring non-charitable tax-exempt organizations from reporting the names and addresses of donors above $5,000. Klobuchar would overturn that rule and require tax-exempt organizations involved in political advocacy to disclose the names of people who donate more than $5,000 annually.

Reduce Child Poverty. Klobuchar would aim to reduce poverty by 50% over the next decade and eliminate it within a generation. To achieve this, her plan would expand the Earned Income Tax Credit, the Child Care Tax Credit, Supplemental Nutrition Assistance Program (SNAP) benefits and reform housing policy.

Closing Corporate Loopholes. In an effort to encourage businesses to keep earnings and operations in the United States, the TCJA enacted international provisions that set a global minimum tax rate for parking such activity overseas. Klobuchar’s administration would keep jobs in the United States by ending tax loopholes on corporate overseas earnings.

Infrastructure. Her administration would seek to rebuild U.S. infrastructure and pay for it through an increase in the corporate tax rate.

Taxpayer Advocacy. The Klobuchar IRS would consider the IRS an “essential service,” thereby ensuring taxpayers are continually represented by a Taxpayer Advocate.

Free Tax Filing. President Klobuchar would prohibit Free File participating programs from manipulating search engine results to steer taxpayers away from free services.

What is it Good For? Raising Revenue

Yesterday, Democratic presidential candidate Beto O’Rourke proposed imposing a “war tax” on wealthy American taxpayers in order to fund healthcare, disability and medical needs for veterans. The tax, which would be progressive, would require households earning over $200,000 annually and without family members in the military or veterans to pay $1,000 for future wars the U.S. was involved in. For non-military taxpayers earning less than $30,000, the tax liability would drop to $25. At the beginning of each new war, a new Veterans Health Care Trust Fund would be established to hold the funds. A new tax, which the O’Rourke camp says would be “implemented on a progressive basis,” would be established for each war. O’Rourke, who served on the House Veterans Affairs Committee while in the House, also outlined a number of other veteran-focused initiatives, including providing citizenship to immigrants serving in the armed forces and allowing deported veterans to return to the United States as full citizens.

Enter Sandman

With anticipation peaking before the first Democratic primary debates this week, Sen. Bernie Sanders (I-VT) on Monday dropped a zero-hour bill to wipe clear all $1.6 trillion of existing U.S. student debt. Similar to previous proposals, the bill is predicated on offsetting the costs through a series of transaction taxes on Wall Street that include: (1) a 0.5% tax on stock transactions; (2) a 0.1% bond-trading tax; and (3) a 0.005% tax on all derivative transactions. However, his proposal differs from fellow progressive candidate Sen. Elizabeth Warren’s (D-MA) insofar as his promises universal relief while Warren tapered off relief as household income grew. Sanders contended that the bill would provide debt relief for upwards of 45 million Americans, and would also set aside $48 billion annually for states to eliminate tuition and fees at public universities. Representatives from leading financial trade associations and companies unsurprisingly decried the legislation for stifling growth and markets for investors. Following the news of the legislation, prominent online brokerages—including E*Trade and TD Ameritrade—saw dramatic share decreases as investors interpret the potential for a transaction tax seeping its way into the national debates and policy conversations. As of today, the legislation has not yet received a score by the Congressional Budget Office or Joint Committee on Taxation.

AT A GLANCE

  • TIGTA on Tight Tax Filing. While Taxpayer Advocate Nina Olson criticized operational deficiencies at the Internal Revenue Service (IRS), the Treasury Inspector General for Tax Administration (TIGTA) released its own report commending the agency for overcoming many challenges this year to avoid any delays in the tax filing season. Previously, TIGTA had notified the IRS that it was at risk of delaying the start to the tax filing season as a result of ongoing Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) implementation efforts and challenges with meeting information technology deadlines.
  • Keep it Going. Twenty Democratic senators wrote a letter to Senate leadership and the heads of the Senate Finance Committee on June 19 to pressure their colleagues to extend the renewable energy investment tax credit that is set to phase down at the end of this year. The senators underscored that the residential renewable credits have a “strong record” of fueling solar deployment, jobs, and carbon reduction, and should likewise be embraced for future clean energy expansions.
  • Battle For SALT Rages On. Spurred on by recent Treasury regulations aimed at preventing states from developing ways around the $10,000 cap on state and local tax deductions, the House Ways and Means Committee held a hearing on Tuesday morning to discuss ways the limitation “harms communities, schools, first responders and housing values.” Democrats at the hearing were fired up. Rep. Bill Pascrell (D-NJ) tried to shoot down reports that repealing the cap would largely benefit wealthy households. Rep. Lloyd Doggett (D-TX) said any increase in the cap would need to be offset, and in response, Rep. Tom Suozzi (D-NY) proposed a bump in the corporate tax rate, from 21% to 25%.

BROWNSTEIN BOOKSHELF

  • Opportunity Time. The Joint Committee on Taxation (JCT) released a presentation on Qualified Opportunity Zones on June 19. Read it here.

  • It’s a Tax Eat Tax World. Laura Davison of Bloomberg Tax writes on the growing popularity of “tax the rich” policy proposals and the complicated nature of these plans.

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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