Tax Legislation

January 22, 2017

This is shaping up to be a lively year for tax legislation.  What ultimately passes is anybody’s guess, because even with control of all levers of Government, legislation that massively impacts a constituency will be hotly debated and query whether the Republican majorities can hold.  Also, absent passing tax legislation through the 51 vote “reconciliation” process, Republicans don’t have 60 votes in the Senate.  Of course if Republican Senators wish they may eviscerate the filibuster, but will they weaken their chamber for a tax bill?

The last time we had this potential scope of change was 1986.  Back then, and Congress (Dems and Reps) worked for years to get the proposals executed as it is no simple matter to craft complex legislation.  Therefore, the proposals likely to get accomplished rapidly are those that have already crafted by Republican legislators.  In addition, the budget reconciliation process (coming up this spring) gives Republicans a chance to move massive tax legislation through a 51 vote Senate majority.

 For look at the broader Republican proposals see:

http://taxfoundation.org/article/details-and-analysis-2016-house-republican-tax-reform-plan 

 One of the big government Revenue Raisers is “Border Adjustment”.  This law disallows tax deductions for imports, and does not tax revenue generated from US Exports.  The big problem with the Border Adjustment provisions is that there will undoubtedly be World Trade Organization (WTO) challenges.  However, this potential has not in the past prohibited Congress and the President from passing legislation that was a “dead duck” on arrival at the WTO.  That legislation took some time to be reversed, so perhaps this is Border Adjustments ultimate fate.  Border Adjustment creates a massive tax increase on the US Trade Deficit (because the dollar value of what we import is much in excess of our exports).  It also has the salient political point of punishing importers (Foreign owned or US owned), in an era of rising nationalism worldwide.  US Importers with significant foreign buying would be significantly impacted.

 However, massive changes in tax law never enters the real world in a vacuum.  The following article from the Tax Foundation articulates this law of “unintended consequences” hypothesizing on how exchange rates would be impacted under this rule:

http://taxfoundation.org/blog/exchange-rates-and-border-adjustment 

 What would be interesting is if a US Territorial system, and a Reduction in Business rates (both in the proposals) is pushed through simultaneously with Border Adjustment.  Fundamentally, we need revenue raisers to pay for meaningful tax reform.  The constituencies protecting their tax deductions (medical, state & local municipalities) will have their say.  However, massive rate reductions and the complete exemption of foreign earnings from US tax would be compelling to much of the US business community.  Query if there are enough votes for Border Adjustment which will increase costs to average Americans (clothing and at the gas pump), along with the other revenue raisers (poor Californians and New Yorkers kiss their income / property tax deductions goodbye), to pave the way for a more competitive US system.

A lively year indeed.

Bill Collier, CPA
Vice President

 

 

 

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