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TAX - Weekly Federal Tax Policy Update - October 20, 2017

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PROCESS and POLITICS:

House Budget Resolution:

The House passed its FY2018 budget titled, “Building a Better America” with a vote of 219-206; 18 Republicans voted against it and no Democrats supported it. Here is the legislative text and a summary.

The House was in recess this past week but is scheduled to return October 23.

Senate Budget Resolution:

The Senate agreed to the House’s FY2018 budget with a vote of 52-48; 1 Republican voted against it and 0 Democrats supported it.

Amendments adopted through roll call votes:

# and Summary Purpose Sponsor Yea Votes No Votes Status
1552 Keeps tax code progressive Fischer     passed by
voice vote
1553 Payment in lieu of taxes program Udall 58 41 passed by
roll call
vote
1561 Budget enforcement provisions Enzi 52 48 passed by
roll call
vote
1422 Provide for an international tax system Portman     passed by
voice vote
1393 Tax relief for middle class/reduce tax deductions that benefit high earners Capito 52 47 passed by
roll call
vote
1234 Tax relief for middle class/reduce tax deductions that benefit high earners BPOO against tax breaks for companies that outsource jobs overseas outsource jobs overseas Donnelly     passed by
voice vote
1151 Tax relief for small biz while disallowing sheltering income Collins     passed by
voice vote
1167 Significantly improving the budget process Perdue     passed by
voice vote
1178 Make the tax system fairer and simpler Flake 98 0 passed by
roll call
vote
1205 Child tax credits Rubio     passed by
voice vote
1144 Protecting Medicare and Medicaid Hatch 89 9 passed by
roll call
vote
1146 Tax relief to American families with children Heller 98 0 passed by
roll call
vote
1116 Substitute amendment Enzi     passed by
voice vote

Release of Tax Legislation:

Republicans will forgo ‘regular order’ on tax reform, which would have otherwise mandated that tax cuts be permanent, not require a bill be deficit neutral, and ultimately need bipartisan support for its passage, for the GOP’s preferred route of ‘reconciliation.’ To refresh, the budget reconciliation process:

  • requires only a simple majority in the Senate and only subjected to limited debate;
  • is subject to the Byrd Rule (deficit neutral in window);
  • and, because of its 10 year window, any tax cuts may be temporary.

- The Senate has until November 13 to unveil a tax bill.

- The House aims to go to markup the week before Thanksgiving and have a floor vote the first week of December.

- The Senate will have a slightly less-aggressive timetable but will still move ahead quickly as Senate GOP leadership is optimistically eyeing a schedule that wraps up voting before Judge Moore, the likely victor in the Alabama Senate race, is sworn in. If elected, it is expected that Judge Moore will be sworn in sometime between December 12 and December 17.

- If a tax reform bill is enacted this year, Speaker Ryan said that Congress will be here through the Christmas holidays if that is what it takes to get the bill enacted this year.

Republican Party Infighting:

- The Senate GOP can only afford 3 defections, assuming no Democrats support the bill, to pass tax reform.

- President Trump and Senator Corker are feuding and it does not help that the Tennessee Republican has already threatened to reject the bill.

- Senator Rand Paul is opposed to any middle-class tax hike.

- Senator Thad Cochran’s health concerns linger, though he has returned to Washington.

- Senator John McCain ‘wants to see a regular-order, not reconciliation, process for a bipartisan tax bill.

- Senator Susan Collins is opposed to repealing both the estate tax and SALT deductions

- Independent-minded Senator Lisa Murkowski is free from any political pressure as she is not facing reelection until 2022.

- Alabama Senate special election front-runner Judge Roy Moore who has said he wants to “go to war” with Senator Mitch McConnell when he comes to D.C. Judge Moore supports the elimination of the income tax and would rely, instead, on a flat on purchased goods and services.

Whispers of Bipartisanship:

A bipartisan group of Senate Finance Committee members met with President Trump at the White House on October 18 to discuss a tax reform bill.

