As we get ready to enjoy some Turkey and Football on Thursday, I thought I’d give an update on the happenings in Washington. Think of it as a conversation starter over your Thanksgiving meal!
Since last we talked, the House (on Thursday night 11/16/17) voted and PASSED the most sweeping overhaul of the US tax code in decades. Yawn… It was all about the Senate all along…
Zero House Democrats voted for the House bill. Not surprisingly, 13 Republicans voted “no” for the bill. Those Republicans were from NY, CA and NJ. Due to their districts (and to the proposed destruction of things like the state income tax deduction), those 13 are extremely vulnerable. I am mildly surprised that was all of the “no” votes from the Republican side in the House.
Now we go to the Senate (where the game is truly afoot). The Senate needs to pass a tax bill which either gets 8 Democrat votes or fixes the “Byrd rule”… For those of you not following along to my earlier emails / blogs, I’ll abbreviate the Byrd rule:
- An unbalanced budget (literally a $1 deficit) in 2028 will require 8 Senate Democrats to vote for a Senate Republican tax cut bill
- The original Senate Plan and House bill have huge red ink going into 2028
- Pigs will fly before a single Senate Democrat will vote for a Republican tax cut bill, therefore
- To quote the Apollo 13 lunar mission Commander (portrayed famously by actor Tom Hanks)….
- “Houston… we have a problem”….
However, just like the NASA engineers in Apollo 13, the Senate Republicans were genius / inventive in their dodging of the Byrd rule on Friday. They sunset a bunch of the reduced middle-class income tax rates by 2025. This revenue, combined with the revenue from the repeal of the Affordable Care Act’s “Individual Mandate” (see prior email / blog’s) means the Senate now possesses the power to invoke the largest tax reform since 1986 without the necessity of a single Democrat vote. The revised Senate JTC scoring of the Senate Bill is here: https://www.jct.gov/publications.html?func=download&id=5043&chk=5043&no_html=1
In the all-important 2027 year, there is a positive ($30.6 billion) number. Bye, bye Byrd(ie) rule….
As I mentioned in the first paragraph, the main (in my mind) late Senate markup changes they don’t discuss are:
- The proposed individual tax rate reductions are temporary and expire in 2025.
- Repeal of the Affordable Care Act’s Individual Mandates and
- A three year holding period requirement for qualification as long-term capital gains for “carried interest” received in connection with the performance of services
So why on earth would the Senate make permanent a 1/3 drop in corporate taxes while making individual tax breaks temporary? Because they believe in the next 10 years they can eventually make those individual tax rates permanent, and they needed to find Revenue in order to avoid the Byrd Rule. This reminds me of an amazing tax fact, but first you need to know my baseball history.
Some of you may know I am a (rabid) baseball fan. Originally from NY, I followed the Yankees as a youngster. Yes… Mickey Mantle, Yogi Berra, Thurman Munson, Don Mattingly, and later Mariano Rivera, Jorge Posada and Derek Jeter. But love (30 years with my wife Sue) triumphs geography and I moved to the baseball desert of Pittsburgh.
Which brings me to George W. Bush’s “repeal” of the estate tax. He lacked the votes to make the repeal permanent, so (in 2001) with a large Republican majority, he repealed the tax for one year in 2010. The theory was that a later Congress would “fix” the repeal and make it permanent, just like the current Senate’s promise to fix lower income tax breaks “in the future” (thereby avoiding the invocation of the Byrd rule in their bill this year). But if you are a student of the history of tax law you know that Republicans lost power in the mid-terms and waning years of George W. Bush’s presidency and the estate tax repeal “fix” never happened.
Now for the connection of tax law to baseball. Do you know what famous baseball franchise owner died in 2010? I’ll give you a hint… They have more championships (27) than any other franchise, in any other sport, in the world. And it isn’t even close (the Montreal Canadians have 23 but they won a bunch of those with an 8 team league). You guessed it!! George Steinbrenner died in 2010 and passed the $2 Billion NY Yankees to his sons Hal and Hank, completely tax free.
I found this next sidebar interesting. Not wanting to waste an opportunity to put his agency’s nose into the Government fisc, the Commissioner of the IRS is petitioning Congress for more money so the IRS can do a better job to implement tax reform. https://www.taxprotoday.com/news/john-koskinen-warns-irs-will-need-more-resources-and-budget-to-implement-tax-reform?utm_campaign=irs%20watch-nov%2016%202017&utm_medium=email&utm_source=newsletter&eid=8b1f2a8ff0da2534b27156aa98f0b067 This is in fact an age old problem for the government. Of the 700+ pages of law I’ve been reading, the word “repeal” is rarely used. Tax Reform will be complexity on top of complexity. The IRS knows they are outgunned, and it is a classic government tactic to pass a law, not describe it, and not fund the process.
Because I am a pessimist here is 8 reasons why we will not get tax reform:
- John McCain (R-AZ) – https://www.youtube.com/watch?v=tSxwR9kCbZ0
- Susan Collins (R-ME) – https://www.politico.com/story/2017/11/19/collins-senate-tax-bill-needs-work-247984
- Bob Corker (R-TN) – https://www.politico.com/story/2017/10/01/corker-lobbying-tax-breaks-243340
- Jeff Flake (R-AZ) – “I remain concerned over how the current tax reform proposals will grow the already staggering national debt by opting for short-term fixes while ignoring long-term problems for taxpayers and the economy,”
- Ron Johnson (R-WI) – https://www.politico.com/story/2017/11/15/republican-against-senate-tax-bill-244947
- Rand Paul (R-KY) – we all know this guy.
- Lisa Murkowski (R-AK) – see prior emails / blogs
- At least 3 Republican Senators think (like Doc Brown in “Back to the Future) … this:
And here is 1 really big reason tax reform will pass in a couple days:
- The Byrd rule is “fixed”, and there are not 3 “no” votes in my list of 8 above.
We are moving rapidly to a Senate vote, where the bill will be hotly contested. For a glimpse of the action follow the link below for an exchange between Orin Hatch, Chair of the Senate Finance Committee – https://www.cbsnews.com/news/senate-gop-tax-reform-shouting-match-sherrod-brown-orrin-hatch/ and Ohio Democrat Sherrod Brown. If the Republicans can hold it together in the Senate, then it is off to Conference Committee, back to the chambers to vote, and then off to the President. Rest assured the President will sign any turkey of a bill that has the words “Tax” and “Reform” in it.
Happy Thanksgiving Everyone,