PROCESS and POLITICS:
Congress Passes Fiscal Year 2018 Budget
- Despite the defections of 20 Republicans and the support of 0 Democrats, the House narrowly voted to pass the Senate’s budget 216 to 212. This clears the way for tax reform to be undertaken via the reconciliation process.
Release of Tax Legislation
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.
House Republicans will introduce a tax reform bill on November 1st.
- The following week, Ways & Means will begin its markup of the bill
The Senate Finance Committee plans to begin its own markup the week of November 13th.
Republican Party Infighting:
- The Senate GOP can only afford 3 defections, assuming no Democrats support the bill, to pass tax reform. - The McCain, Trump, and Corker feud continues.
- Senator Jeff Flake’s announcement to not seek reelection frees him from any political pressures he might have already been facing.
- 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 taxand would rely, instead, on a flat on purchased goods and services.
Whispers of Bipartisanship
- Democratic leaders Pelosi and Schumer are adamant that their caucuses will not support tax reform that does not allow for bipartisan, regular order. The GOP, however, remains committed to wooing Senators Donnelly, Manchin, and Heitkamp, three Democrats up for reelection in red states in 2018.
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.
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. Of significant interest are the predictions two of MBS’ tax experts, Denise Bode & Anne Canfield, put together.
Fourth Tax Bracket
- House Ways & Means Committee Chairman Kevin Brady is pushing for a fourth tax bracket should the GOP fail to agree to eliminate SALT deductions
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
- The SALT fight remains unresolved post-budget vote as a number of Republicans who both did and did not vote for the budget prepare for the big fight over the issue during the tax reform debate.
- Many of the 20 GOP defections from the budget vote made their decision based on the SALT deduction elimination. Additionally, a number of Republicans voted in favor of the budget want to keep SALT deductions, but wanted to discuss it after the budget had been passed.
- 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.
- The current GOP framework, according to a new study from Boston University, could raise the GDP by as much as 5% and wages by as much as 7%. The Boston University study is similar to the findings from the Council of Economic Advisers study put out earlier this week, which said that the average household income could increase by $4,000 annually if the corporate tax rate was cut from 35 percent to 20 percent.