United States: Tax Policy Update - March 24, 2015

NUMBER OF THE WEEK: $900 Billion

The amount of additional taxes that would fall on businesses and families under Republicans' budget plans, according to a "fact check" by the Associated Press in a story with a title made of the stuff that is every Republican's nightmare: "GOP Budgets Rely on Higher Taxes to Balance." Despite claims that the budget resolutions would have no net tax increases, the revenue assumptions in the plan don't add up without allowing a bevy of tax breaks to remain expired, the AP reports. Read more here, and read our summary of the House and Senate budget resolutions below.

LEGISLATIVE LANDSCAPE

House Ways & Means to Repeal Estate Tax. Ways and Means Chairman Paul Ryan (R-WI) will convene a markup on Wednesday to consider a number of tax bills including one that would repeal the estate tax. The "Death Tax Repeal Act of 2015" ( H.R. 1105), introduced by Rep. Kevin Brady (R-TX), sets out to repeal estate and generation-skipping transfer taxes as well as modify the way the gift tax is calculated. The legislation has garnered strong support from various business organizations. The bill currently has only one Democratic sponsor, Rep. Stanford Bishop (D-GA). Some Democrats on the committee have shown interest in introducing an alternative bill that would create an estate tax exemption for small farms and family businesses. Mr. Brady's bill has little chance of becoming law as President Obama is inclined to move in the opposite direction and increase the current top rate from 40 percent to 45 percent while reducing the exemption from $5.43 million to $3.5 million. According to the Joint Committee on Taxation, a repeal of the estate tax would cost approximately $295 billion. For more details on the markup, read here.

Senate Finance's International Tax Reform Working Group Making Progress. The Senate Finance Committee held a hearing last week focused on the U.S. international tax system and how it could be made more competitive. The witnesses all agreed that the current system must be modernized if U.S.-based multinational companies are to compete in the global economy, but the panel expressed varying views on the best path forward.The big news to come out of the hearing was the positive reports from both Sen. Chuck Schumer (D-NY) and Sen. Rob Portman (R-OH) on the progress being made in the committee's international tax reform working group, which they are co-chairing. Portman reported that the group is "moving toward solutions" and "moving toward consensus" on recommended changes to international tax provisions, which the group must present to Chairman Hatch and Ranking Member Wyden by the end of May.

March Madness, Congressional Style: What's in the FY 2016 House and Senate Budget Blueprints? Both the House and Senate Budget Committees approved their respective budget plans for fiscal year 2016 on March 19 by roll-call votes, which fell sharply along partisan lines. Both chambers are considering the budget resolutions on the floor this week.

The budget plans provide a clear look into Republican policy priorities in both the short and long term. Despite differences between the House and Senate proposals, they articulate a set of common goals – reduce spending, avoid net tax increases, and balance the budget. However, many of the details on how these priorities would become realities, are less clear—especially with respect to taxes.

Key aspects of the House and Senate proposals for fiscal year 2016 are summarized below.

Overview of the Budgetary Effects of the House and Senate FY 2016 Budget Resolutions

House

Senate

  • Balances the budget by 2024
  • Proposes $5.5 trillion in spending cuts
  • Increases deficit by $1.3 trillion over 10 years
  • No net tax increases
  • Balances the budget in 10 years
  • Proposes $5.1 trillion in spending cuts
  • Increases deficit by $1.6 trillion over 10 years
  • No net tax increases

Tax

While neither budget resolution completely quashes the possibility of using reconciliation for comprehensive tax reform, it appears increasingly unlikely. That doesn't mean, however, that piecemeal changes to the tax code won't be included in a potential reconciliation package. In fact, many of the changes inherent in repealing the Affordable Care Act − the presumed target of Republicans' reconciliation language − would necessarily impact taxes, including the medical device tax and the ACA's surtax on net investment income. Interestingly, the budgets appear to assume the revenue from those taxes (about $2 trillion) continues to come in over the next decade − a critical component of balancing the budget, as both resolutions claim to do.

The House resolution is more aggressive in calling for comprehensive tax reform to create a "fairer, simpler tax code," although it remains scant on details. The Senate resolution is even more vague about tax reform, but it does open the door by including a "deficit-neutral reserve fund," to allow for changes to the tax code, so long as they do not increase the deficit. Both resolutions include language embracing, to varying degrees, the use of macroeconomic scoring, also known as dynamic scoring, in assessing the budgetary impacts of tax proposals. But the House budget mandates dynamic scoring, as well as economic projections of policies that look forward 20 fiscal years, rather than the standard 10-year budget window.

Other key differences between the two chambers' FY2016 budgets include the following:

House of Representatives

Calls for reduced corporate and individual rates, including pass-through businesses, but does not mention specific rates.

Repeals the alternative minimum tax (AMT) and "transition[s] away from a worldwide tax system to a more competitive international tax system," presumably shifting to a territorial system or hybrid territorial system.

