United States

Tax Reform: It's Now When and How, Not Whether

Dec 04, 2017
From the Tax Governance Institute

Tax Reform: It's Now When and How, Not Whether

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:

With passage on December 2 in the Senate, the question now is not whether, but how and when Congress will complete a tax bill. While the deal isn’t done yet, it’s increasingly hard to imagine the scenario where Congressional Republicans fails to reach a compromise on a tax bill.

Not long ago, it seemed like we’d never get this far. Now, the next step for Congress is to find a way for both the House and the Senate to pass the same bill.

There are at least three ways for the GOP could get House and Senate onto the same page:

  1. The Senate bill could be approved in its entirety by the House and go to the White House.
  2. Private negotiations could eventually produce a bill both houses would agree to.
  3. A formal conference of both Houses would resolve differences and submit a report that goes back for final passage.

Our best guess is that GOP leadership will choose Option 3, primarily because the conference approach is transparent, includes limited debate, and allows for no amendments, which would most likely speed the process and keep it on track. 

Which leaves the question of when Congressional approval and signing by the President might occur. December 15, December 24, and even December 31 have been positioned in the press as “deadlines,” but in reality, those are all artificial. There is no procedural reason why a conference and a vote couldn’t extend into 2018.

But, as a rule, Congress responds well to deadlines. Look at most important pieces of legislation and you will see they were all enacted up against some sort of looming deadline—the end of the year, August recess, government shutdowns, debt limits reached. That history can help you understand why we believe GOP leadership will likely be ratcheting up the pressure on completion in 2017 and why what seemed implausible just a month ago now looks very possible, very soon.

Read full article below:

The Senate passed its version of tax reform over the weekend, with 51 of 52 Republican (and no Democratic or Independent) senators voting in favor of the bill. Not long ago, it seemed like this would never happen. But in a frenzied November, Congress cleared hurdle after hurdle in its pursuit of tax reform. In less than a month, the current Congress accomplished what took the better part of a year in 1986, the last time we had tax reform.

Congressional Republicans have managed to produce bills in the Senate and in the House that focus on what they promised they would:

  • Make the U.S. corporate rate competitive with the rest of the world.
  • Lower taxes on business income earned by pass-through.
  • Create a form of expensing designed to spur capital investment.

Many of the compromises made in the Senate to get to this point appear to have been made as much out of political priorities as much as they were made from policy priorities. It’s also not clear whether either the Senate or the House bill will create the economic growth its proponents have promised all along.

But the 35 percent corporate rate was simply unsustainable in the current competitive global tax environment. So while this bill may be an imperfect vehicle, it nevertheless attempts to put the United States on equal footing with our major trading partners.

What’s next?

There are at least three paths that Congress can take.

House to White House: The first, and shortest, path to the President’s desk is to simply have the House vote and approve the Senate bill as is. But recall that the Senate made many changes to the original House-approved tax reform bill (H.R. 1). And it doesn’t appear that the House is inclined to simply accept the Senate bill without making changes. So this option does not appear likely.

Private negotiations:  The second option is for House and Senate leadership to “lock themselves in a room” and hammer out a single bill they believe could pass both chambers of Congress. This approach generally happens behind closed doors, away from the press, lobbyists, and even rank-and-file Congressional members, and can happen quickly.

But this approach risks converting “yes” votes to “no” votes from members of Congressional who were locked out of these important negotiations. What’s more, a bill negotiated in this way has to run the Senate gauntlet all over again, potentially subject to another full round of amendments. This can burn valuable time and political capital on the Senate floor.

A formal conference: This is the path we believe that Republican leadership is leaning toward. With this process, House and Senate leadership appoint conferees who are authorized to formally negotiate a compromise bill. While this process plays out (mostly) in the public eye—and sometimes slowly—it does have an important advantage: the conference report that ultimately emerges can’t be amended and debate on it is limited, so there will be few opportunities for opponents to delay a final vote.

Parting thoughts 

While nothing is finished until the President signs the bill, it’s increasingly hard to imagine a scenario where Congressional Republicans don’t reach a compromise on the tax bill. So the real question is when it might occur.

While there is no actual, set-in-stone deadline to get tax reform done, the reality is that Congress doesn’t do well without deadlines. And Republican leadership knows that if the bill slips into 2018, there’s no obvious deadline on the calendar to force a final vote on it. Which means that there’s every reason for them to ratchet up the pressure on completion in 2017. While that seemed implausible just a month ago, it now looks very possible.

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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.