Alex Brosseau Deloitte Tax LLP Setting the stage A look ahead at the 115 th Congress Deadlines will dominate 2017 Jan 3 115 th Convened Jan 20 Inauguration Feb 6 Presidents FY18 budget due in theory ID: 644691
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After the Election: An Outlook on Federal Tax Policy
Alex Brosseau, Deloitte Tax LLPSlide2
Setting the stageSlide3
A look ahead at the 115
th
CongressDeadlines will dominate
2017
Jan. 3
115
th
Convened
Jan. 20
Inauguration
Feb. 6
President’s FY18 budget due (in theory)
Apr. 15
Congress adopts FY18 budget (in theory)
Sep. 30
FY2017 Ends
Apr. 30
“First 100 Days”
Mar. 16
Debt limit reinstated
After the Election: An Outlook on Federal Tax Policy
Apr. 28
FY17 CR Expires
Jul. 31
Sep. 4
August Recess
After the Election: An Outlook on Federal Tax PolicySlide4
The deficit reprieve is over
After 2018, budget deficits to stage inexorable ascent
Note: Assumes current law remains unchanged (e.g., remaining tax extenders expire as scheduled, sequester cuts are allowed to transpire as scheduled, etc.).
Source: Congressional Budget
Office,
The Budget and Economic Outlook: 2017 to 2027 (Jan. 2017); $9.4T cumulative deficit spans the current 10-year budget window (2018-2027)
% of GDP
$9.4 trillion deficit
After the Election: An Outlook on Federal Tax Policy
Copyright ©
2017
Deloitte Development LLC. All rights reserved.Slide5
Budget ReconciliationSlide6
First, House and Senate must agree on a budget resolution that includes the reconciliation instructions (that alone could pose challenges)
Reconciliation instructions cannot be prescriptive – may only specify:
The Committee(s) charged with reporting legislation
The budget impact of legislation to be reported (spending ↑↓, revenues ↑↓, or “deficit reduction”)
May also be used to raise the statutory debt limitDate by which Committee(s) must report conforming legislation
Limited debate – legislation moved under reconciliation cannot be filibustered in the Senate (may pass with 51 votes)Recent uses: 1996 welfare reform, 2001 tax cuts, 2003 tax cuts, much of 2010 health reform law
GOP control raises specter of “budget reconciliation”How does it work?
After the Election: An Outlook on Federal Tax Policy
After the Election: An Outlook on Federal Tax PolicySlide7
The “Byrd Rule” can set up 60-vote hurdles in the Senate, including with respect to:
Provisions that would
increase the deficit in any year beyond the period covered by the budget resolution, unless offset by other changes in the same title (
recall the expiring 2001/2003 tax cuts) Provisions that have no budgetary effect or whose budget effect is “merely incidental” to the underlying policy
Maximum of 3 reconciliation bills can be moved in one year – one each for revenues, spending, and the debt limitFor example, revenue effects from ACA repeal could preclude a follow-on bill for tax reform unless Congress passes a second budget resolution with additional reconciliation instructions
Reconciliation has become an inherently partisan exercise – no buy-in from minority party raises risk of later repeal if balance of power shifts
Tax reform through reconciliationIs it really an option?
After the Election: An Outlook on Federal Tax PolicySlide8
The AHCA would have repealed major health coverage- and tax-related provisions of the Affordable Care Act, including those noted below. In total, the bill would have repealed tax provisions totaling nearly $1 trillion over the next decade.
The American Health Care Act
What its demise may mean for tax reform
Medicaid
expansion
(new enrollment frozen in 2020)
Premium assistance
tax credit
(effective
2020)
Penalties for not carrying/providing adequate coverage, i.e., the “mandates”
(effective 2016)
3.8% Net Investment Income Tax
(effective
2017)
Medical Device Excise Tax
(effective
2017)
Higher AGI floor for itemized medical expense deduction
(effective
2017)
Limit on contributions to health FSAs in cafeteria plans
(effective
2017)
Annual fee on health insurance providers
(effective
2017)
Additional 0.9% Medicare payroll tax on high-income
taxpayers
(effective
2017*)
“Cadillac” tax on high-cost employer-sponsored coverage
(postponed effective date to 2026)
Annual fee on manufacturers and importers of branded drugs
(effective
2017)
Codification of economic substance doctrine
(NOT REPEALED)
* Note: A late-posted change to the original manager’s amendment would have postponed repeal of the additional 0.9% Medicare tax until 2023. That change was not reflected in the most recent Congressional Budget Office analysis showing a roughly $1 trillion reduction in revenue over 10 years on account of the AHCA.