Calls for "broadening the tax base by closing special interest loopholes that distort economic activity" but does not identify any specific provisions.

Calls for permanent extension of certain expired tax provisions ("extenders") without having to offset them with new revenue or spending cuts.

Senate

Gives the Senate Finance Committee some flexibility to reform the tax code but does not lay out a blueprint for an overhaul.

Nods approvingly, without endorsing as a policy matter, the continued extension of certain expiring tax provisions known as extenders.

Calls for the repeal of the medical device tax.

Calls for the budget resolution to include the cost of tax expenditures. This was an amendment offered by Sen. Sheldon Whitehouse (D-RI) during the Budget Committee's markup and was adopted with the help of six Republican senators.

Open to offer more tax-related amendments during the Senate's floor consideration of the resolution, although none of these amendments, or the resolution itself, will have the force of law.

Health Care

Both the House and Senate Budget Committees would use the reconciliation process to overturn the Affordable Care Act. The Senate bill also calls on the Senate Finance and Health, Education, Labor and Pensions Committees to find at least $1 billion each in deficit reduction savings from the Affordable Care Act by July 31. House Republicans use reconciliation to repeal the Affordable Care Act "in its entirety" and would shift some savings to Medicare's solvency.

The House Budget would repeal the Independent Payment Advisory Board (IPAB), which was intended to advise Congress on Medicare cuts but was never staffed. It would reform Medicare by changing the program to a premium support model, starting for beneficiaries in 2024, and combining Parts A and B so there would be a single premium for seniors. The budget also appears to call for some risk adjustment of premiums, and it provides a catastrophic cap on annual out-of-pocket expenses for Medicare beneficiaries

The House Budget would reform Medicaid, repealing the ACA's expansion of Medicaid and substituting State Flexibility Grants instead, and would unify Medicaid and the Children's Health Insurance Program (CHIP) while providing funds to extend CHIP.

The Senate Budget Committee, in contrast, stops short of moving Medicare to a premium support model, but seeks $430 billion in Medicare cuts and would move Medicaid more toward a CHIP model.

Energy

As part of overall efforts to reduce the deficit, congressional Republicans are using their budget proposal to push cuts to renewable energy incentives and the President's climate change agenda. In conjunction with efforts to streamline domestic energy programs, they aim to eliminate regulatory redundancy and waste for the benefit of lowering Americans' energy costs. Both chamber budget blueprints note that the United States is at the center of an energy renaissance, and the federal government should do what it can to help increase domestic oil and gas exploration (on both public and private lands) and build a robust energy infrastructure in order to enhance U.S. energy security and promote economic opportunities.

Key differences between the two chambers' FY2016 budgets include the following:

House of Representatives

Calls to immediately end the green energy loan programs, starting with the American Recovery and Reinvestment Act of 2009 (ARRA), and remove regulations and subsidies that favor some industries over others. The budget blueprint notes that the Department of Energy's research and development efforts "should focus solely on breakthrough innovations," rather than the application or commercialization of new technologies.

Identifies climate change funding at Department of Defense and the Central Intelligence Agency as "examples of areas where there should be room to cut waste, eliminate redundancies, and end the abuse and misuse of taxpayer dollars."

Following lengthy oversight of various Obama Administration regulatory proposals, including the Environmental Protection Agency's (EPA) Clean Power Plan, the budget mirrors longstanding Republican policy proposals related to regulatory reform. It includes a bid to mandate congressional approval of any administrative rule that would levy more than $100 million in annual economic costs on the economy, a classification applicable to much of the regulatory portfolio at EPA and the Department of Interior, among other agencies.

Denounces the notion of establishing a carbon tax as a means to cutting carbon emissions.

Senate

Leverages private-sector resources to make energy upgrades to federal buildings and lower energy costs by directing Congressional Budget Office to more accurately account for the long-term budgetary effects associated with Energy Savings Performance Contracts (ESPC) and Utility Energy Savings Contracts (UESC).

Fully funds wildfire suppression operations and healthy forest management activities and encourages increased timber production from national forests.

Financial Services

At the start of the 114th Congress, Republican legislators made clear their desire and intention to roll back certain provisions in the Dodd-Frank Act, which they perceive as burdensome. Last year, Republican lawmakers introduced several pieces of legislation to modify various parts of Dodd-Frank and bring regulatory relief to both small and large financial institutions. This year will be no different. For example, Republicans in both houses have already hinted at possibly changing the designation process for systemically important financial institutions (SIFIs) and ending the conservatorship of Fannie Mae and Freddie Mac.

Though the House and Senate budget plans do not provide much in terms of financial regulatory reforms, they do broadly outline the policy direction toward which the congressional Republicans are headed.

