Ohio Tax Federal Tax Policy: A Discussion of Comprehensive Tax - - PDF document

26th Annual

Tuesday & Wednesday, January 24‐25, 2017

Hya Regency Columbus, Columbus, Ohio

Ohio Tax

Federal Tax Policy: A Discussion of Comprehensive Tax Reform Efforts and Other Legislative Developments

Caroline L. Harris Vice President, Tax Policy & Chief Tax Policy Counsel, U.S. Chamber of Commerce Washington, DC

Wednesday, January 25, 2017 10:00 a.m. to 10:45 a.m.

• Rev. April 2016

1615 H Street, NW Washington, DC 20062 202-659-5406 www.uschamber.com The U.S. Chamber of Commerce is the world’s largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations.

Caroline L. Harris

Vice President, Tax Policy, and Chief Tax Policy Counsel, U.S. Chamber of Commerce

Caroline L. Harris is vice president, tax policy, and chief tax policy counsel at the U.S. Chamber of Commerce. She directs the development, promotion, and publication of the Chamber’s policy on tax-related matters. She analyzes tax legislation, other legislation with revenue-raising provisions, and tax reform proposals, and submits comments, Hill letters, and testimony to Congress and regulatory agencies. Harris routinely meets with members of Congress and their staffs, the administration, and regulatory agencies to promote the Chamber’s tax policy. Harris also frequently speaks to business leaders, local chambers of commerce, other trade associations, and member companies to educate them on the Chamber’s tax policy priorities and current legislative outlook. She regularly meets with Chamber members to assess what provisions affect their businesses. In addition, Harris publicizes the Chamber’s tax policy through media communications with the Dow Jones and the Financial Times. She contributes opinion pieces in notable newspapers, such as The Washington Post and The Washington Times and comments

• n tax policy on national television networks, including Bloomberg and Fox Business.

Harris serves as the Committee Executive for the Chamber’s Taxation Committee and represents the Chamber on the Steering Committee of several national tax coalitions. Harris is admitted to the District of Columbia Bar. She is a member of the American Bar Association and its Tax Section. Harris received a B.A. in economics from the University of Wisconsin–Madison and her J.D. from The George Washington University School of Law. She received a Master of Laws in Taxation, with distinction, from the Georgetown University Law Center. Harris hails from Philadelphia and currently resides in Washington, D.C. with her husband, Ethan.

The 2017 Tax Outlook

• Where Are We?

– Where Did We End Up? – Election 2016 Results

• Legislative Outlook?

– Budget

• Vote‐A‐Rama?
• Health Care?

– Regulatory Reform – Tax Reform

• Process and Timing?
• Key Players?
• Starting Points?
• Revenue Considerations?
• Winners and Losers?
• Effective Dates?
• What Should YOU Be Doing?
• Regulatory Outlook

– Debt/equity – Minority Valuation

• Litigation Outlook

– Internet sales tax – Altera – Inversions

The 2017 Tax Outlook: I’m Still Here

Where Did We End Up?: Year End

• Tax Reform? Nope…
• Remaining Tax Extenders? Bye‐bye racehorses, NASCAR, and Hollywood…
• State and Local Tax Issues?

– PITFA? Yes! – Internet Sales Tax? Marketplace Fairness, OSSA, DMA v. Brohl… Nope… – BATSA? Nope… – Mobile Workforce? Nope….

• Regulations? Debt/Equity went final, minority valuation still in proposed…
• Tax Treaties? No ratification 6 ½ years and counting…

Where Are We?: Election 2016 Results

• Republicans control both branches of

Congress

– 51 Republican Senators – 241 House Republicans

• A Republican White House and House and

Senate Republican Leadership can set a common agenda

Where Are We?: Election 2016 Results

• Senate Republicans now have 51 votes…
• Enough to pass expedited budget legislation,

approve Cabinet…

• But not enough to overcome filibusters,

approve Supreme Court….

Legislative Outlook: Budget: Health Care

• Procedure: Senate passed budget with

reconciliation instructions on health care, sent to House

• Repeal and Delay Strategy? Replacement?

– Will need revenues for replacement so isn’t clear what will happen to the ACA taxes – Cadillac and medical device? Bipartisan engagement…. – 3.8% investment tax? Optics issues….

• Outlook: Internal politics, D resistance but will

pass

Legislative Outlook: Reg Reform

• House: Will pass:

– REINS Act (require congressional approval of any exec branch regs costing over $100M) – Midnite rules (repeal Obama rules in clusters using the Congressional Review Act (CRA))

• Senate: Bills will hit snag b/c need 8 Ds
• Outlook: One or more Obama rules will be killed

using CRA

Tax Reform: Process

• Bipartisan Process?

