Since Congress last reformed the Internal Revenue Code in 1986, there have been more than 20,000 statutory changes to the tax code. Many economists argue that as global commerce gets more sophisticated and competitive, the tax code is getting more burdensome and harmful to economic growth. Democrats and Republicans alike have called for comprehensive tax reform to reduce marginal tax rates and close unnecessary tax loopholes to better address our nation’s priorities.
Today, the chief tax-writer in the House, Chairman Dave Camp (R-MI) of the Ways and Means Committee, unveiled his long-awaited plan to reform the tax code. If enacted, Camp estimates the reform would create 1.8 million jobs, increase federal revenue by $700 billion in the next decade and increase economic activity by $3.4 trillion. Here are a few highlights:
Individual marginal rates:
- 10% rate for income up to $71,200 for joint filers
- 25% rate for income between $71,201 and $450,000 for joint filers
- 35% rate for income above $450,001 for joint filers
- Standard $22,000 deduction for joint filers (adjusted for inflation)
- Repeal of the Alternative Minimum Tax
Corporate marginal rates:
- 25% flat-rate phased-in by 2019
- Deducts 40% of the capital gain or dividend. Remaining 60% is taxed as marginal rate of income.
Deductions and credits affecting you or your business:
- Increases child tax credit to $1500 per child
- Reduces mortgage interest deduction limit from $1 million to $500,000 of interest indebtedness
- Repeals deduction for a family’s out-of-pocket medical expenses
- Revises accelerated cost recovery tables for depreciable capital assets
- Repeals the medical device tax for sales after the date of enactment
- Repeals the inflation adjustment for the renewable energy production tax credits (PTC) for electricity and refined coal produced or sold after 2014. The credit would revert back to 1.5 cents per kilowatt-hour for the remainder of the 10 year period, and the entire PTC would be repealed for electricity or refined coal sold after 2024.
- Repeals expensing of the cost of any qualified property used for processing liquid fuel from crude oil or qualified fuels prior to 2014. The remaining cost would be recovered under normal depreciation rules.
- Provides $126.5 billion for the Highway Trust Fund through a one-time tax on accumulated foreign earnings that the taxpayer has the option to pay over an eight-year period.
- Considers interest on private activity bonds (PABs) issued after 2014 as taxable income.
- Imposes a 0.035% excise tax on financial institutions with more than $500 billion in assets.
- Requires private businesses with more than $10 million revenue to use accrual accounting, with some exceptions.
Recent History and Challenges
Camp’s bold plan is the culmination of three years of groundwork. Along with former Sen. Max Baucus (D-MT) of the Senate Finance Committee, the two tax-writers charged their respective committees to prepare for the laborious task. The two tax panels held dozens of hearings and formed working groups to focus on specific areas. Camp and Baucus even toured the nation together visiting businesses to get their thoughts on tax policy and competitiveness. The two reportedly continued to meet privately at a Capitol Hill pub to keep the momentum going.
Though the two chairmen took extraordinary steps to prepare for the overhaul, many challenges remain. Most pressing, they remained at odds over a central piece of the matter: how much new revenue should the new code generate for the treasury? Senate Majority Leader Harry Reid (D-NV) indicated he wants tax reform to increase revenue by nearly $1 trillion, which is even more than Senator Baucus is comfortable with. Republican leaders, however, favor deficit-neutral reform, meaning they would need to close fewer tax loopholes. Republicans have favored a new way of measuring revenue through a technique called “dynamic scoring,” which looks at economic growth as a metric of increased revenue.
Another challenge comes from industry. Every year, the IRS returns roughly $1.1 trillion in tax credits and deductions to individuals and businesses. Some industries design their entire business plan around specific tax provisions which make their activity profitable. Every tax deduction or credit has an industry which supports it. Any proposal to eliminate that status will result in local businesses in that field lobbying their federal legislators to oppose the idea or else jobs may be lost in their home states and home districts. This political problem has derailed prior efforts to reform the tax code, and many wonder if it will have the same effect this time around.
Finally, another hurdle is the clock. Camp himself is term-limited as chairman of his committee. Surrendering his gavel in less than a year means 2014 is the time for him to act. In the Senate, the prime champion of reform, Senator Baucus, recently left the Senate to become US Ambassador to China, a sign to many that he is skeptical his efforts on tax reform will bear fruit. His replacement, Ron Wyden (D-OR) has shown willingness to participate in tax reform, but has a very short transition time to prepare.
Though there remain many hurdles to successfully passing comprehensive tax reform, there is another important tax measure on the horizon as a fallback plan. The term “tax extenders” refers to the collection of temporary tax provisions that are regularly extended by Congress, typically for one or two years at a time. Tax extenders encompass a wide range of provisions and are diverse in purpose. The more than 50 temporary tax provisions that expired in 2013 included provisions impacting individuals, businesses, the charitable sector, energy, community assistance, and disaster relief.
Since the beginning of the 113th Congress, Chairman Camp has been reluctant to consider tax extenders outside of the broader context of tax reform. Ways and Means members and House leadership have been respectful of the Chairman’s position, and despite the popularity of many of the extenders, these provisions were allowed to expire on Dec. 31, 2013 with almost no opposition.
The discussion draft released by Camp did not include a package of tax extenders. If these temporary tax provisions were permanently extended, the Congressional Budget Office (CBO) estimates say it would lower the revenue baseline for this proposal by $1 trillion over a 10 year period. However, the Committee recognizes the likelihood that some of the expired temporary tax provisions will be extended, and Ways and Means has indicated its interest in receiving feedback on which extenders should be included to determine if the package is deficit neutral.
If Camp is unable to sell his tax overhaul proposal to House Republicans in the lead-up to the November elections, senior GOP sources believe Congress will revive discussion on retroactively renewing the tax extenders that failed to be renewed last year.
We at McDonald Hopkins Government Strategies will continue to monitor tax reform as it is considered in Congress. We are available at any time to provide full insight into the provisions of this bill and their implications on your business.
A Conversation with Steve LaTourette on Tax Reform and Regulatory Reform:
Steven C. LaTourette, President | 202.559.2600
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