In a speech setting his priorities for the coming year, House Speaker Paul Ryan (R-WI) has put tax reform at the top of the legislative list, saying that the “broken tax system” stands in the way of the Republican agenda of “creating jobs and raising wages” and that “if we want to offer ideas then we actually need to have ideas.”
Ryan has frequently said that being the Chairman of the Committee on Ways and Means was his “dream job” because it would allow him to pursue tax and entitlement reform. As this session of Congress winds to a close, he is actively using his capacity as Speaker of the House to set up conditions to advance such reform in 2016.
In a move that is unprecedented, the Speaker has brought his top staff from the Ways and Means Committee to the Speaker’s office. This is a clear sign that while the work of tax reform will follow regular order through the Committee on Ways and Means, this Speaker intends to firmly guide the process by drawing on the knowledge of this group of experts in tax and entitlement reform. In contrast, his recent predecessors had a single adviser dedicated to following the work of the tax writing committees. Moreover, the Speaker’s posture in the current negotiations over the extension of expired tax provisions is also designed to facilitate tax reform.
Instead of the traditional approach of extending the 60 or so expired provisions for a set temporary period of time, such as the two years that the Senate Finance Committee voted for in Spring 2015, the Speaker is seeking to make some of the provisions permanent (the research credit and small business expensing, for example) and to extend others (such as bonus depreciation) for five years. In exchange, he would agree to extend the expansions of tax-driven social programs that President Barack Obama achieved in 2009 (the EITC, Child Credit, and American Opportunity Credit). This approach will allow the Speaker to make a major baseline adjustment for tax reform. The cost of extending tax credits on a permanent basis is high, reducing the amount of revenue that the tax system raises and making it easier to achieve lower rates, because in a revenue-neutral tax reform program, less revenue will need to be raised. However, there is no guarantee that any of the provisions that might be made permanent will survive tax reform. Permanence makes tax reform easier from an accounting standpoint, but the intent is also to repeal a great many tax expenditures in favor of lowering the rates.
International tax reform may come first
Although the Speaker intends to forward a comprehensive tax reform plan next year in order to put ideas into the political debate and to gain a mandate from the voters for those ideas, it is possible that international tax reform could be enacted prior to the elections. Major inversion deals (US companies shifting their tax domiciles overseas to reduce their US tax burdens) are accelerating and US companies are being purchased outright by their foreign competitors; meanwhile US trading partners in Europe and Asia are carrying out major corporate and international tax reforms which put American companies at a competitive disadvantage. These rapid changes have created a sense of urgency to act, at least in this area, prior to 2017.
Over the past several years, a general bipartisan consensus for international reform has come together on Capitol Hill and in the Administration focused on shifting the US to a territorial tax system with a very low rate on the repatriation of profits earned by foreign subsidiaries of US companies, a one-time tax on accumulated foreign profits, and base erosion provisions to discourage American companies from moving to extreme low-tax jurisdictions. The pressure to act on these proposals has become even greater as the OECD proceeds with its Base Erosion and Profit Shifting (BEPS) initiative, which is seen as putting the US at an even greater disadvantage in global markets. That pressure was apparent at hearings last week in both the House Ways and Means and Senate Finance Committees, in which both Administration witnesses and members of Congress on both sides of the aisle agreed that, absent international tax reform, BEPS would result in a raid of American corporate profits by cash-strapped European governments.
Although there has been a consensus on the general technical approach to international reform, the political will to act has not kept pace until now. Former House Speaker John Boehner (R-OH) was a general supporter of tax reform, but he downplayed it, believing that it was not good politics for Republicans. In contrast, Speaker Ryan believes that Republicans should advance bold ideas in an election year and that good ideas and actions are the way to achieve good political results. Ryan has been in discussions with two key Senate allies, Senator Rob Portman (R-OH) and the man who in 2017 will be the leading Senate Democrat, Charles Schumer (D-NY), on international tax reform, and those discussions are ongoing. And no lawmaker wants to preside over, or be blamed for, the erosion of the US global tax base, a key factor that may drive Congress and the Administration to act.
In recent days, as negotiations have accelerated over the year-end tax bill, House Republicans have discussed urging the President to join with them early in 2016 to advance international tax reform as a way to stop the loss of American global companies; they may also intend to note that starting the tax reform process could become part of Obama’s legacy. While it remains unlikely that the President would be willing to agree on the individual tax rate reductions that Republicans want in order to achieve comprehensive tax reform, the Ryan plan is to advance individual and corporate reform plans next year to achieve a popular mandate for them, so that these aspects of reform will be in a position to be enacted early in the next Administration.
Take the effort seriously
The American political system is designed to make it difficult to get big things done because power is decentralized and all voices are invited to participate. Paul Ryan has proven that he has the skills to bring disparate voices together to gets things done and the intellectual power to articulate the need to act. He will focus very heavily on tax reform in 2016 and, with much of the groundwork already laid down in the past few years, it would be wise for stakeholders to take the current effort seriously and to participate.
Find out more about the current effort and its potential impact on your business by contacting the authors.