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Reconciling Tax Reform and Reconciliation

Congress is not an ATM

-Robert Byrd, Former US Senator

Tax reformThe year is halfway through, but it doesn’t feel like we’re halfway to tax reform. Don’t get me wrong – tax reform might still happen. But as one Hill staffer said to me, “Health care is sucking the oxygen out of Washington.”

I’ve talked about the connections between ACA repeal-and-replace and tax reform several times on the video updates found on the Tax Reform Resource Center. In a nutshell, repeal of the ACA-related taxes, such as the Net Investment Income Tax (NIIT), before tax reform is undertaken, would make the tax reform baseline score less expensive.

The work on tax reform continues nonetheless, and the AICPA has testified at both a House Small Business Committee hearing and a Senate Small Business and Entrepreneurship Committee hearing. We’ve also supported the INVEST Act of 2017 (S. 1144). This tax reform legislation, introduced by Senator John Thune (R-SD), would simplify certain tax rules for small- and medium-sized businesses and their owners.

Also, House Ways and Means Committee Chair Kevin Brady (R-TX) recently announced the committee will hold two hearings in July – one focusing on the benefits of tax reform to small businesses, and the other on the benefits to families and individuals. Finally, Senate Finance Committee Chair Orin Hatch (R-UT) has indicated that a handful of Senate Finance Committee Republicans have been called upon to work on specific tax reform issues.

It’s fairly clear that to pass legislation in a rancorous Washington, the Senate must resort to a process called “reconciliation.” Congress created reconciliation when it passed the Congressional Budget and Impoundment Control Act of 1974 (Public Law 93–344, July 12, 1974) to make it easier to reconcile or align revenue and spending levels. In the early period of the use of reconciliation, extraneous and sometimes controversial amendments were offered and the Senate reacted by adopting what became known as the “Byrd Rule” to limit extraneous measures. The Byrd rule originated when Senator Robert C. Byrd, on behalf of himself and others, offered an amendment to S. 1730, the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985. The Senate adopted the amendment unanimously. The rule has been expanded and revised several times over the years.

The practical application of reconciliation is that:

1) It limits debate time to 20 hours;

2) Filibusters – a blocking tactic – can’t be used;

3) Only a simple majority vote is necessary for passage; and

4) The Byrd Rule prohibits legislation that increases the deficit after the time period covered by the budget resolution – in other words, “Congress is not an ATM.”

One of the most vivid examples of reconciliation in action occurred in 2010 when George Steinbrenner, owner of the New York Yankees, died. In 2001, President George W. Bush worked with Congress to enact tax cuts that included a phase out of the estate tax – the Economic Growth and Tax Relief Reconciliation Act of 2001. The estate tax had completely phased out by 2010 and was scheduled to come back in 2011 – in accord with the Byrd Rule and at the pre-2001 levels. By passing away in the year that the estate tax completely phased out, some estimate that the Steinbrenner estate may have saved as much as $600M.

So what are the current prospects for the passage of tax reform? Congress goes on recess the end of July through Labor Day. When they return in September, a September 30 fiscal cliff will be looming with the fiscal 2018 funding bill needing resolution; the Federal Aviation Administration law, federal flood insurance and a children’s health insurance initiative are all set to expire; and a number of smaller provisions are also set to expire, including Coast Guard laws and some Medicare and Food and Drug Administration programs. Congress may be forced to adopt short-term fixes to keep government running. On top of all of this, the Treasury Department estimates that the debt ceiling will be reached by the end of September or the beginning of October. And if that weren’t enough, the President has already tweeted that the country “needs a good ‘shutdown’ in September.”

In other words, September may be too busy for tax reform. I do believe there is a window of opportunity between October and early 2018 before the election cycle gets too distracting, although it’s possible that tax reform may look more like rate cuts. And I also believe that opportunity will include reconciliation in the Senate. 

On October 23, 1986 – the day after the Tax Reform Act of 1986 was signed into law – the Wall Street Journal indicated, “[t]he battle to get tax reform is over; the battle to keep it is just beginning.”  Keep an eye out; they may be able to use that line again.

Ed Karl, CPA, CGMA, Vice President-Taxation, Association of International Certified Professional Accountants

Tax reform courtesy of Shutterstock.

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