Middle-Market Public Policy Roundup

The “Big Six” released their tax reform framework on Wednesday, outlining key components that Republican leaders will use to guide any tax reform efforts.

Now that the framework has been released, congressional leaders can focus on passing a budget resolution for 2018, which would include reconciliation instructions, the mechanism by which any tax bill could be passed by a simple majority in a filibuster-proof way.

Currently, the House version of the 2018 fiscal year budget contains instructions for a deficit-neutral tax reform package. However, as reported in last week’s Public Policy Roundup, the Senate Budget Committee is indicating that they’ve reached a budget agreement that would result in the allowance of up to $1.5 trillion in deficit-financed tax cuts.

The nonprofit, nongovernmental Committee for a Responsible Budget has current scoring of the tax reform outline, showing that it could cost up to $2.2 trillion. Take this with a grain of salt. In the absence of substantive detail within the plan, scoring is likely flawed. However, this is emblematic of the continuing need for a revenue raiser and the likelihood of deficit-financed packages.

The individuals that form the so-called Big Six are:

• Mitch McConnell, Senate Majority Leader
• Paul Ryan, Speaker of the House
• Kevin Brady, Chairman of the Ways & Means Committee (the House tax-writing committee)
• Orrin Hatch, Chairman of the Senate Banking Committee (the Senate tax-writing committee)
• Gary Cohn, White House Economic Adviser
• Steve Mnuchin, Secretary of the Treasury

What the Framework Means for Businesses

Reduction in the corporate income tax to 20 percent

• This is a key issue for the Trump administration. President Donald Trump has said that he will not negotiate on this number. This may in part be due to the net raise in rates some companies would experience from the bill. According to consultancy A&M, “For many corporations, dropping the tax rate to 20 percent will not be a significant reduction when paired with the potentially increased limitations on the net interest deductions and elimination of section 199 benefits.”
• Middle-market companies subject to the corporate income tax stand to gain more than large multinational corporations, which often have large teams of employees devoted to strategy around lowering their overall tax rate.

Maximum tax rate of 25 percent on pass-through corporations

• More than 90 percent of corporations in the United States are pass-through entities that face a marginal tax rate in excess of 47 percent (Tax Foundation), making this one of the biggest measures in the bill.
• The problem is how to prevent individual taxpayers from forming LLCs and taking advantage of a rate that is 10 percent lower than the top rate. The framework doesn’t propose a way of achieving this. Instead, it deflects the issue, stating: “The framework contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”
• Congressional staff have made no indication that they have accomplished a way to prevent this gaming of the system.

“Partial” interest deduction limitation

• Preserving interest deductibility is an essential component of ACG’s lobbying efforts. The framework calls for a partial limitation of the interest deduction in relation to C corporations, without providing further detail. The “replacement” proposed is full expensing of capital expenditures for a minimum of five years.