- The President expressed interest in a bipartisan bill and Chairman Hatch (R-UT) said a tax markup won’t be everything Democrats want, but it won’t be just GOP priorities, either.

- Senators Stabenow (D-MI) and McCaskill (D-MO) called the meetings “constructive” and “interesting,” respectively. Both senators face reelection in 2018 and hail from states that President Trump won in the 2016 presidential election.

- Senator Brown (D-OH) was pleased he had the opportunity to discuss his two bills: the Patriot Employer Tax Credit Act (S. 1778), which would provide a tax credit to certain companies that invest in the U.S., and the Working Families Tax Relief Act of 2017 (S. 1371), which would expand the earned income tax credit and strengthen the child tax credit.

- Senators reported that President Trump was focused on a middle-class tax cut throughout the meeting. This contradicts Treasury Secretary Mnuchin’s claims, in a same-day interview, that the tax plan will include breaks for the wealthy.

Multiple adopted amendments also signal bipartisan support for a tax bill to put guardrails on pass-through income and expand the child tax credit.

- It’s important to note that the amendments aren’t binding because they do not directly instruct the Finance Committee to adjust revenues, the deficit, or spending by a specific amount.

Expect Longer Workweeks:

A majority of Senate Republicans has agreed to stay in session for more rigorous workweeks as they stare down a daunting to-do list this fall – tax overhaul, immigration, budget caps, hundreds of nominees, and maybe even the debt ceiling. Senate Majority Leader Mitch McConnell (R-KY) has told senators to be ready for Monday-through-Friday work, and possibly even weekends.

SUBSTANCE:

Release of Tax Reform Framework:

- MBS tax experts published an article about the “Big Six” Framework after it was released. It is still available to view here.

- House Ways and Means Chairman Kevin Brady (R-TX) is expected to release a tax bill next week.

Full Expensing of Capital Investments:

- The Framework contemplates full deductions for the cost of certain capital expenses by businesses made after September 27, 2017, for a five-year period. The effect of this change will likely be greatest for privately held companies, as public companies may be more likely to view full expensing as providing a timing – i.e., not a permanent financial statement -- impact.

- The framework excludes structures, such as buildings, from being eligible for full expensing.

Individual Tax Reform:

State and Local Tax (SALT) Deduction:

- House GOP leaders are considering scaling back their proposed repeal of the state and local tax deductions. A cap might be imposed so all but higher-income earners would be able to continue to claim it. GOP leaders haven’t yet publicly stated who, for the purposes of the deduction, should count as the “middle class.”

- Depending on where Republicans draw the line on the cap, that could cut deeply into one of the few revenue sources that congressional Republicans have identified to pay for an estimated $5 trillion in cuts they’d like to make.

- This could be a ‘line-in-the-sand’ moment for Republicans from states that stand to get hit the hardest by the deduction’s elimination. Intra-party, even intra-state disagreements are arising as Rep. Tom MacArthur of New Jersey isn’t drawing red lines while fellow Republican New Jersey representative, Leonard Lance, is less willing to negotiate saying he favors retention of SALT in its entirety.

Estate Tax:

- MBS tax experts believe that a full repeal of the estate tax should not expected in a final tax reform package. Multiple GOP senators, including Senators Mike Rounds and Susan Collins, are opposed to the elimination of the estate and gift tax. Their views were echoed by Warren Buffett this past week who shares their view.

- In the October 18 meeting at the White House between the President and a bipartisan group of senators from the Finance Committee, President Trump remained determined to repeal the estate tax.

EITC and Child Tax Credit:

- The Earned Income Tax Credit is expected to remain in the final tax reform product while the Child Tax Credit is set to be expanded.

Dynamic Scoring Models to Tabulate Deficit Effects of Tax Reform Bill:

Democrats remain committed to static scoring whereas Republicans desire dynamic scoring.

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