Tax Reform, Debt Top Fall AgendaSeptember 6, 2017
Tax Reform, Debt Top Fall Agenda
Members of Congress have returned to Washington, D.C. following a long August recess and face a very long, and challenging to-do list. Among the many looming deadlines they face is the Sept. 30 deadline to pass spending bills, and the projected Sept. 29 deadline identified by Treasury Secretary Steven Mnuchin of when the debt limit must be increased. Republican leadership also has placed tax reform as a top priority for the fall which would likely also require movement on a 2018 budget resolution.
In order to avoid a shutdown on Oct. 1 when fiscal year 2018 begins, Democrats and Republicans will have to arrive at some type of mutual accord on appropriations levels for defense and nondefense accounts. Complicating matters is the so-called “sequester” – statutory caps on all discretionary spending put in place in 2011 as part of a deal to raise the debt limit – which is set to return in full force on Oct. 1.
Two bipartisan deals in recent years have lifted the sequester caps for fiscal years 2014 through 2017 in exchange for savings generated elsewhere in the budget. Many believe another such agreement is likely to be required this year in order to garner sufficient Democratic support to move appropriations legislation through the Senate.
However, negotiations on such a plan have yet to begin in earnest, which has led to speculation that a stop-gap spending measure – or continuing resolution – of some duration may be needed to keep the government open past Sept. 30.
Secretary Mnuchin warned congressional leaders in late July that Congress must act by Sept. 29 to lift the statutory debt limit. A previously enacted debt limit “suspension period” technically lapsed on March 15, 2017, but since that time Treasury has been employing various accounting maneuvers to keep the government from breaching the current limit.
The administration is backing a “clean” increase to the debt limit, free of other legislative proposals, however it is unclear whether such an approach will appeal to many conservative Republican lawmakers, who in recent years have pushed for spending reductions and budget process reforms in conjunction with any debt limit increase.
Senate Majority Leader Mitch McConnell (R-Ky.) and Speaker Paul Ryan (R-Wis.) are expected to move legislation that will keep the government funded until December and raise the nation’s debt limit high enough to last beyond the 2018 midterm elections without funding for the U.S.-Mexico border wall or significant spending reforms favored by conservatives.
On top of all this, Congressional Republicans will also have to adopt a fiscal year 2018 budget resolution if they intend to use the budget reconciliation process to fast-track a tax reform bill this fall, and thereby pass legislation outside the 60-vote threshold to overcome a filibuster in the Senate.
In July, the House Budget Committee approved an FY 2018 blueprint that included reconciliation instructions targeted at moving revenue-neutral tax reform alongside $203 billion in spending cuts on entitlement programs. That plan faces an uncertain future, however, because some moderate and conservative Republicans have raised various concerns over the size and scope of the mandated spending cuts. Further divisions could occur depending on what a tax reform package would include should it be moved as part of the budget reconciliation process as many expect it to be.
In a joint statement on July 27, Congressional Republican leaders and White House officials announced that as part of their shared commitment to tax reform, a border-adjustment tax will not be included in any tax code overhaul that moves through Congress this year.
The statement – which was released by House Speaker Paul Ryan (R-Wis.), Senate Majority Leader Mitch McConnell (R-Ky.), House Ways and Means Committee Chairman Kevin Brady (R-Texas), Senate Finance Committee Orrin Hatch (R-Utah), Treasury Secretary Steven Mnuchin, and National Economic Council Director Gary Cohn—known informally as the “Big Six” – outlines a consensus Republican view of the key principles that should animate tax reform.
The elimination of the border-adjustment proposal, which was estimated to raise over $1 trillion to offset the cost of a corporate rate cut, has not been replaced with any alternative revenue source for bankrolling a rate reduction. In addition to discussing the border-adjustment issue, the statement from the Big Six also addresses some other significant tax reform priorities for businesses and individuals, albeit obliquely.
Rates: The statement calls for tax reform that protects American jobs and makes taxes simpler, fairer, and lower for hard-working American families and lowers tax rates for businesses of all sizes as much as possible.
Permanence: The statement urges the congressional tax-writing committees to develop legislation that places a priority on permanence. This appears to be a call for lawmakers to move forward with comprehensive, revenue-neutral tax reform rather than a tax cut-only bill which would have to be temporary in order to comply with the budget reconciliation rules, which preclude legislation that increases the deficit outside of the 10-year budget window.
Territoriality: The statement does not include an explicit call to adopt a territorial system for taxing foreign-source income of U.S. multinationals. It does, however, call for tax reform that “creates a system that encourages American companies to bring back jobs and profits trapped overseas.” The House Republican tax reform blueprint advocates a territorial tax system; Secretary Mnuchin commented at a July 26 Senate Appropriations and General Government Subcommittee hearing that moving to territoriality is a “main priority” of the Trump administration; and Finance Committee Chairman Hatch has been extolling the virtues of a territorial tax system in recent speeches and materials released by his panel.
Cost recovery and limits on interest deductibility: The statement includes a reference to “unprecedented capital expensing” for businesses; however, it does not specify the extent of any proposed change in the expensing rules nor does it mention pairing that proposal with changes to the treatment of interest deductibility.
The House Republican blueprint proposes 100 percent expensing for all assets – tangible and intangible – in year one, but pairs that provision with a call for repealing the deduction for net interest expenses. Small-business owners have argued that eliminating the deduction for net interest expenses could be problematic for businesses that rely on debt financing because they have limited access to capital.
With the release of the statement, the Big Six appeared to shift the tax reform process back to the tax-writing committees, saying, “our expectation is for this legislation to move through the committees this fall, under regular order, followed by consideration on the House and Senate floors.”
Please click here to read NSBA’s tax reform priorities.
Please click here to read why NSBA opposes corporate-only reform.