After the Election: An Outlook on Federal Tax PolicySlide9
A look at the
House GOP “Blueprint,”
Trump tax platformSlide10
Remembering H.R. 1, the Tax Reform Act of 2014
High-level overview and lessons learned
Lowered top rates on corporations and individuals, and transitioned to a territorial system,
while
maintaining revenue- and distributional-neutrality over the 10-year budget window
Included dozens of politically painful base-
broadeners (e.g., amortizing R&D and advertising expenses; repealing MACRS, LIFO, §1031 exchanges, §199 deduction; limiting the mortgage interest/charitable deductions),
plus a broad-based 10% surtax that lifted the top effective rate on individuals
Phased-in corporate rate reduction, timing shifts (e.g., repealing MACRS, expanding Roth accounts), and one-time revenues (e.g., deemed repatriation) could indicate plan would have lost revenue beyond the 10-year budget window
Deemed to boost GDP by between 0.1% and 1.6%,
resulting in additional “dynamic” revenue of $50 - $700 billion Slide11
House GOP tax reform blueprint gets a second look
“Destination-based cash-flow tax”
House
GOP Tax Reform Blueprint
Business
Corporate
Rate
20%Pass-through Rate
25% top rate on active business income (with unspecified rules to ensure employee-owners take “reasonable compensation”)
Full Expensing
Yes (would also apply to intangible property and non-land real estate)
Interest DeductionNo current deduction for net interest expense (disallowed deductions may be carried forward indefinitely)
Alternative Minimum TaxRepeal (both corporate and individual)§199
DeductionRepeal
Net Operating LossesEliminate NOL carryback; permit indefinite carryforward with amount “increased by an interest factor”; limit current deduction to 90% of taxable income
InternationalTerritorial (via 100% dividend exemption)
One-time deemed repatriation with differential rates for cash (8.75%) and noncash assets (3.5%), payable over 8 years at the taxpayer’s election
Eliminate most subpart F rules; retain foreign personal holding company rules
Border Adjusted Tax BaseTax imposed on imports, but not exports (similar in concept to border adjustment of other countries’ credit-invoice VATs); applicable to products, services, and intangibles
IndividualTop Individual Rate
33%Capital
Gains and DividendsTax at ordinary rates with 50% exclusion (i.e., effective top rate of 16.5%); repeal 3.8% net investment income tax*
Itemized DeductionsRepeal state and local tax deduction; review mortgage interest and charitable deductions to make more “effective and efficient”
Standard DeductionConsolidate standard deduction & personal exemption into a larger standard deduction of $12,000 (single) / $24,000 (joint)
Health CareCap exclusion for employer
provided health benefits at an unspecified threshold; new refundable credit for individuals without access to workplace plans; repeal all other ACA taxes* (e.g., med device tax, “Cadillac” tax, additional 0.9% Medicare tax)Estate Tax
Repeal
10-Year Revenue EffectLoses $3.1 trillion (per Tax Policy Center under conventional scoring); Goal of revenue neutrality against a “current policy” baseline and after including “dynamic” revenue effects
* Items marked with an asterisk were included in the House GOP health care reform blueprint, which was released separately from the tax reform blueprint.
After the Election: An Outlook on Federal Tax PolicySlide12
House GOP ‘Blueprint’ and border-adjustments
Can’t have one without the other?
Revenue Estimate (Tax Policy Center)
2016 - 2026
$ billions
Consolidate/reduce individual tax rates, repeal individual AMT, increase standard deduction, other individual tax cuts- $3,657
Reduce corporate rate to 20%, repeal corporate AMT, reduce top passthrough business rate to 25%, transition to territorial system
- $2,345Expensing, net of interest deduction limit
- $1,085Repeal ACA taxes, estate tax
- $990Reduce effective rate on capital income
- $498
Repeal itemized deductions, other than mortgage and charitable+ $1,908
Repeal personal/dependent exemptions+ $1,654Border adjusted tax base+ $1,180All other revenue raisers
+ $734
Net revenue effect (under conventional scoring)- $3,101
Source: Tax Policy Center, An Analysis of the House GOP Tax Plan, Table 2
Impact on net importers (e.g., retail, oil refining) – will exceptions be made?
Impact on net exporters / tax-driven M&A?
Will the dollar adjust? How much?
Impact on American investments abroad /
dollar-denominated debts in EMs?
How would the WTO view this regime? Our trading partners?
If no border adjustments, what base erosion protections would accompany the proposed territorial system?After the Election: An Outlook on Federal Tax PolicySlide13
President Trump – key elements of tax platform
Business provisions
Donald
Trump
Corporate Rate
15%
Pass-through Rate
May elect to be taxed as a C corp to benefit from 15% rate; however, all but “small” pass-throughs (undefined) would face second-layer tax on distributions to owners
Full Expensing?Yes, electable for US manufacturers
Interest DeductionEliminated for firms that elect full expensing
Carried Interest Tax as ordinary
incomeEnergyNo changes specified, but see “Other” below
Financial Products and InstitutionsPhase-out deferral of inside build-up on life insurance contracts for “high-income earners” (per original plan released in September 2015)International
Repeal deferral(per original plan released in September 2015)
Deemed RepatriationYes (10% rate, payable over 10 years)
Business Tax Reform Related to Enhanced Infrastructure Spending?Trump discusses increasing such spending by as much as $1 trillion, but to date has not tied the policy to business tax reform (e.g., deemed repatriation)
OtherReduce or repeal “special interest“ provisions and deductions made “unnecessary or redundant” by the 15% rate
(but specifically mentions R&D credit would be retained)Source: Unless otherwise noted, parameters taken from campaign websites and Tax Policy Center.
After the Election: An Outlook on Federal Tax PolicySlide14
President Trump – key elements of tax platform
Individual provisions
Donald
Trump
Top Individual Rate
33% (begins at $225k for joint filers)
Capital Gains and Dividends20% top rate
(repeal 3.8% net investment income tax)Alternative Minimum Tax
Repeal (both individual and corporate)Itemized Deductions
Dollar cap on total itemized deductions ($200k for joint filers, $100k for single filers)Standard Deduction
$15,000 (single) / $30,000 (joint), indexedPersonal
Exemptions / Filing StatusRepeal personal and dependent exemptions; eliminate Head of Household filing statusEstate and Gift
TaxRepeal, but tax capital gains at death in excess of $10 millionPersonal Exemptions
RepealNew Tax Benefits
New above-the-line deduction for child care costs + new Dependent Care Savings Accounts10-Year Revenue Effect
Loses $6.2 trillion (per Tax Policy Center under conventional scoring)Source: Unless otherwise noted, parameters and revenue impact taken from campaign websites and Tax Policy Center.
After the Election: An Outlook on Federal Tax PolicySlide15
Questions?
Alex Brosseau
abrosseau@deloitte.com
202.661.4532Slide16
This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.
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