What’s the Latest?

Now that the new Trump administration is in office and Congress has begun preparing its agenda, additional insights regarding corporate tax reform have come to light.

The proposal’s substance hasn’t changed much. The overall concept of the plan put forward by the House Ways and Means Committee Chairman, Kevin Brady (R-TX), outlined in our prior post on this matter, remains in place. Highlights include the following:

  1. Reduce the Corporate income tax rate to 20%.
  2. Remove the majority of special deductions and credits (the R&D credit remains as virtually the only business credit).
  3. Implement a “border adjustment” feature which excludes the deductibility of imports while shielding export sales completely from income tax.
  4. Allow pass through income (S-Corps and Partnerships) to be taxed at this new lower rate, albeit with a 5% surcharge.
  5. Provide for “100% expensing” of capital purchases while removing the deduction for interest expense (note – this feature seems to be the least fleshed-out item and may get cut during the lawmaking process).
  6.   Presently, no actual bills have been submitted, nor has any draft legislation been published.

President Trump seems to be on board. Despite some unfavorable comments about “border adjustment” shortly before the inauguration, President Trump has recently spoken favorably about the border adjustment feature, which is quickly becoming the most-controversial aspect of tax reform.

Opposition is forming. Congressional Democrats seem united in opposition to the plan.  In addition, two Republican Senators, David Purdue (GA) and Tom Cotton (AR), have stated their opposition to border adjustment.  Further, import-dependent industries such as retail, strongly oppose border adjustment, which some see as a 20% tax on most consumer goods sold in retail outlets like Walmart, Target, Best Buy, and online through Amazon.

Likelihood of passage. The big hurdle to corporate tax reform is likely the US Senate filibuster rules. Senate Republicans could attempt to use the budget reconciliation process (which only requires a simple majority, as opposed to a 60 vote filibuster-proof majority), as they did during the Bush 43 administration, to pass a tax reform bill. However, such a bill might not be able to fit under the reconciliation rules. Further, the Senate GOP cannot afford any additional “defections” if Senators Cotton and Purdue remain opposed to any tax reform plan with border adjustment, since Senate Republicans only control 52 seats (and have Vice President Pence to cast a tie-breaking vote).  What’s the likelihood that other Senators from states disaffected by border adjustment wouldn’t also “defect”?  It’s easy to see a massive public relations campaign generated by interest groups posing questions such as “Do you want to pay 20% more for everything you buy on Amazon?” launching as a corporate tax reform bill is debated in Congress.

While GOP leaders are eager to pass and implement a significant tax reform plan, and President Trump seems to be on-board with the main features (including border adjustment), there are significant hurdles to passing such a bill through Congress, and it’s unclear how public opinion might sway the debate once tax reform becomes a major news story.  Stay tuned for more updates.

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