US Tax Reform: A Status Update
07 November 2013
Posted by: Author: OECD
Despite complex political dynamics and a fundamental partisan
dispute over whether tax reform should be a vehicle to raise additional
revenue, the chairmen of both congressional tax writing committees are
moving forward on the issue of US tax reform and intend to bring reform
bills up for committee consideration this fall.
The prospect of House Ways and Means Committee Chairman Dave Camp
(R-MI) and Senate Finance Committee Chairman Max Baucus (D-MT) unveiling
comprehensive tax reform legislation and processing that legislation
through their respective committees is significant. The process will
require each committee to decide which current tax provisions will be
retained, modified, or eliminated.
A "grand bargain” in conjunction with deadlines related to government funding and the debt limit (as well as revisiting the Budget Control Act sequester)
provides the best opportunity to bridge this partisan dispute over
whether reform should be revenue neutral or raise revenue.
Recognizing that, both chairmen have made clear that it is their intent to mark up legislation in the fall.
Laying the groundwork
In speaking about the timeframe for consideration of reform, both
chairmen emphasize the groundwork they have laid in surveying other
members. Chairman Camp has met with off-Committee House Republicans and
Committee Democrats, and spent considerable time in recent months
meeting with Committee Republicans. Chairman Baucus has said he has "had
meetings with every single Senator about the Tax Code.”
They also cite the combined roughly 50 hearings held between the two
panels in this Congress and last. Both Committees also undertook
separate but similar processes for examining specific issues under tax
reform this past spring – Ways and Means through working groups and
Finance through options papers and meetings.
The revenue issue
As was the case in the debt limit negotiations in summer 2011 and
heading toward the fiscal cliff at the end of 2012, President Obama and
Congressional Democrats insist that any large scale fiscal or tax reform
package raise significant net revenue, from tax increases on higher
income individuals and possibly corporations. Republicans are adamantly
opposed to new net revenue. Senators have become even more entrenched in
their positions, and the issue has flared among Senate and Finance
Finance Committee leaders have
had their own public disagreement over revenue. Chairman Baucus assured
fellow Democrats during an early July caucus meeting that tax reform
would result in additional revenue, prompting Senator Orin Hatch (R-UT)
to announce that he and the Chairman had agreed to pursue a
revenue-neutral tax reform plan.
In the House,
Chairman Camp has stated clearly that tax reform will be revenue
neutral. While some have said they would not prejudge the effort,
Committee Democrats will likely oppose a bill that does not raise
revenue. They could still be active in the markup.
Democratic members also continue to doubt the feasibility of the
Majority’s tax rate targets, particularly for individuals. On 31 July,
they released Joint Committee on Taxation estimates of the revenue
effects of lowering the top individual tax rate to 25% and the corporate
tax rate to 25%, showing the reductions would cost approximately $5
trillion over the ten-year budget window.
The Administration’s view
President Obama has pushed for tax reform only intermittently, to the
frustration of Republican lawmakers who contend that Presidential
leadership is necessary to make tax reform a reality, as evidenced by
President Reagan’s active role in the run-up to the Tax Reform Act of 1986. The President’s Framework for Business Tax Reform released
by the Obama administration in February 2012 called for a 28% top
statutory corporate tax rate, or 25% for manufacturers, and an
unspecified minimum tax on foreign earnings.
President’s FY2014 budget released this past April for the first time
set aside some revenue raising proposals from previous budgets for
revenue-neutral business tax reform. The business tax reform reserve was
estimated to raise only $95 billion over ten years – a fraction of the
roughly $700 billion to $800 billion estimated cost of reducing the rate
On 30 July, the President called for a plan consistent with the 2012 Framework but
broke from the revenue-neutral principle the Administration had held
for business tax reform in calling "one-time revenue” generated in the
transition to a reformed system to be used to finance construction jobs
through infrastructure investment and fund worker training.
Contrary to initial reports, Administration officials denied a
repatriation tax associated with a switch to a territorial system was
the source of the funding, although later said foreign earnings could be
one source for the revenue, in addition to changes to the current
system of accelerated depreciation and the last-in/first-out (LIFO)
method of accounting.
Fiscal grand bargain
Regardless of whether a tax reform package ultimately raises revenue,
it is likely to be swept into a larger fiscal package that will be
negotiated in conjunction with deadlines this fall involving government
funding and the debt limit, with the weight of those issues potentially
providing momentum for a grand bargain to be enacted. On the one hand,
tax reform could be used to raise revenue to contribute to deficit
reduction or partial replacement of the sequester. Alternatively, a
revenue-neutral bill would be viewed as a boost to the prospects for
economic growth over the next few years.
to government funding, Congress is unlikely to resolve differences in
FY2014 appropriation bills prior to the start of fiscal year 1 October
due to differences in how the sequester is addressed by the two parties.
Senate appropriators are marking up bills with a total target of $1.058
trillion, reflected in President Obama’s FY2014 Budget and assuming the
sequester will be replaced with a separate package of tax increases and
Their House counterparts are
following the $966 billion spending target reflected in the Budget
Resolution approved earlier this year by the House, which assumes
sequestration will go forward.
With this government
funding issue unresolved, a "continuing resolution” to extend funding at
current levels for at least several months is likely to be pursued in
order to avoid a government shutdown, setting up an omnibus
appropriations process in the fall that could be combined with some
approach to win Republican support for an increase in the debt limit.
The increase will be necessary sometime in October or November (or
The Administration maintains that
it is the job of Congress to increase the limit and to do so without
causing a crisis in financial markets, while Congressional Republicans
have said they will not agree to an increase without accompanying
spending cuts. The debt limit and appropriations process combined will
put significant pressure on a fiscal deal this fall. It remains to be
seen whether a tax reform bill could be used as a means to help make a
What to expect in the near term
and Means Chairman Camp has already laid down some markers on tax
reform through three discussion drafts: the October 2011 international
tax discussion draft, which outlined moving the United States closer to a
territorial system, including three much-talked about options for
addressing concerns about base erosion; and drafts on the tax treatment
of financial products and reforming the tax rules affecting small
No additional isolated reform elements
are expected to be issued by the Ways and Means Committee, with the next
release likely to be H.R. 1, the bill number set aside for
comprehensive tax reform legislation by House GOP leadership and
presumably the starting point for a markup. Camp will likely unveil the
bill after discussions with Republican members of his Committee when
they return to Washington in September.
Finance Committee Chairman Baucus has not released any draft elements
related to tax reform. Unlike the House Ways and Means Committee effort –
in which ranking
Democrat Sandy Levin (D-MI) is not
playing a role in Chairman Camp’s formulation of a reform plan –
Chairman Baucus and ranking Republican Hatch have been in cooperation on
tax reform thus far. That cooperation has already been tested on the
issue of revenue, and it is unclear how Baucus and Hatch will remain
aligned and see a bipartisan bill reported out of the Committee unless
the revenue issue is resolved.
Committee staff have said tax reform drafts on specific issues will
likely be issued following the August recess. The goal would be to get
feedback from Senators and stakeholders and keep the tax reform process
in the Senate moving forward until a Committee markup becomes feasible.
Taxation of foreign earnings could be one of the issues previewed if
isolated drafts are circulated, given the business community’s strong
interest in the subject and the highly technical nature of the issue.
The Finance Committee has traditionally marked up legislation "in
concept” rather than working from and then amending statutory language;
it remains to be seen whether the tradition will be followed.
This article first appeared in ey.com.