Tax Reform Update

March 29, 2017

On March 24, Republican leaders abruptly pulled their overhaul of the nation’s health-care law from the House floor, a dramatic defeat for President Donald Trump and House Speaker Paul Ryan (R-Wis.) that leaves a major campaign promise unfulfilled.

The decision leaves former President Barack Obama’s chief domestic achievement in place and raises questions about the Republican’s ability to advance other high-stakes priorities, including tax reform and infrastructure spending. However, after pulling the American Health Care Act (AHCA) from a vote, Ryan stated that Republicans intend to move forward with the rest of their legislative agenda—including tax reform, but he also acknowledged that with the Patient Protection and Affordable Care Act (ACA) still in place, tax reform becomes “more difficult, but not impossible.”

The Republican’s original agenda for the year called for action on health care to come first, using the reconciliation instructions in the Fiscal Year (FY) 2017 budget resolution approved in January, followed quickly by passage of comprehensive tax reform using reconciliation instructions in a yet-to-be-passed budget resolution for FY 2018. They planned to use this method because budget reconciliation instructions set up a fast-track process shielding qualifying legislation from a filibuster in the Senate by allowing legislation to be passed in that chamber with only 51 votes, rather than the 60 votes normally needed to clear procedural hurdles – a useful tool for Republicans, who currently control only 52 Senate seats.

Republican leadership had hoped to pass the AHCA first because it contains nearly $1 trillion in tax cuts over 10 years that, if enacted into law, would result in a lower revenue baseline and potentially make it easier for Republicans to achieve their goal of revenue-neutral tax reform. Deficit neutrality over the long-run – that is, beyond the 10-year budget window – is a necessary condition for advancing permanent legislation under the budget reconciliation process.

Intent to move forward with their tax reform “Blueprint” released in June 2016, Speaker Ryan, House Ways and Means Committee Chairman Kevin Brady (R-Texas), and other tax-writers have spent a significant amount of time and energy promoting their proposal, which would dramatically overhaul the U.S. tax system and will likely be the basis of any tax legislation that comes from the House.

The Blueprint proposes to lower corporate and pass-through business tax rates, reduce individual tax rates, and provide full expensing for business costs (with no deduction for net business interest expense) under a border-adjustable destination-based cash-flow business tax system. In addition, the Blueprint would move the U.S. from a worldwide international tax system to a “territorial” dividend-exemption system, and impose a mandatory “deemed” repatriation tax (8.75percent for cash or cash equivalents and 3.5 percent for other accumulated foreign earnings).

Under the Blueprint, the top U.S. corporate income tax rate would be reduced from 35 percent to 20 percent. A new pass-through business income tax system with a top rate of 25 percent would apply for owners of C corporation business entities, including S Corporations, limited liability companies, partnerships, and sole proprietorships. The top individual income tax rate would be reduced to 33 percent.

Additional details on how lawmakers plan to proceed on tax reform and their other legislative priorities are likely to emerge in the coming days.

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