United States

The (Tax Reform) Law of Unintended Consequences

Dec 11, 2017
From the Tax Governance Institute

The (Tax Reform) Law of Unintended Consequences

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:

Of all the surprising things we’ve seen from the House and the Senate on tax reform, none may be more surprising than the speed with the legislation has moved. Of course, Congress isn’t done yet—they still need to finish a bill, and that could be weeks away, at best.

But there is another reason to keep the corks in the champagne bottles. 

The speed with which this legislation has come together raises the specter that the final bill could well have flaws or unintended consequences requiring subsequent changes. That's a fairly common expectation for large-scale or sweeping legislation generically. In this case, however, fixing those glitches may not come easily further down the road, and taxpayers may have no short-term recourse but to live with the results.

There are many examples of corrections and refinements to legislation in the Congressional history books, with the preferred way to perfect imperfect legislation being the technical corrections process. But the current political environment raises some significant roadblocks:

  • The corrections system is built on a tradition of bipartisan unanimity across the parties and within government. It shouldn’t surprise anyone when we note that the phrase “bipartisan unanimity” is not one heard often in our recent political conversations.
  • In addition, technical corrections cannot make new law or new policy and must have zero revenue effect. If the effect is not zero, the proposal cannot be included as a technical correction and must instead be enacted as a substantive law change. This requirement means that how (or whether) technical corrections are enacted to the present tax reform bill hinges to a great extent on the lack of unanimity within Congress referenced earlier. No Democrats support the current legislation, and they may not be willing to help the Republicans fix it after the fact. 

And so it would seem that unless Congressional Republicans can find a sweetener sweet enough to get Democrats on board, or they somehow draft technical corrections so that they actually raise or lose revenue (and can, therefore, be approved via a 51-vote reconciliation), taxpayers may have to live with any unintended negative consequences of the final legislation for the foreseeable future. 

Read full article below:

Tax reform legislation is coming together more quickly than anyone expected. Congressional Republicans are pleased to have gotten so far, so fast. But it’s not time for them to pop the champagne just yet. They still need to put together a single bill out of similar, but still different House and Senate bills, which will be a challenge.

And because of the speed with which this legislation is coming together, it may be a bill with flaws—maybe deep flaws—and unanticipated consequences. Fixes to those glitches may not come easily.

Let’s take a closer look at this situation and how it came about.

While the Senate was scrambling to pull its tax bill together, its architects were trying to meet legislative demands with revenue costs they hadn’t yet figured out how to pay for. This created a chain reaction that ultimately led to serious complications.

For example, to find additional revenue to pay for income tax rate cuts, the Republican leadership decided to restore the individual alternative minimum tax (AMT), albeit with higher exemption amounts. The restoration of the individual AMT in turn led them to reinsert the corporate AMT.

But this decision led to many other unintended consequences. For instance:

  • More taxpayers are subject to the AMT than before.
  • Many tax credits, including the R&D credit, were rendered largely useless.
  • The Senate’s complex new international tax system, including the global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII) and participation exemption deduction, were potentially affected.

Now that the dust has settled and the drafters realize the problems caused by restoring the AMT, they’re committed to fixing it, but the fixes resurrect the revenue problems that led to its restoration in the first place.

This raises a bigger question: How many other problems like this are lurking in the House and Senate bills?

Debugging the bill

It’s clear that Republicans don’t want to slow down passage of tax reform and take the time to perfect what they know could be a flawed law with unanticipated consequences.  So, assuming passage, how will these inevitable glitches be fixed?

The preferred way to perfect imperfect legislation is through the “technical corrections” process. But there are several obstacles to this path, chief among them:

  • By tradition, every technical correction needs unanimous approval—by Congressional Republicans and Democrats.
  • Technical corrections cannot have revenue impact, positive or negative. If they do, the proposal cannot be included as a technical correction and must instead be enacted as a substantive law change.

What’s more, Congressional Republicans can’t use budget reconciliation to enact technical corrections with just 51 votes, as they did to pass the Senate bill. That’s because Congressional rules prohibit using the reconciliation process to pass technical corrections.

So where does this leave tax reform?

Congressional Republicans can try bring Democrats on board. But it may prove difficult to persuade the Democratic opponents to the legislation to help fix it.

Alternatively, Congressional Republicans can intentionally draft the technical corrections in a way that actually raises or loses revenue. That would permit use of the budget reconciliation process, requiring just 51 votes in the Senate.

The danger here is that taxpayers may have to live with any unintended negative consequences of a flawed bill for the foreseeable future.

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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.

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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.