United States

Will the Framework Work?

Oct 02, 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:

The release last week by the GOP of its slim, high-level “Unified Framework” for tax reform brings us to an obvious question: Can the framework become law?

The framework seems to have convinced GOP House and Senate budget hawks that they should move forward with a budget that could accommodate tax reform. But the politics around the proposal between the House and Senate remains challenging and fault lines have already begun to appear. Furthermore, it’s safe to say that the jury is still out as to whether the framework will have the desired effect of creating a popular groundswell for tax reform that could help overcome any legislative reluctance.

But even if there is broad support for the framework, arcane Congressional budget reconciliation rules suggest that many hard choices still lie ahead—among them permanent versus temporary reform, additional tax brackets, and some straight out math problems—to help ensure passage of tax reform.

Which leads us to view the framework as an important but small step on a long, uncertain journey that doesn’t necessarily finish in 2017.

Our conclusion: While the framework shows us there is a path to tax reform, there are still many hurdles to be overcome—politically and procedurally—before it could become law.

Read the full article below:

The GOP released its “Unified Framework” for tax reform last week. Short on details, it covers familiar territory: lower rates, broader base, minimum tax on foreign earnings, limitation on interest deductibility, special pass-through tax rate, and repeal of the state and local tax deduction.

The question that many observers are asking: Can this framework be the basis of a tax reform bill that can pass Congress and be signed by the President? Let’s take a look at some of hurdles—both political and procedural—that will need to be overcome.

Navigating the politics of reform

Key among the framework’s intended audiences were (1) House and Senate Republican legislators, and (2) the general public.

GOP congressional members House and Senate budget committees and deficit hawks have been reluctant to commit to an FY18 budget resolution until they are convinced tax reform is moving in the right direction. The framework seems to have had that desired effect.  A budget resolution is necessary for Senate consideration under reconciliation procedures that avoid the need for 60 votes to avoid a filibuster.

Most conservative members of the House endorsed the framework and have apparently acceded to a budget that would accommodate a plan. The Senate released its budget plan last Friday that would allow for a bill to add $1.5 trillion to the deficit over the next 10 years, the sum thought necessary to accommodate the tax cuts in the framework.

But stiff challenges lie ahead. Senate Finance Chair Orrin Hatch (R-UT), one of the so-called Big Six, is strongly opposed to eliminating the state and local tax deduction, a view shared by several Republican House members representing districts with large percentages of itemizers. And other disagreements are likely to surface in the coming weeks as more details are revealed.

With only 52 Senate Republicans, there’s virtually no margin for error.

The general public – Middle-class tax cuts were supposed to generate support for tax reform among the public. President Trump vowed that the plan would be “at least as progressive” as current law, and might include a top individual rate higher than the proposed 35 percent.

But some aspects do not appear to reflect that populist agenda, like the repeal of the estate tax and alternative minimum tax, as well as the proposed reductions in the top individual rate and the special 25 percent maximum rate for passthrough businesses. Moreover, eliminating state and local tax deductions could hurt middle class taxpayers in high tax states such as New York, New Jersey, Illinois, and California.

Procedural hurdles, too

To take advantage of the reconciliation process (and the 51-vote rule), the bill (1) must meet identified targets inside a 10-year budget window, and (2) cannot add to the deficit after the 10-year window.

Here’s the problem: The Senate budget would allow the tax reform bill to add an additional $1.5 trillion to the deficit over the next 10 years. By one estimate, the cost of the framework could be as much as $5.5 trillion. So to make the math work, Congress needs to find $4 trillion in offsetting tax increases.

That leaves Congress with two options: raise more money elsewhere (e.g., via economic growth or additional tax revenues) or scale back the Framework’s tax cuts. Either strategy runs the risk of turning yes votes into no votes—something the GOP can’t afford.

In addition, House Speaker Paul Ryan wants tax reform to be permanent, not temporary. But to use the reconciliation process, the tax reform bill cannot add a nickel to the deficit after the 10-year window period.

This may force Congress to make hard choices: either add sufficient permanent tax increases to the bill or sunset many of the tax cuts. So, for example, the proposed 20 percent corporate rate might have to revert back to 35 percent sometime in the next decade.  The framework already indicates that its expensing provision would terminate after five years.

One small step forward

The release of the framework marked a step forward. But tax reform negotiators must still build political consensus for their proposal, and that may be a difficult task. At the same time, they must solve the math problems discussed above to stay on track procedurally, at least so long as the effort does not include Democratic support.

So while tax reform in 2017 remains possible, it’s far from certain.

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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.