What’s Up With Federal Tax Reform


Is anything really happening? Yes.
Will something eventually get passed? Probably.

A group of key individuals who dubbed themselves the “Big 6” has been meeting for a few months and more intently in recent weeks. They include two members each from the administration (Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn), Senate (Majority Leader Mitch McConnell and Finance Committee Chair Orrin Hatch) and House (Speaker Paul Ryan and Ways and Means Chair Kevin Brady.)

Are they motivated to find common ground? Certainly. Is there a consensus? Not yet. Right now, they don’t even agree on whether, or to what extent, the legislation must be revenue neutral.

But they all seem to recognize that they need to do something – failure to coalesce is not in anyone’s interest. So what have they agreed on so far? The border-adjustment tax is out. Some method for allowing the repatriation of overseas earnings (at a one-time low-rate tax) is in. The corporate rate must drop to 25% or less (depending on how many deductions and breaks they can eliminate.) They appear to be embracing a way to allow small businesses to immediately deduct investments in new equipment and facilities, i.e. “full expensing.” On the individual income side, a collapsing of the brackets and lowering of rates (no details.)

Possible tradeoffs or “pay-fors” in tax circles: eliminating some business interest deductions, eliminating the state and local tax (SALT) deductions and capping the mortgage interest deduction. These are yet unsettled issues. But listen and watch closely to the SALT discussions going forward; there is a lot of money and a lot of political (with a small p) interest in this item. It is more a geographic than partisan issue because taking the SALT deduction away will have a significant negative impact on people (constituents of Republicans and Democrats) in states that have high state and local taxes. This item could have a big bearing on the entire effort and whether we get true reform or temporary tax cuts.

Tax cuts are the easy part for these folks. The hard part is finding ways to pay for reductions. The last true tax reform was in 1986, 31 years ago, and it required a lot of time and bipartisan buy-in. The Big 6 are all Republicans and they are anxious to get something done. They could mimic the Bush tax cuts of 2002 and 2003, passed through the reconciliation process, which means whatever they do expires after 10 years. Somewhat ironically, most of those Bush cuts were only made permanent as part of the Obama budget deal of 2012.

To recap the status of tax reform: Much remains up in the air.

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