House of Representatives

FDIC Orderly Liquidation Authority (OLA). The House plan proposes to prevent the Federal Deposit Insurance Corporation from using taxpayer dollars to pay the creditors of financial institutions that have been designated as systemically important.

CFPB Funding. The House plan proposes to change the way the Consumer Financial Protection Bureau receives its annual funding. Currently, the bureau is funded by remittances to Treasury from the Federal Reserve. The budget plan would subject the bureau to the regular annual appropriations process.

Privatization of Fannie Mae and Freddie Mac . The plan proposes to privatize Fannie Mae and Freddie Mac, putting an end to the two oft-criticized government-sponsored enterprises (GSEs).

Senate

The Senate plan provides even less in the area of financial services. It proposes the creation of a spending-neutral reserve fund for financial regulatory system reform. Reserve funds in budget resolutions simply make it easier for lawmakers to move related legislation later on in the session as long as the legislation adheres to the criteria set forth in the resolution. The Senate budget reserve fund would support legislation aimed toward providing regulatory relief to small and large financial firms, improvements to the regulatory framework, improvements to the oversight of the Federal Reserve, and improvements to capital access.

Defense

Debate over defense spending proved to be the most divisive among congressional Republicans. At the heart of the debate was the House's attempt to get around the 2011 caps on defense spending by increasing funds for the Overseas Contingency Operations account (OCOs), which pays for military operations abroad (e.g., Iraq and Afghanistan). The disagreement between fiscal conservatives and defense hawks led House Budget Chairman Tom Price to delay the final vote until last Thursday.

Despite disagreements between the House and Senate on OCO funding and the overall level of spending for defense, the budget committees reported similar totals for defense spending in their revised plans. Total defense spending provided in the House plan stands at $617 billion. The Senate plan provides a total of $619 billion.

House of Representatives

The initial budget maintains the 2011 spending caps on base defense spending, but proposes $94 billion for Overseas Contingency Operations – $20.5 billion of which would be contingent upon an offset, however. Republican defense hawks balked at this caveat and attempted a failed amendment that would have removed the offset requirement.

The version of the House budget, approved by a 22-13 vote, leaves the original OCO funding amount and offset requirement in place. However, House Speaker John Boehner has indicated that the $20.5 billion offset requirement would be stripped before floor consideration.

Thus, total defense spending provided in the House plan stands at $617 billion. The total may be raised further during floor consideration.

Senate

The House Budget Committee's attempt to get around the defense caps by funneling money through OCO received early criticism from Senate members.

The initial Senate blueprint calls for $58 billion for OCO funding, matching President Obama's request for fiscal year 2016.

After complaints from pro-defense Senate Republicans, the committee adopted an amendment by Senator Lindsey Graham, which increased OCO funding to $96 billion.

Thus, total defense spending provided in the revised Senate plan stands at $619 billion.

REGULATORY WORLD

Proposed Regulations on MLP Qualifying Income Forthcoming. The IRS has announced that proposed regulations on qualifying income for master limited partnerships (MLPs) will be released soon. The MLP entity allows for one level of taxation at the investor level so long as 90% of the income is qualifying income. Qualifying income generally includes income derived from exploration, development, mining, or production, processing, refining, transportation and marketing of minerals and natural resources. Many experts expect that the proposed regulations to be consistent with previous private letter rulings, like permitting fracking service providers to be recognized as MLPs. Moreover, the IRS plans on responding to private letter ruling requests addressing the qualifying income of MLPs.

U.K. Diverted Profits Tax Effective April 1, 2015. The United Kingdom is going forward with its diverted profits tax (DPT), scheduled to take effect on April 1, 2015. The diverted profits tax imposes a tax on multinational companies' profits that have been deemed "diverted" from the country. The primary targets of the DPT are those companies that have avoided UK permanent establishments and benefitted from tax mismatches through the creation of intra-group expenses. The tax was first proposed in 2014 when lawmakers discussed cracking down on the shifting of profits offshore by multinationals—a growing global trend as the development of the OECD's base erosion and profit shifting (BEPS) recommendations continues. Given the short timeline from inception to implementation of the new U.K. tax, there is some uncertainty about how it will work, and future revisions are likely.

LOOKING AHEAD

Wednesday, 3/25

House Ways and Means Committee

The full committee meets to markup a package of tax bills, mostly related to clamping down on the IRS, with the exception of a bill to repeal the estate tax. The markup takes place in 1334 Longworth. Read more here.

Thursday, 3/26

Vote-a-Rama

The Senate's consideration of the FY 2016 budget resolution will turn into a symphony (or cacophony) of dozens of messaging votes on amendments covering everything from climate change to taxes—and plenty in between—under the Senate's unique rules surrounding votes on the budget blueprint. Although none of the amendments would have the force of law if adopted, they give lawmakers a chance to tout their policy priorities on the floor and test their staffers' endurance. The last time the Senate had a vote-a-rama, votes ended around 5:32.... A.M.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions