House Speaker Paul Ryan released a joint statement on tax reform (from the six folks working behind the scenes on tax reform – Ryan, Brady, McConnell, Hatch, Mnuchin and Cohn). Here is the key portion about tax changes:
“We have always been in agreement that tax relief for American families should be at the heart of our plan. We also believe there should be a lower tax rate for small businesses so they can compete with larger ones, and lower rates for all American businesses so they can compete with foreign ones. The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas. And we are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base. While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform.”
It appears that the plan will:
- Not be a consumption tax as proposed last June by the House Republicans. Thus, the plan won’t deny a deduction for imports or exempt export revenue. And there is no need to deny a deduction for interest expense of businesses. Also, expensing of business assets is not a given, but there may be non-consumption tax reasons for allowing such expensing. Also, with asset expensing, it’s likely not all business interest expense will be deductible (assuming asset expensing is in the final plan).
- Include a rate cut for both businesses and individuals. How much of a tax reduction that translates to for taxpayers depends on what changes are made to deductions and credits, the AMT, and for higher income individuals, what happens to capital gain rates and the net investment income tax.
- Include a shift to a territorial system. Senator Hatch noted recently that this has bipartisan support and was part of both the House plan and President Trump’s 1-page plan.
So, the most significant part of the statement today is the last sentence in the excerpt above – they are not pursuing a border adjustable consumption tax. The import tax of that was a significant revenue raiser so it also means they need new revenue raisers to support either the 20% corporate rate House Republicans want or the 15% rate President Trump seeks.
But, still lots of questions including what revenue neutral reform means in terms of how much base broadening will be needed and how the effect of changes are measured. The President’s budget proposal “assumes deficit neutral tax reform.” What is the best change approach for economic growth? Will the drafters wait for Senate Finance Committee to review the ideas they received in July?
But with continued hearings, discussion, and work likely already underway on drafting legislative language, perhaps we will see a proposal this year. And, rate reduction, base broadening and a shift from worldwide to territorial all mean major changes and rethinking for tax compliance and planning. And we’ll also need to see what the states do in response to any federal changes.
What do you think?