25th September 2017
The article below was drafted by our colleagues from Dutko in Washington D.C.- for any questions you can contact Jayne.Fitzgerald@dutkogr.com
With the failure of the White House and Republican-controlled Congress to repeal Obamacare, all attention in D.C. is now focused on the tax reform. Repeated attempts over the past years have failed to produce a unified Republican position on tax reform. However, President Trump has now made tax reform his priority as a means to demonstrate that the Republican Congress and White House can actually govern, and that Members up for re-election in 2018 have a product on which they can run.
Corporate America has been begging the government for years to reduce the corporate tax rate to enable it to compete with US trading partners. Individual American taxpayers have suffered under a complex and unwieldy tax code with the gradual unravelling of the last successful tax reform in 1986. Republican leaders in Congress have pledged to rectify these handicaps this year. The Trump Administration, which made numerous discrete tax proposals during the campaign, appears to have reached the same conclusion.
How to bring home the trillion dollars held overseas
In late spring, the Administration released a one-page outline of its tax reform priorities, which included reducing the corporate and individual rates, and a nod to bringing home the trillion dollars of deferred earnings held overseas by U.S. corporations. However, no further details have been forthcoming. Meanwhile, the House Republicans plowed forward on the outline they had released as a campaign document in the summer of 2016. It included corporate and individual rate reductions, a move to a territorial system of taxing U.S. multinationals (a system that most of our trading partners employ), and a border adjustment tax on imports. Senate Republicans have been more circumspect, although Senate Finance Committee Chairman Orrin Hatch (R-UT) has been examining a corporate integration proposal to eliminate the double tax on corporations and their shareholders.
Gaining support with Democrats in the Senate
The Trump Administration, fresh off of a bruising defeat on an all-Republican health care repeal, decided that it might want to make a deal with selected Democrats to try to ensure the success of a tax reform package. President Trump has reached out to those Democratic Senators up for re-election in states that he won to see if they might be interested in supporting tax reform. In addition, he has met with a bipartisan coalition of moderate Republicans and Democrats in the House to test its interest. The President and Congressional Democrats do have a shared interest in funding infrastructure improvements, and negotiations late in the last Congress attempted to tie the revenues from the repatriation of U.S. multinationals’ of untaxed earnings abroad to infrastructure improvements. It remains to be seen what this outreach will achieve.
Pending procedural issues
Meanwhile, there are two related procedural issues that must be resolved in order for the tax reform to proceed. First, if the Congressional Republican leadership wants to proceed with Republican votes only, it must first pass a budget for Fiscal Year 2018 in both Houses that includes “reconciliation” instructions on taxes. Whether that is politically possible is yet to be seen. The House has talked about bringing its budget with tax reconciliation up for a vote the week of September 25th but it is unclear whether that will happen. Second, if the decision is made to proceed with the reconciliation tactic, tax reform must be structured in a way that does not lose revenues outside the 10-year budget window, which means any tax cuts must be temporary or that there must be tax-raising provisions to offset the revenue losses. Republicans are split on how to resolve this issue, and which offsets should be used. This issue has been made particularly acute by the costs of providing relief for Hurricanes Harvey and Irma, which are set to further inflate the federal deficit.
The Trump Administration is pushing the Congress to enact tax reform by the end of 2017. To that end, House Republicans have indicated that they would release more details on the plan they are discussing with the White House on September 25th. In the meantime, hearings are proceeding in the Senate Finance Committee on individual and corporate tax reform. Outside stakeholders have undertaken advertising campaigns largely in favor of “tax reform” in an effort to push undecided members on the issue. Yet the outcome of all of these efforts remains cloudy at this time. The enormous difficulty of facing down groups with an interest in preserving existing tax benefits provisions could mean that the ultimate result may be the politically easier route—i.e., only tax rate reductions with little actual reform of the current tax system.
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