United States

A Potentially Ill Omen for Tax Reform?

Oct 16, 2017
From the Tax Governance Institute

Is the Blueprint on a collision course with political reality?

By John Gimigliano, Principal in Charge, Federal Legislative & Regulatory Services, Washington National Tax, KPMG LLP

Read more Tracking Tax Reform blog posts

What's on our minds this week:

While the September 27 release of the Unified Framework represents a step toward tax reform, it also represents a step away from the House Blueprint.

Whether you thought the blueprint was great policy or bad, the introduction of the framework potentially forewarns a rough road ahead for comprehensive tax reform:

  • First, the blueprint was a coherent set of policies, designed to carefully mesh together in an effective way. It’s not clear that the policies of the framework have similar cohesiveness.
  • Second, the framework’s apparent abandonment of revenue neutrality makes it very difficult to enact a sweeping tax reform bill on a permanent basis. A finished product could be less sweeping than what the proponents of tax reform had originally set out to achieve. 
  • Finally, the last year has shown us how very hard it is to change the status quo. Lobbying efforts against the main features of tax reform will likely continue all the way to the finish line.

The bottom line: Although the current entrenched U.S. tax system is an imperfect one, it somehow achieves an equilibrium that generally works for many taxpayers. Trading one equilibrium for another is no easy task, as we’re now finding out. Stay tuned.

Read full article below:

While the September 27 release of the Unified Framework by Republican leadership represents a step toward tax reform, it also represents a step away from the House Blueprint. This may not bode well for tax reform.

Dismantling the Blueprint

When the Blueprint was released, it boasted a number of prominent features that were, in many ways, essential to the cohesiveness of the plan. But many of these key items have since been abandoned in whole or in part. Let’s take a closer look:

Destination-based system: The Blueprint called for a destination-based system through the proposed border adjustment tax (BAT) that would have exempted exports and taxed imports. But importers vigorously opposed the BAT, and House leadership eventually abandoned it. The Framework replaces it with far less radical idea of a minimum tax on foreign earnings.

Cash flow tax: The Blueprint’s cash flow tax system would have replaced the existing capitalization, cost recovery, and timing rules with a simple system allowing an immediate full deduction for tangible property, intangibles, buildings, and inventory (virtually everything other than land) at the time a taxpayer incurred the cost. But like the BAT, the cash flow tax elicited opposition by taxpayers that preferred a reduction in the tax rate.

The Framework promises “unprecedented expensing,” but that likely means a system closer to 100 percent bonus depreciation, which would not apply to intangibles, buildings or possibly purchases that are not original use property. Further, this system may only apply for five years, presumably then reverting to current law MACRS.

Interest deductibility: The Blueprint would have eliminated the deduction for net interest expense. The Framework now says there will be a “partial limitation” on the interest deductibility, but offers no details.

Repeal of the state and local tax deduction: The Blueprint envisioned offsetting the revenue cost of individual tax cuts—and also making the tax code more progressive—by completely repealing the deduction for state and local taxes. This has been seen as harmful to many taxpayers in high-tax states, and full repeal is now seems unlikely.

Revenue neutrality: This objective was promoted as being essential to the Framework’s pro-growth goals. Also, a revenue neutral tax reform bill could be made permanent law under the budget reconciliation rules of the Senate. But as the revenue-raising items described above have been eliminated or limited, the goal of revenue neutrality also appears to have been abandoned.

Chances for major tax reform fading

The dismantling of the Blueprint doesn’t bode well for comprehensive and transformational tax reform this year.

Although the current U.S. tax system is an imperfect one, it achieves an equilibrium that generally works for many taxpayers. Trading one equilibrium for another is no easy task, as we’re now finding out.

The conflicts and contentiousness of the past several months have clearly illustrated just how hard it is to change the status quo. We can expect vigorous opposition to the main features of tax reform to continue. 

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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

____________________

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.