House Republicans Unveil Tax Reform BlueprintJune 29, 2016
On June 24, House Speaker Paul Ryan (R-Wis.) unveiled a tax reform blueprint as part of his “Better Way” agenda. The proposal represents the first major attempt at comprehensive tax reform since former House Ways and Means Committee Chairman Dave Camp (R-Mich.) introduced a proposal at the end of the Congressional session in 2014. While that bill was not taken up by the next Congress, Speaker Ryan’s proposal is expected to serve as the blueprint for House consideration of tax reform in 2017.
The 35-page report on tax reform—prepared by a House Republican task force on tax reform, led by Ways and Means Committee Chairman Kevin Brady (R-Texas)— would lower corporate and pass-through business tax rates, reduce individual tax rates, provide full expensing for business costs (with no deduction for net business interest expense), and move the U.S. from a worldwide international tax system to a ‘territorial’ dividend-exemption system.
Under the plan, the top statutory corporate income tax rate would be reduced from 35 percent to a flat rate of 20 percent. Meanwhile, pass-through business income (e.g., business income earned through sole proprietorships, partnerships, limited liability companies, subchapter S corporations, etc.) would face a maximum rate of 25 percent – greater than the proposed top rate for corporations, but less than the proposed 33 percent top income tax rate for individuals. The blueprint states that sole proprietorships and pass-through businesses will pay or be treated as having paid reasonable compensation to their owner-operators. Such compensation will be deductible by the business and will be subject to tax at the graduated rates for families and individuals. The report does not define “reasonable compensation.”
On the individual side, the blueprint calls for the current seven individual income tax brackets (with a top rate of 39.6 percent) to be consolidated into three, with rates of 12 percent, 25 percent, and 33 percent; however, the blueprint does not specify income thresholds for these proposed new rate brackets. Net capital gain, dividend, and interest income would be taxed as ordinary income, but would be subject to a 50 percent exclusion resulting in effective rates on such income of 6 percent, 12.5 percent, and 16.5 percent, depending upon the taxpayer’s marginal rate. The individual AMT would be repealed, as would the estate and generation-skipping transfer taxes.
Other significant proposals included in the blueprint would:
- Move toward a cash-flow business tax model by allowing 100 percent first-year expensing of investments in tangible personal property, real property other than land, and intangible property.
- Disallow deductions for net business interest expense (i.e., interest expense would be deductible only to the extent of interest income), with an indefinite carry-forward period for disallowed net interest expense deductions. The blueprint notes that the Ways and Means Committee intends to develop special rules for industries such as banking, insurance, and leasing, for which interest expense is integral to their business model.
- Repeal carrybacks of net operating losses (NOLs), but allow NOLs to be carried forward indefinitely with a dollar adjustment designed to compensate for inflation. The blueprint proposes to limit NOL deductions in any one year to 90 percent of taxable income (similar to the current-law NOL limit under the alternative minimum tax).
- Repeal the corporate AMT.
- Repeal most business tax preferences, and while generally vague on details in this regard, it specifically mentions the section 199 deduction for domestic production activities income as a business tax preference that should be repealed.
- Retain the research and experimentation tax credit and the last-in-first-out (LIFO) method of inventory accounting.
- Overhaul the international tax rules by moving toward a territorial system with a 100 percent tax exemption on dividends received from foreign subsidiaries. This regime would replace the current international tax system which generally taxes US firms on their worldwide income – subject to deferral and an allowance for foreign tax credits.
With the blueprint’s release, committee members and House tax staff will now focus on fleshing out the many details needed and converting the outline into legislative language. While no timeline has been set, it is unlikely that tax reform legislation will be released this year.
While election-year politics will dominate legislative action this year, comprehensive tax reform remains a top priority for NSBA and our members. NSBA supports a broad overhaul of the tax system by dramatically broadening the base—cutting the breaks that litter the tax code—and lowering rates. NSBA believes it is imperative that the U.S. moves towards a simpler, fairer tax system that does not attempt to only tweak one piece of the puzzle, such as international-only tax reform, and instead incorporates NSBA’s nine principles for tax reform.
Details of the House Republican tax reform blueprint can be found here.