– GOP Blueprint HWM Markup Full House Vote (limited amendments) – Senate Bill SFC Markup Full Senate Vote (amendments more likely) – Conference Committee to resolve differences – Vote on Conference Agreement – Bill to President for Signature

Tax Reform: Process

• Bipartisan Process: Requires 60 in Senate, Min 8 Dems
• Targets: 2018 Dems Sitting in Red States

– Nelson (D‐FL) – Donnelly (D‐IN) – Stabenow (D‐MI) – McCaskill (D‐MO) – Tester (D‐MT) – Heitkamp (D‐ND) – Brown (D‐OH) – Casey (D‐PA) – Manchin (D‐WV) – Baldwin (D‐WI)

Tax Reform: Process

• Reconciliation Process?

– Pass budget, which includes instructions on details (like tax reform); limited to how many reconciliation bills can do in one year; if ACA early, tax reform later – Committees of jurisdiction cobble together underlying legislation, vote at least month after – but quicker if House, Senate, Pres on same page

• Limitations: Cannot add to deficit outside of 10 year window (need

phaseouts… see fiscal cliff fiascos…)

• Benefits: Only need 51 votes, so can do with NO Democrats
• Feasible could do 2 bills: 1 bipartisan, 1 under reconciliation

Tax Reform: Timing

• Questions: House has blueprint, Senate does not….
• 1986 Lessons: A 13‐month Process

– House

• HWM conducted 26 days of markup of tax reform (September 18, 1985‐December 3,

1985, with breaks)

• Full House passed the bill 2 weeks after the markup concluded (on December 17, 1985)

– Senate

• SFC reported its reform bill approximately 4½ months after the House passed its version
• SFC conducted 17 days of markup (March 19, 1986‐May 6, 1986, with breaks)
• SFC filed report for its bill on May 29, 1986, full Senate deliberated for a little under a

month before passing its bill, with amendments, on June 24, 1986.

– Conference: Conference committee approved a conference agreement about 2 mos. after Senate passage and filed its report a month later (on September 18, 1986) which was then approved by both the House and the Senate – President: Signed into law on October 22, 1986

Tax Reform: Key Players

• Admin: Treasury Secretary Mnuchin, unnamed

Treasury Policy positions

• House: Speaker Ryan, HWM Chair Brady
• Senate: Majority Leader McConnell, SFC Chair

Hatch, SFC Budget Chair Enzi, Minority Leader Schumer, SFC Ranking Member Wyden

Tax Reform: Starting Point: Individual

Issue Trump GOP House Blueprint

Tax Brackets  3 brackets (12%, 25%, 33%)  Same Cap Gains/ Dividends  Retain existing capital gains tax structure  Repeal 3.8% NIIT  Taxed at ordinary rates with 50% exclusion (effective tax rates of 6%, 12.5%, 16.5%)  Repeal 3.8% ACA tax Carried Interest  Tax as ordinary income  Follows proposed treatment of capital gain (i.e., tax at ordinary rates with 50% exclusion for max effective rate of 16.5%) Itemized Deductions  Cap itemized deductions at $200K (married)/$100K (single)  Retain deductions for mortgage interest, charitable giving; eliminate most others Standard Deductions; Other Credits  Increase standard deduction to $15K (individuals), $30K (MFJ)  Eliminate personal exemptions and head‐of‐household filing status  Create new above‐the‐line tax deductions for child /elder care expenses, tax‐preferred savings accounts  Consolidate standard deduction & personal exemption into 1 larger standard deduction of $12K (single) , $18K (single with child), $24K (MFJ)  Consolidate personal exemption for children & child tax credit into single $1,500 credit, $1,000 of which is refundable Estate Tax  Repeal, eliminate stepped up basis  Repeal

Tax Reform: Starting Point: Business

Issue Trump GOP House Blueprint

Business Tax Rate  Reduce corporate rate from 35% to 15%  Pass‐thru businesses:  May elect to be taxed at 15% corporate rate or under individual side of code  Large pass‐thrus electing 15% rate subject to 2nd‐level tax on dividends, small ones would not  Anti‐abuse provisions to prevent taxpayers from misclassifying wage income as business pass‐thru income negotiated with Congress  Top corporate rate of 20%  Top pass‐thru rate of 25% Depreciation  Full expensing of assets in year 1 for manufacturing firms if give up deductibility

• f interest

 Full expensing  Elimination of current deductions for net interest expense

• Note: Tension between losing interest deductibility and full expensing… is this a trade
• ff of a permanent benefit for a timing difference? What about small biz that already

gets full expensing under s179? What are they gaining? Trump proposal may alleviate some tension but could be expensive….

Tax Reform: Starting Point: International

Issue Trump GOP House Blueprint

International Regime  “BIG border tax….”  Border‐adjustable territorial tax system with a 100% participation exemption for foreign dividends Deemed Repatriation  Deemed repatriation of corporate profits held offshore at one time tax rate of 10%  One‐time deemed repatriation with differential rates for cash (8.75%) and noncash assets (3.5%), which could be paid ratably

• ver 8 years
• A Note on Border Adjustability: How does it work? Is it WTO compliant? What re

effective dates? Are there phase‐ins? Are there carve outs? Stay tuned….

