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Federal Tax Update - Sept 29

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PROCESS and POLITICS

Release of Tax Reform Framework:

The “Big 6” released their framework for tax reform on Wednesday. With the release of the framework, Republican leadership will proceed in passing a FY 18 budget resolution containing reconciliation instructions for tax. We will be sending out a chart on how the framework compares with previous proposals.

House Budget Resolution:

The House will vote on its FY18 budget resolution next week, kicking off the start of Republican effort to overhaul tax code. Congress’ passage of a budget resolution is required to advance tax reform through reconciliation. The House is proceeding with a floor vote after the House Freedom Caucus announced this week that its almost three dozen members will be putting away their knives that have been aimed at the GOP budget. The HFC endorsed the tax framework and House budget, saying in a statement it’s “forward-looking” and will help make U.S. businesses competitive abroad.

Senate Budget Resolution:

The Senate unveiled its FY18 budget resolution today. The Senate Budget Committee will mark up and vote on the draft next week with floor votes planned later in October followed by a conference to resolve differences with the House. The Senate is expected to have enough votes to pass the resolution. Once in place, the resolution would allow Republicans to bring up a tax-cut bill. November 13 is the tentative deadline for tax writers to submit their plans for an overhaul to the budget panel.

As expected, the Senate’s pared-down version veers drastically from the House version. The House budget would require a tax plan that does not add to the deficit. The Senate’ legislative text includes reconciliation instructions that allow the Senate Finance Committee to add up to $1.5 trillion to the deficit over the next 10 years. The proposal does not contain language to aid a full repeal of Obamacare after failure of several efforts made by Republicans this year. This is significant in advancing tax reform.

Senate Tax Hearings Next Week:

The Senate Finance Committee is holding its next hearing on international tax reform on October 3. Witnesses include: Bret Wells, Professor of Law and George Butler Research Professor of Law, Law Center, University of Houston, Houston, TX; Kimberly Clausing, Ph.D., Thormund A. Miller and Walter Mintz Professor of Economics, Reed College, Portland, OR; Stephen E. Shay, Senior Lecturer on Law, Harvard Law School, Harvard University, Cambridge, MA; and Itai Grinberg, Professor of Law, Law Center, Georgetown University, Washington, DC.

The Joint Economic Committee is also holding a tax hearing on October 3 on “The Startup Slump: How Tax Reform Could Revive American Entrepreneurship”. Witnesses include Mr. John R. Dearie, Founder and President, Center for American Entrepreneurship, Great Falls, VA; Ms. Falon Donohue, Chief Executive Officer, Venture, Ohio, Columbus, Ohio; Mr. Scott A. Hodge, President, Tax Foundation, Washington, D.C.; and Mr. John Arensmeyer, CEO and Founder, Small Business Majority, Washington, DC.

Blue Dog Coalition Pushing for a Seat at the Table:

The Blue Dog Coalition, a House caucus made up of 18 centrist Democrats, wants a seat at the negotiating table. Bloomberg reports that the Blue Dog Coalition leaders call on Republicans to use tax reform push “as an opportunity to turn to the governing wings of both parties, use regular order and have real, open debate on the issue.” The coalition Co-chairs Representatives. Jim Costa, Henry Cuellar and Daniel Lipinski say in an emailed statement that the GOP tax plan contains goals that are "laudable on paper, but the devil is in the details…The Blue Dogs want a real seat at the negotiating table, so we can work with Republicans and Democrats to produce a tax reform bill that is fiscally responsible.”

Key Senators for Tax Reform:

Bloomberg presents why the future of tax cuts depends on six Senators: Bob Corker (R-TN), John McCain (R-AZ), Rand Paul (R-KY), Pat Toomey (R-PA), Orrin Hatch (R-UT) and Susan Collins (R-ME). “There’s no question that there’s certainly comfort in margins, and we don’t have margins for error. And so each individual senator is very empowered when it comes to a big issue like this,” No. 3 GOP Senator John Thune of South Dakota said, referring to the tax overhaul. “As we’ve seen now a couple different times, it’s very easy to take a big bill like this down.”

