Considering Tax Reform
Congress is back in Washington after the August recess with a heavy agenda for the remainder of the year, including increasing the national debt limit, funding the government for Fiscal Year 2018 and providing disaster relief for the victims of Hurricane Harvey. Each of those issues offers substantial challenges under normal circumstances, but nobody can seem to remember what “normal circumstances” in Washington are.
In fact, Republicans, who control both Houses of Congress and the White House, are split on whether to have a “clean” bill to increase the debt ceiling or to address other policy matters in the same legislation. On funding the government, there is the usual tension between the Freedom Caucus (the most conservative Republican House members) and House leadership on reducing the size of government. The White House, for its part, is insisting that any spending bill include funds for beginning the wall along the U.S./Mexican border, one of President Trump’s campaign promises, which threatens to further divide the Congressional Republicans.
Adding to the confusion is the fact that nobody knows the extent of the funding that may be necessary for disaster relief in Texas and Louisiana or how long the recovery efforts will need federal support.
Democrats, on the other hand, are content to watch the GOP fight among themselves, which they hope will give them a further boost in their efforts to regain control of one or both Houses of Congress in the 2018 Congressional elections.
Oh, I almost forgot to mention Congress is also planning to pass comprehensive tax reform before the end of 2017.
What could possibly go wrong?
Regardless of these challenges, President Trump kicked off a major effort in support of comprehensive tax reform with a speech in Missouri on Aug. 30. The speech sought to position tax reform as a way to “unrig” the economy and stimulate increased economic growth that will lead to more jobs, increased wages and opportunities for middle-class Americans.
The President gave few specifics on the forthcoming legislation, preferring to leave those details to the tax-writing committees on the Hill. For their part, House Speaker Paul Ryan (R-WI 1) and House Ways and Means Committee Chairman Kevin Brady (R-TX 8) have been crisscrossing the U.S. during August seeking support for their vision of tax reform.
The final package will need to take shape quickly in order to have any realistic chance of passage before the end of the year. Among the issues still to be addressed are:
- The corporate rate – President Trump has called for a top corporate tax rate of 15%, and Congressional leaders have said they want to get the rate “as low as possible.” With the Border Adjustment Tax seemingly dead, however, many observers question whether the rate can get below 20-25% without blowing a hole in the deficit (not allowed under the “budget reconciliation” process, which allows passage in the Senate with only 51 votes).
- The individual rate – Other than comments about “reducing the rate” for individuals, there have been few details about how individual taxpayers would fare under tax reform. There’s also the problem of so-called “pass-through” entities, which are companies organized as limited liability corporations or partnerships. Those entities “pass through” their income to the owners, who pay taxes at their individual rate. The Forging Industry Association (FIA) has been arguing for the past several years that any comprehensive tax reform must include equal treatment for manufacturing income, regardless of the structure of the business.
- Expensing vs. interest deduction – One prominent feature of the tax-reform outline circulated by House leaders earlier this year was allowing immediate deduction for business investments in the year they are made but elimination of the deduction for interest on business loans. For many businesses, the ability to borrow money for long-term investments is dependent on being able to deduct the cost of the interest on the loans.
- International tax treatment – Both the White House and Republicans in Congress are in favor of shifting the U.S. tax system to eliminate double taxation of income earned from foreign operations. As part of that shift, the question is how to treat business income that is currently held offshore (to avoid a double tax under current law if the funds are returned to the U.S.). One approach would be to create a low one-time repatriation rate (perhaps 10%) in order to encourage companies to bring offshore funds back to the U.S. and, in theory, use them to invest in the U.S., thereby creating economic growth.
As policymakers begin to address these details, FIA will continue to make sure that they understand the concerns of the U.S. forging industry.