United States: Tax Policy Update - April 8, 2014

Last Updated: April 14 2014
Article by Russell W. Sullivan and Danielle R. Dellerson

NUMBER OF THE WEEK: 2. The number of traditional tax extenders that did not make it into the Senate Finance Committee bill after last week's markup produced an $85 billion two-year extension of the other 53 extenders, plus a few new provisions. The left-out provisions include a credit for energy-efficient appliances and an expensing provision for certain refinery property.

April 8, 2014  

LEGISLATIVE LANDSCAPE

Senate: Extender-ganza. The Senate Finance Committee marked up a bipartisan package Thursday, April 3, 2014, that, if enacted, would extend a potpourri of expired and soon-to-expire tax breaks through the end of 2015. Expansions of the research tax credit for startup businesses and an expansion of the Work Opportunity Tax Credit for employers who hire the long-term unemployed were among the surprise additions to the package. Another surprise came from Republican Senator Pat Toomey (R-PA), who pushed for a vote to consider his amendment to repeal the medical device tax despite Chairman Ron Wyden's ruling that the amendment was not germane to the extenders bill and should be considered at a more appropriate time. Toomey lost his vote to override Wyden's decision, and may have damaged his relationship with Wyden and Wyden's staff in the process. It is unclear when the full Senate will begin consideration of the bill, but it does not appear to be happening before the upcoming two-week recess.

Meanwhile, the House Ways & Means Committee is illustrating its more restrained approach to extenders, kicking off the first in a series of hearings today with a hearing focused on business tax extenders. Retiring Chairman Dave Camp (R-MI) indicated in his tax reform discussion draft that a select few should be made permanent, while the majority should be allowed to expire for good.

Levin Goes Gloves-Off With Caterpillar. Sen. Carl Levin, chairman of the Senate's Permanent Subcommittee on Investigations (PSI), put executives from Caterpillar Inc. and PricewaterhouseCoopers LLP in the hot seat on April 1, 2014, during a five-hour hearing delving into Caterpillar's international tax strategies. Executives from the multinational manufacturing company testified that the company pays a combined effective tax rate of 29 percent on both its domestic and international income, in compliance with all tax laws. Caterpillar is the most recent multinational firm to face PSI scrutiny over international tax practices. Apple, Microsoft and Hewlett-Packard have all faced similar investigations, with Levin pressing for stricter transfer pricing rules.

Murray Introduces Tax Bill. Sen. Patty Murray (D-WA), the Senate Budget Committee chairwoman, introduced legislation on March 26 that would increase and expand eligibility for the Earned Income Tax Credit, paid for by limiting corporate tax deductions for stock options paid to executives as compensation and clamping down on multinationals with foreign subsidiaries whose income is taxed below 15 percent. The measures echo proposals in the president's FY 2015 budget and are likely to be discussed at a Senate Budget Committee hearing this morning on tax reform (more information in "Looking Ahead").

House: Ryan's Budget. Speaking of budgets, House Budget Committee Chairman Paul Ryan (R-WI) introduced the GOP's FY 2015 budget last week, with no real surprises and scant detail in terms of taxes. The contender for the Ways & Means gavel proposed a top individual and corporate tax rate of 25 percent, and embraced "pro-growth tax reform" without outlining a specific plan. The House is expected to vote on the budget resolution this week.

CAMP COUNSELOR: MANUFACTURING

Wish Granted. On the domestic tax front, U.S. manufacturers got their big "ask" answered in Camp's proposed overhaul of the tax code: a flat 25 percent corporate tax rate, down from the current top rate of 35 percent. Under Camp's plan, the rate would decrease by two percentage points per year over a five-year period. But the concomitant elimination of several key tax breaks would impact the manufacturing sector sooner, with some provisions taking effect immediately upon enactment and others -- including major cost recovery changes -- beginning in 2016. The net effect would likely increase the overall tax burden for many firms in those first five years, if not indefinitely.

Domestic manufacturing firms organized as pass-through entities, and subject to individual tax rates, would also pay a maximum 25 percent tax rate and would be exempt from the 10 percent surtax applicable to individual taxpayers with modified adjusted gross income above $400,000, indexed for inflation. The exemption for qualified domestic manufacturing income (QDMI) would be phased in over three years, with one-third of QDMI excluded from the top 35-percent bracket in the 2015 tax year and two-thirds excluded in the 2016 tax year. The highly unpopular Alternative Minimum Tax (AMT) would be repealed for both corporations and passthroughs.

Be Careful What You Wish For. As many in the manufacturing sector had feared, Camp's plan -- in its attempt to remain "revenue neutral" -- would jettison the accelerated cost-recovery regime and other provisions in order to help offset the $680 billion in lost revenue (over 10 years) from rate reductions. The current "modified accelerated cost recovery system" (MACRS) would be replaced with something more akin to the current "alternative depreciation system" (ADS), which requires longer recovery periods, and depreciation deductions would be determined under the straight-line method instead of the declining balance method.

The draft would also repeal the currently expired bonus depreciation provision for property with a recovery period less than 20 years -- a provision that many in the manufacturing sector are hoping will see new life in a still-under-construction extenders package in the Senate Finance Committee this week.

These cost-recovery changes, along with the repeal of some more specialized provisions such as the special allowance for second generation biofuel property, are estimated to increase revenues by $269.5 billion over 10 years -- replacing almost 40 percent of the revenue lost from reducing the corporate rate.

Camp's second-largest offset for the overall rate reduction is the amortization of research and experimental expenses over a five-year period. The provision would be phased in gradually, recouping $192.6 billion in revenue over 10 years, or 28 percent of the lost revenue from the corporate rate reduction.