SUBSTANCE

Retroactivity:

While Marketwatch reports senior administration officials shared Republican tax cuts won’t be retroactive. However, as reported by Bloomberg, Treasury Secretary Mnuchin said, “The White House would like changes made in tax reform to have a Jan. 1, 2017, effective date, but it will depend on getting the votes in Congress…I think we'd like to” have a retroactive start date,” Mnuchin said Sept. 28 at an event in Washington hosted by the Atlantic and the Aspen Institute. “But we'll see where we get on that.” The moderator said the idea will likely be subject to more debate and is dependent on whether there are enough votes in support of it. “Correct,” Mnuchin said. The event was held a day after the Big Six—the group of White House officials and Republican leaders who have been meeting for months about a tax bill—released its most detailed plan yet on tax reform.”

The House Freedom Caucus Chair Mark Meadows also spoke in support of having parts of the tax reform bill applying retroactively to January 1, 2017 or another date so taxpayers see an immediate benefit during the 2018 tax filing season.

State and Local Tax Deduction (SALT):

One of the Republican leadership’s proposals to help pay for lower tax rates is the repeal of the individual deduction for state and local taxes. However, changes are on the horizon for this proposal as Republican leadership faces major opposition from their colleagues in California, New York and New Jersey and their votes are necessary to pass tax reform. Wall Street Journal reports, “The fight over the state and local deduction, with more than $1 trillion at stake over a decade, is an early signal of the bruising battle ahead for Republicans trying to pass a tax bill that hasn’t garnered Democratic support and that faces narrow GOP margins in the House and Senate. It is the most obvious case of a bloc of pivotal lawmakers holding a specific concern, but it won’t be the only one…If Republicans from high-tax states all oppose repeal and stick together, they have the clout to force a change. The top nine states for the deduction, measured as a percentage of income, are represented by 33 House Republicans. With one vacancy in the House, the party can lose no more than 22 GOP votes on legislation if all Democrats remain opposed.” BNA also reports on the impacts on local and state groups and their fight against the elimination of the SALT deduction, “The loss in local revenues could result in a cut in local services,” Elizabeth Kautz, mayor of Burnsville, Minn., and member of Americans Against Double Taxation, said Sept. 27. “It will be a further erosion of the partnership that we have offered and continued to seek. Any changes will disrupt the ability of state and local government to raise the revenue they need to support critical public services.”

INDUSTRY

National Association of Realtors (NAR) Criticize the “Big 6” Framework:

After the release of the framework, the NAR released a statement on how the tax proposal would harm middle-income homeowners. “According to the Big 6’s framework for tax reform, changes to the current tax code would eliminate important provisions, such as the state and local tax deduction, while nearly doubling the standard deduction and eliminating personal and dependency exemptions. NAR believes the result would all but nullify the incentive to purchase a home for most, amounting to a de facto tax increase on homeowners, putting home values across the country at risk and ensuring that only the top 5 percent of Americans have the opportunity to benefit from the mortgage interest deduction.” The NAR President stated, ““This proposal recommends a backdoor elimination of the mortgage interest deduction for all but the top 5 percent who would still itemize their deductions. When combined with the elimination of the state and local tax deduction, these efforts represent a tax increase on millions of middle-class homeowners. That tax increase flies in the face of a reform effort ostensibly aimed at lowering the tax burden for Americans. At the same time, the lost incentive to purchase a home could cause home values to fall.”

Stock Market Investors’ Reactions to the Big 6 Framework:

MarketWatch reports, “The tax proposal “does not change our overall assessment that Congress will likely pass tax cuts for individuals in early 2018. We may also get a modest reduction in corporate taxes,” said Lewis Alexander, chief U.S. economist at Nomura, in a note. But the complexity of the corporate tax code, worries over the deficit and the ability of special interests to sway the handful of Republican senators needed to derail any plan leaves the firm pessimistic “about the likelihood of significant corporate tax reform,” he said. The unveiling of the proposal was credited with providing a tailwind for stocks. Indeed, the small-cap oriented Russell 2000 index RUT, +0.14% soared by nearly 2% to close at a record, outpacing a 0.4% rise by the S&P 500 SPX, +0.37% Small-cap firms, after all, are seen as more likely to benefit from corporate tax cuts as they’re more likely to pay nearer the top rate than big multinationals. That doesn’t mean corporate heavyweights wouldn’t also benefit. Financial stocks also outperformed on Wednesday. The Wall Street Journal noted that Morgan Stanley Chief Executive James Gorman in June told an industry conference that a 25% corporate rate would lift the bank’s earnings by 15%, assuming no changes to the business mix. Shares of energy companies, which are also seen as having heavier tax exposure, were also winners on Wednesday. But analysts aren’t pegging the action entirely to taxes…”

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