The Pieces to Make Tax Reform Happen are Lining Up: Knight to H3?
"Today only happens once in a lifetime. Make the most of it."
-Michael Ray, Country Music Singer
It’s hard to believe that it’s been seven months since I blogged about tax reform; I guess I was distracted by IRS service issues. But here we are again and it looks like the stars are aligning for a once-in-a-lifetime opportunity for tax reform. Or in my case, a twice-in-a-lifetime opportunity. I was around in 1986 for that monumental tax act and 15,000 changes later, here we are again. Our legislative process is part of the price we pay for democracy and that isn’t all bad.
(Chess and the legislative process have a lot in common, hence the reference to Knight to H3, the dangerous but noble move Ron Weasley makes to achieve checkmate in the movie, Harry Potter and the Sorcerer’s Stone.)
Magic, however, is not one of the optional responses to the test I’ve given in my tax reform blogs: “What will be the greatest driver of tax reform?”
- Bipartisan compromise
- Congressional leadership changes
- Current events
- Good tax policy
Donald Trump winning the White House wasn’t one of the choices either but seems to be part of the answer with the Administration, the Senate and the House all Republican-led. The current iteration of tax reform discussions has lasted for about six years. Last June, the House Republican Leadership released A Better Way, its blueprint for reform. To be sure, there are no current bills or legislative language. Quite the opposite, details are missing. But with Republican control, tax reform may be just over the horizon.
As an aside, and speaking of good tax policy, the AICPA recently updated its Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposals. The 12 guiding principles offer criteria for developing and improving tax laws in directions that the AICPA believes are in the public interest.
The political environment changes almost daily; however, here is the timing as we know it today. ACA repeal and replacement has been the first order of business. House Speaker Paul Ryan has indicated that he’d like to see a tax reform bill released publically by the end of April or early May and pass the House before Congress takes its traditional August recess.
A separate Senate process will take time and likely involve budget reconciliation. The possible result is the bill could be passed earlier but it just couldn’t go into effect until the government’s next fiscal year, which begins October 1, 2017.
Despite the extreme level of partisanship in Washington, there is still bipartisan interest in tax reform. Notwithstanding that interest, crossing the finish line to signed legislation will not be easy due to several challenges:
- Creating a revenue-neutral bill will be difficult. A focal point driving the current discussions of tax reform is lower individual and business rates. Broadening the base – read that to mean eliminating deductions – to make up for these low rates will be a challenge. The changes will be fundamental and uncomfortable for many – some will win and some will lose.
- Managing ACA repeal/replacement overlaps tax reform. A key priority for the Republican leadership and the Administration, repealing and replacing the Affordable Care Act is proving to be more of a challenge to implement and seems to be contributing to a delay in taking up tax reform. However, the timing for taking on ACA could very well slide.
- Using regular order or budget reconciliation is an important consideration. Using the reconciliation process makes it easier to pass a bill in the Senate as only a simple majority of votes is needed but there’s a catch: it can only be used once a year and leaders plan to use it for ACA repeal. That leaves tax reform needing 60 Senate votes to pass if ACA action occurs first. As I alluded to earlier, the other option would be to consider reconciliation – that scenario is a bit murky, they may still be able to vote on tax reform legislation, but delay the date the bill goes into effect to comply with the once-a-year restriction.
- Possible Senate resistance to a House bill. Senate Finance Committee Chairman Orrin Hatch (R-Utah) has raised concerns with aspects of the House Republican Blueprint and has indicated that the Senate may not just take up and pass a House tax reform bill. Specifically, Hatch has questioned the Blueprint’s border adjustability proposal, calling it a “significant shift” in business tax policy.
So, to sum things up, there’s still a very good chance for major tax reform happening twice in my lifetime but it’s looking like the timing is sliding to the latter part of the year. It’s a huge undertaking.
Michael Ray also said, “People have enough ideas. The real question is ‘Which ideas are you going to use?’” Sometimes the AICPA likes the ideas and sometimes not. For example, we strongly oppose restrictions on using the cash method of accounting.
Learn what ideas are being proposed on the AICPA’s Tax Reform Resource Center, how they affect you and how we are speaking up on behalf of the profession.
Edward Karl, CPA, Vice President – Taxation, Association of International Certified Professional Accountants- Public Accounting.
Chess image courtesy of Shutterstock.