• A Note on Repatriation: What is money used for? Infrastructure? Democratic buy in?

The Schumer factor?

Tax Reform: Starting Points: Senate

• No Senate blueprint comparable to House

Blueprint

• Chairman Hatch has pursued integration but

unclear how that proceeds now the Rs control both houses and the WH… watch for elements

• f integration in tax reform…

Tax Reform: Likely Pieces

• “Yuge” rate reductions?
• Border adjustable approach?
• 100% business expensing?
• Net interest deductibility (with some possible

carve outs)?

• Goring of some scared cows (some holier than
• thers)?
• Deemed repat?
• Shift to territorial system?

Tax Reform: Revenue Considerations

• Revenue neutral?
• Scoring?

– No official Joint Committee on Tax (JCT) score… – Static vs. dynamic? – Outside estimates?

• TPC: $3.1T/10 yrs (House), $6.2T/10 yrs (Trump) [static]
• Tax Foundation:

– $2.4T/10 yrs (House), $4.4T‐$5.9T/10 years (Trump) [static] – $191M/10 yrs (House), $2.6T‐$3.9T/10 yrs (Trump) [dynamic]

Tax Reform: Winners and Losers

• Importer vs. exporter?
• Is business asset intensive?
• Does the business use leverage?
• ETR is driven by marginal rate or use of

deductions/credits?

• Is business multinational?

Tax Reform: Effective Dates

• No clear effective dates, but unlikely to be

retroactive in any way

• Transition rules?

Tax Reform: What Should YOU Be Doing?

• Look at proposals and model the impact on

your business

• Work with your corporate offices on what

your priorities and goals should be

• Identify similarly situated companies, trades,
• etc. as possible allies for your priorities
• Articulate any advocacy efforts (carve outs,

transition rules, etc.)

Regulatory Outlook: Debt/Equity Final Rules (s385)

• Final rules issued in October 2016
• Significant improvements for USMNCs, still

challenges for foreign MNCs

• Path Forward?

– CRA to disapprove rule? Would revert to prior case law on issue… Prevents future regulatory action on the same topic… – Repeal of s385?

Regulatory Outlook: Minority Valuation Rules (s2704)

• Proposed rules issued in August 2016 which

purport to address valuation discount abuses but which are overly broad

• A lot of feedback, written and at hearing
• Path Forward?

– Rubio/Davidson bills blocking funding? – Chief of Staff Memo (“Priebus Memo”) ordering Executive Branch agencies (and requesting independent agencies) to withdraw proposed and final rules from publication; usually issued on or shortly after Inauguration Day…

Litigation Outlook: Internet Sales Tax Collection

• Attempts to address legislatively have been unsuccessful
• South Dakota v. Wayfair Inc.

– States have been challenging the Quill physical nexus standard through legislative and regulatory means – South Dakota enacted legislation in March 2016 requiring large

• ut‐of‐state sellers to collect sales and use taxes within their

borders — regardless of physical presence — then sued Newegg Inc., Wayfair Inc. and Overstock.com Inc. a month later to enforce the new sales tax law. – Status: After South Dakota sued the e‐tailers in state court, they removed the case to federal court. The state is currently trying to remand the dispute back to state court.

Litigation Outlook: Reject “Tax Exceptionalism”

• Issue is IRS response to taxpayer comments
• Altera Corp. v. Comr.

– Chamber has filed amicus in 9th Circuit, asking the court to affirm a Tax Court decision striking down a Treasury reg on arbitrary and capricious grounds. – The brief argued that:

• Tax Court properly rejected the IRS’s theory of “tax exceptionalism,” which the agency

routinely advances in an attempt to evade the Administrative Procedure Act (APA).

• In applying the traditional rules of administrative law, the Tax Court correctly concluded

that the regulation failed under the APA for a litany of reasons, including that the IRS failed to collect, much less examine, the relevant data necessary to engage in reasoned decision making.

• Like all other federal agencies, IRS must comply with the APA

– Status: Awaiting decision in 9th Circuit

Litigation Outlook: Inversion Rules

• Chamber lawsuit challenging unlawful IRS regs
• Chamber of Commerce v. IRS

– Commerce and TAB filed legal challenge to IRS’s immediately effective Multiple Acquisition Rule (MAR), which attempts to prevent certain corporate mergers otherwise permitted under the inversion rules under s7874 – Treasury and the IRS ignored the clear limits of the tax code to target entirely lawful transactions – Section 7874 sets a specific numerical threshold governing combination transactions between U.S. and foreign companies – Treasury and the IRS rewrote the Code and steamrolled over the APA, which requires that an agency provide interested parties with notice and an

• pportunity to comment before a rule becomes effective. They admit to

skipping over any prior notice or opportunity to comment on their MAR, but

• ffered no justification for dodging their legal obligations in this way.

– Treasury and the IRS should not act as if they are above the basic rules that govern all federal agencies – Status: Awaiting decision in W. District of Texas