There has been tremendous preparatory work done on tax reform in the last two Congresses. In the House, former Ways and Means Chairman Camp introduced comprehensive tax reform legislation and current Chairman Brady has unveiled a Blueprint for Tax Reform, with both proposals seen as potential starting points for comprehensive reform. In the Senate, former Finance Chairmen Baucus and Wyden and current Chairman Hatch have also spent considerable time and effort laying the groundwork for tax reform.
While the goal of comprehensive reform has not been achieved, there seems to be a growing consensus that the corporate rates should be reduced, the tax code needs to be simplified, and corporate inversions need to be stopped. There is also a concern about the growth in offshore funds of U.S. multinational corporations. One concrete sticking point, however, is that Republicans would like to lower the top individual tax rate while Democrats believe it should either remain unchanged or be raised for wealthier taxpayers.
With the election less than two weeks away, polling indicates that Hillary Clinton is likely to be elected President, Republicans will maintain a majority in the House, and control of the Senate is too close to call. This report looks at how comprehensive tax reform would be addressed in the two most likely political scenarios.
President Hillary Clinton/Democratic Senate/Republican House
Hillary Clinton generally has followed the Democratic view that the tax code should be used to raise revenues from wealthier taxpayers to fund new initiatives. She would increase taxes on the wealthy (both income and estate taxes) and provide tax relief to middle-income families through an enhanced child tax credit. On the business side, she would provide new incentives for small business such as increased expensing for new investment and a 100% capital gains tax exclusion for long-term investments. Regarding international taxation, she supports Obama Administration proposals to limit the ability of U.S. multinationals and foreign-owned U.S companies to reduce their taxable income through “earnings stripping.” She also reportedly favors a reduced tax rate for offshore income that is repatriated and invested in an infrastructure bank.
While comprehensive tax reform has not been a key campaign issue for Mrs. Clinton, her promise to spend billions on infrastructure could spur her to support tax reform as a means to an end, i.e., revenue raised from taxing repatriated earnings would be designated for infrastructure spending. Linking infrastructure and repatriation is certainly not a new idea and continues to be high on the agenda of Senator Chuck Schumer, the new Majority Leader in a Democratic Senate. Additionally, the new Senate Finance Chairman, Ron Wyden, has long been a champion of comprehensive tax reform and co-authored bipartisan proposals in 2010 and 2011.
Meanwhile in the House, Speaker Ryan has said tax reform is one of his priorities for 2017 ("I really want to get tax reform running as quickly as possible,” he said recently), and Ways and Means Chairman Brady is expected to unveil legislative language for his tax reform blueprint, with the hope of pushing that proposal through the Ways and Means Committee and then the full House. However, even though Republicans will still control the House, their majority is expected to be slimmer and there is no guarantee that Brady’s bill will make it through the House.
Among the many philosophical differences dividing Democrats and Republicans on tax reform are their views on tax rates for individuals and investment income. The Brady Blueprint would lower the top individual rate from 39.6% to 33% and provide for a maximum tax rate of 16.5% on capital gains, dividends, and interest income. Clearly, Chairman Brady will not support and a Republican House will not approve the Clinton proposals for tax hikes on high-income individuals, so this will continue to be a stumbling block in the middle of the road to tax reform.
Optimists, however, believe that a deal on infrastructure and repatriation could provide an opening for a Clinton Administration to find common ground with Republicans on corporate and international tax reform, coupled with corporate rate reduction and tax relief for middle-income, working families.
President Hillary Clinton/Republican Senate/Republican House
Recognizing that Republicans would need to garner 60 votes to break a filibuster to push a tax reform bill through the Senate under regular order, House Speaker Ryan has mentioned the possibility of using reconciliation procedures that would enable legislation to clear the Senate with only a majority vote.
The first step in the reconciliation process is House and Senate approval of a budget resolution instructing the tax-writing committees to report tax reform legislation that will be considered under the special reconciliation rules.
There are numerous parliamentary problems with using the reconciliation process for tax reform and not all Republicans support this approach, so it is not a given that (1) Ryan’s idea will be pursued, and (2) that a partisan tax reform bill could pass the Senate, even under Republican control. In addition, without some concession to Democrats, either in the form of middle-income class tax relief or increased infrastructure spending, the bill would be ripe for a veto. The bottom line, then, is that with a Democrat in the White House and Republicans in control of Congress, tax reform will need broad, bipartisan support to become the law of the land.