United States

Considering plan B (or C or D...)

Apr 07, 2017

Tracking Tax Reform

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

Read more Tracking Tax Reform blog posts

Whether the House Blueprint for tax reform may become law is certainly far from certain. Still, President Trump and the GOP-held Congress are under significant pressure to make good on their promise to enact major tax reform in 2017. So, let’s consider some alternative paths for tax legislation to get to the Rose Garden this year.

Going bipartisan: If GOP leaders can’t rally enough Republican votes in the House and Senate, they could consider drafting a tax bill that would attract enough Democrats to pass it under the regular order of the Senate (that is, achieving 60 votes).

In fact, there were reports last week that senior Republicans were considering revising the Blueprint to eliminate the business deduction for wages paid while dramatically reducing payroll taxes paid by individuals. This would provide a tax cut to middle- and lower-income earners and could draw some Congressional Democrat votes.

Changing the rules: Congress typically uses a 10-year window to estimate the effects of tax legislation on the budget. To use the “reconciliation process” for a tax bill—and therefore only require 51 votes in the Senate instead of 60 to pass—the tax bill must (1) be revenue neutral after the 10-year window or (2) sunset the provisions at the end of 10 years (like the 2001 Bush tax cuts).

But Congress theoretically could change the budget window to a longer period, say 20 years. If that’s done, Congress could pass a tax bill that’s revenue-negative with 51 votes, and still achieve 20 years’ worth of tax reform. While temporary tax reform is not ideal, a 20-year lifecycle could be a realistic lifespan for a modern tax system in light of today’s rapidly changing economy.

Changing the vote threshold: The Senate could change its rules for passing substantive legislation, allowing the Senate to pass permanent revenue-negative tax reform with only 51 votes rather than the higher threshold of 60 votes. (This would be similar to what occurred last week with Neil Gorsuch’s confirmation to the U.S. Supreme Court.)

That option seems unlikely, however. The Senate‘s supermajority rule was designed to produce more moderate and bipartisan results than in the House. So a universal simple majority rule in both houses of Congress could result in the partisan pendulum swinging back and forth dramatically with each change in Congressional control. Still, this possibility can’t be ruled out.

Now for something completely different: While the House Blueprint has garnered the most attention recently, other potential legislative vehicles exist:

  • Senator Orin Hatch (R-UT) continues to push his dividends-paid deduction plan as a better approach to tax reform. He claims his plan is revenue neutral, distributionally neutral, and legal entity neutral (see last week’s Tracking Tax Reform item).
  • The Senate could choose to revisit the proposed Camp Tax Reform Act of 2014 as an alternative to the House Blueprint. For many lawmakers, the Camp plan is a known commodity.
  • Finally, we could see something less ambitious than real tax reform—for example, a bill with no rate reduction that still delivers significant tax benefits to businesses and/or individuals.

One thing’s for sure: Congress won’t let major tax legislation for 2017 go down quietly. If the House Blueprint falters, these alternatives—and others impossible to foresee—could well come in to play.

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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.