Phaseout and Repeal of Domestic Manufacturing Deduction. Just when manufacturers thought they could live with the changes to cost recovery and R&E, the draft smacks them on the head with the phaseout and repeal of the deduction for domestic production. The 9 percent deduction (6 percent for certain oil and gas activities) is currently available to a wide range of industries beyond the manufacturing sector, including domestic construction and certain engineering and architectural services. Camp's provision, Sec. 3122 of the discussion draft, would reduce the deduction to 6 percent in 2015, 3 percent in 2016 and repeal it after that, bringing in $115.8 billion in new revenue in the process.

Capital Contributions Included in Gross Income. Manufacturers and state and local governments are also not pleased with Camp's proposal to largely eliminate one of the ways localities entice companies to locate in their district. Camp's draft explains that requiring corporations to report capital contributions as income -- including the types of incentives and concessions that states and localities offer to attract businesses to relocate -- would help remove a "federal tax subsidy" for such enticements.

Is It Worth It? The reality is that many corporations will find the tradeoff worth it for the 25 percent rate. Passthroughs defined as manufacturers also might support the package because it gives them the 25 rate. But those that do not meet the domestic manufacturing definition, or are in a high-growth industry, such that increased capital costs provide enough depreciation deductions to offset most or all of their income, may prefer the status quo.

REGULATORY WORLD

IRS Releases Guidance for Same-Sex Couples' Retirement Plans. The Internal Revenue Service issued the long-awaited guidance on retirement plans for same-sex married couples in the wake of the U.S. Supreme Court's decision in United States v. Windsor, which struck down the Defense of Marriage Act. The link to the guidance concerning prospective and retrospective considerations and timing for plan amendments can be found here. The guidance makes clear that retirement plans are not required to apply the Windsor ruling retroactively.

COURTS & LEISURE

"Stupid" Tax System. Jason Furman, the chairman of President Obama's Council of Economic Advisers, told attendees at the International Tax Policy Forum conference "I like to describe the system that the U.S. has right now as a 'stupid territorial tax system.' " Furman went on to say that the international aspects of the U.S. tax code are the most broken, "in that right now it does a combination of raising relatively little revenue and doing that while imposing a substantial distortion."

In Other "Stupid" Tax News... Senate Finance Committee Ranking Member Orrin Hatch (R-UT) made it pretty clear he's not worried about running again when he let slip the phrase "stupid-ass tax," in reference to the medical device tax, during last week's markup. The Mormon lawmaker immediately followed the phrase with "I probably shouldn't have said that," eliciting laughter from the packed hearing room.

LOOKING AHEAD

There is a flurry of activity on the Hill this week before the House and Senate recess for two weeks.

House:

  • Committee on Ways & Means: Extenders. Committee Chairman Dave Camp will take on business tax extenders during a hearing Tuesday, April 8, 2014. According to a committee advisory, "The hearing will explore the value in having stable, permanent tax policy for employers, as well as the problems caused by tax policies that frequently expire and are extended for short periods of time (and often retroactively). To that end, the hearing specifically will consider those expired business tax provisions that are either made permanent or are provided long-term extensions under the discussion draft of the Tax Reform Act of 2014." Witnesses include:
    • Ms. Judith Zelisko
      Vice President of Tax, Brunswick Corporation
    • Mr. Bob Stallman
      President, American Farm Bureau Federation
    • Mr. James Redpath
      Managing and Tax Partner, HLB Tautges Redpath, Ltd.
    • Mr. Joshua Odintz
      Partner, Baker & McKenzie LLP
    • Mr. Thomas Hungerford
      Senior Economist and Director of Tax and Budget Policy, Economic Policy Institute
  • Committee on Ways & Means: Final Employer Mandate Regulations. The Subcommittee on Health will hold a hearing Tuesday, April 8, 2014, on the implications of the Treasury Department's recently released final regulations implementing the employer mandate and employer information reporting requirement provisions of the Affordable Care Act. J. Mark Iwry, Senior Advisor to the Secretary and Deputy Assistant Secretary for Retirement and Health Policy for the Treasury Department, will be the sole witness.
  • Committee on Oversight and Government Reform: Lerner Facing Contempt Vote. Chairman Darrel Issa (R-CA) has teed up a resolution that the committee will vote on this Thursday, April 10, 2014, to hold former Internal Revenue Service official Lois Lerner in contempt for refusing to answer questions from the committee concerning alleged targeting of certain applicants during her tenure as the head of the IRS division that reviews tax-exemption applications.

Senate:

  • Committee on Finance: Tax Preparers. The committee will hold a hearing Tuesday, April 8, 2014, entitled "Protecting Taxpayers from Incompetent and Unethical Tax Preparers." Witnesses include:
    • The Honorable John A. Koskinen, Commissioner, Internal Revenue Service
    • Ms. Nina E. Olson, National Taxpayer Advocate, Internal Revenue Service
    • Mr. James R. McTigue Jr., Director, Tax Issues, Government Accountability Office
    • Mr. William Cobb, President & CEO, H&R Block
    • Ms. Janis Salisbury, Chair, Oregon Board of Tax Practitioners
    • Dr. John Barrick, Associate Professor, Brigham Young University
    • Ms. Chi Chi Wu, Staff Attorney, National Consumer Law Center
    • Mr. Dan Alban, Attorney, Institute for Justice
  • Budget Committee: Tax Reform. Chairwoman Patty Murray (D-WA) will focus on how changes to the tax code can help spur economic growth and promote fairness. Witnesses include:
    • John L. Buckley, J.D., Former Chief Counsel, House Committee on Ways and Means and former Chief of Staff, Joint Committee on Taxation
    • Jane Gravelle, Ph.D., Senior Specialist in Economic Policy, Congressional Research Service
    • Diana Furchtgott-Roth, Senior Fellow, Manhattan Institute for Policy Research

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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