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TAX - Weekly Federal Tax Policy Update - October 13, 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 are a few highlights:

- Achieves $6.5 trillion in total deficit reduction over 10 years
- Sets discretionary spending for FY 2017 at $1.132 trillion
- $6211.5 billion in defense discretionary spending
- $511 billion in non-defense discretionary spending
- Provides reconciliation instructions for fundamental tax reform to 11 House committees to achieve at least $203 billion in mandatory savings and reforms
- Provides significant funding to construct a border wall
- Incorporates the House-passed American Health Care Act

Links to

- Legislative Text
- Summary

Senate Budget Resolution

The Senate Budget Committee passed its FY2018 budget along a 12-11 party line vote and a full floor vote is expected during the week of October 16. Here are a few highlights of the Senate Budget Committee’s bill:

- Reduces spending by $5.1 trillion
- Provides reconciliation instructions:
    - Finance Committee - $1.5 trillion for comprehensive tax reform
    - Energy & Natural Resources - $1 billion in deficit reduction
- Provides a surplus of $197 billion in 2027
- Provides maximum level of regular defense funding allowed under the law
- Reduces nondefense discretionary spending by $632 billion
- Honors Social Security’s off-budget status

Links to

- Legislative Text
- Summary

Release of Tax Legislation

- The Senate has until November 13 to unveil a tax bill
- Two ways the Tax Reform process will work, either through a budget reconciliation or through regular order:
  - Budget Reconciliation (have to pass FY2018 Budget Resolution first [House has, Senate scheduled for a floor vote during the week of October 16]):
    - Requires only a simple majority in the Senate and only subjected to limited debate
    - Subject to the Byrd Rule – deficit neutral in window
    - Because of 10 year window, tax cuts may be temporary
  - Regular Order:
    - Does not need to be deficit neutral
    - Tax cuts permanent
    - Bipartisan, but would take longer to pass

- 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.

- MBS covered the Senate Finance Committee’s hearing on “International Tax Reform.” For a summary of the hearing, please click here.

Party Politics in the Senate

- Party infighting, in combination with the slim 52-48 seat majority that the GOP has in the Senate could lead to a tense and dramatic tax battle. The recent feud between Senator Corker and President Trump is not helping Senate GOP leadership get to 50+ votes, especially since the Tennessee Republican has already threatened to reject the bill. This infighting is in addition to the challenges presented by Senator Rand Paul’s opposition to any middle-class tax hike; Senator Thad Cochran’s health concerns (he is expected to return to Washington next week); Senator John McCain’s ‘maverick’ personality and desire to see a regular-order, not reconciliation, process for a bipartisan tax bill; Senator Susan Collins’ opposition to repealing both the estate tax and SALT deductions; and independent-minded Senator Lisa Murkowski’s freedom from any political pressure as she is not facing re-election until 2022.

- As discussed earlier, what may be even more pressing on the minds of Senate GOP leadership is 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.

Role for Centrist Democrats in Question

- The Hill reports, Rep. Mark Meadows, chairman of the House Freedom Caucus, has been reaching across the aisle to a handful of moderate Democrats including Rep. John Delaney (MD), who is running for president in 2020, and Rep. John Garamendi (CA). A number of skeptical, moderate Republicans could peel off from the GOP tax-reform bill, so Meadows and former Freedom Caucus chairman Rep. Jim Jordan are looking to make up for those losses with Democratic votes. Democrats have been gauging whether the Freedom Caucus is interested in pairing tax reform with infrastructure. Delaney has introduced two bills aimed at tapping into cash stored overseas. One measure would establish a $50 billion infrastructure bank to finance local transportation, energy, water, and education projects. The other would allow U.S. multinational corporations to bring back, or repatriate, their earnings at a mandatory, one-time tax of 8.75% - a discount on the current 35% and deferral option.

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.

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

- After substantial outcry from both Democrats and moderate Republicans, House GOP leaders are considering scaling back their proposed repeal of the state and local tax deductions. House Ways and Means Chairman Kevin Brady met with multiple concerned congressmen on October 12 to address the issue. Attendees at the meeting expressed some encouragement that they will fend off a full repeal of the deduction. Instead, 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.

- The estate tax could be modified with the introduction of a larger exemption and/or a decrease in the rate without complete elimination of the 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:

- The Hill reports, Senate GOP leadership is pushing for the support of Senator Joe Manchin, a prominent centrist Democrat, on tax reform. Manchin is running for reelection next year in West Virginia, a state that President Trump won in a landslide. Manchin told Senator Mitch McConnell in a meeting in the Senate Majority Leader’s office shortly before the Columbus Day recess that he could support a tax reform bill as long as it doesn’t add too much to the deficit, aligning himself with Senator Bob Corker. Corker says the legislation should not add a penny to the deficit under a special dynamic scoring model that takes into account economic growth projected from tax reform.

INDUSTRY

National Association of Realtors

- The National Association of Realtors opposes doubling the standard deduction saying it would reduce the value of the mortgage interest deduction, curbing the incentive to purchase a home and leading to a “de facto tax increase on homeowners.”

Alliance to Save Energy

- The Alliance to Save Energy supports renewable energy tax credits stating that energy efficiency has broad, bipartisan support from consumers and businesses alike, and that encouraging energy efficiency is exactly what Congress should be doing with the tax code.

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