President Obama, Secretary Lew Outline Tax Reform Proposals
As mentioned in previous coverage of the State of the Union Address, President Obama has proposed approximately $320 billion in new taxes, aimed largely at investment income and large financial institutions, with revenues raised from these proposals to be dedicated principally to a new or expanded series of tax credits and incentives to help “working Americans trying to get a leg up in the new economy.”
Specifically, the President would increase the top capital gains rate to 28 percent and significantly curtail the stepped-up basis on inherited assets. In addition, the President would impose a seven basis point fee on the liabilities of roughly 100 of the largest financial institutions.
The President would use the revenue generated from these tax proposals to “better support and reward work” through the creation a new “Second Earner Credit,” expansion of the Earned Income Tax Credit (EITC) and child care tax benefits, and streamlining of certain education tax incentives. Additionally, the revenue would be used to reform retirement tax incentives and expand savings opportunities, while also helping to pay for the President’s recent proposal to provide two years of free community college.
The day following the State of the Union Address, Treasury Secretary Jack Lew offered his support for President Obama’s tax proposals. According to Secretary Lew, while individual tax reform may be unlikely during this Congress, the Administration and lawmakers have a “unique opportunity” to work together in a bipartisan way to accomplish business tax reform. However, both Chairman Hatch and Chairman Ryan suggested that the President’s proposal is a “nonstarter” and would merely serve to further complicate the tax Code. Nevertheless, Chairman Ryan and other Republicans continue to affirm their commitment to work with President Obama on business tax reform.
Ways and Means, Finance Committees Organize and Discuss Priorities
Last week, both the House Ways and Means and Senate Finance Committees held organizational meetings to prepare for the 114th Congress. According to Ways and Means Committee Chairman Paul Ryan (R-WI), his committee will focus on various items, including: (1) the economic and budget outlook; (2) tax reform; (3) the Highway Trust Fund; (4) the Affordable Care Act; and (5) Treasury and Internal Revenue Service (IRS) priorities. During the committee’s organizational meeting, Ranking Member Sandy Levin (D-MI) noted that he did not fully agree with Chairman Ryan’s priorities and would have preferred to focus more on: (1) healthcare; (2) the tax exempt organization application process; and (3) trade and Trade Promotion Authority (TPA).
With regard to the Senate Finance Committee, Chairman Orrin Hatch (R-UT) has stated that his committee’s agenda for the 114th Congress puts the economy first, increases job security and provides a more responsible fiscal footing for the country. While Chairman Hatch admitted that his goals are “ambitious,” he noted that his priorities include: (1) tax reform; (2) trade; (3) healthcare; (4) entitlement reform; (5) pensions; (6) the debt limit; (7) human resources issues; and (8) oversight. Moreover, given that Chairman Hatch has indicated that his highest priority is tax reform, Ranking Member Ron Wyden (D-OR) urged the committee to consider the importance of “grow[ing] the American workers’ paycheck” in its approach to reform.
Senate Finance Committee Announces Subcommittee Members and Tax Reform Working Groups
The Senate Finance Committee last week announced the membership of its subcommittees, including the following Chairs and Ranking Members:
- The Subcommittee on Trade, Customs, and Global Competitiveness will be chaired by Senator John Cornyn (R-TX), with full committee Ranking Member Wyden serving as Ranking Member of the subcommittee.
- The Subcommittee on Energy, Natural Resources, and Infrastructure will be chaired by Senator Dan Coats (R-IN), with Senator Michael Bennet (D-CO) as Ranking Member.
- The Subcommittee on Social Security, Pensions, and Family Policy will be chaired by Senator Dean Heller (R-NV), with Senator Sherrod Brown (D-OH) as Ranking Member.
- The Subcommittee on Taxation and Internal Revenue Service Oversight will be chaired by Senator Mike Crapo (R-ID), with Senator Bob Casey (D-PA) as Ranking Member.
- The Subcommittee on Fiscal Responsibility and Economic Growth will be chaired by Senator Rob Portman (R-OH), with Senator Mark Warner (D-VA) as Ranking Member.
Separately, Chairman Hatch and Ranking Member Wyden announced the launch of five separate bipartisan Finance Committee Working Groups “to spur congressional comprehensive tax reform efforts in the 114th Congress.” The Working Groups include:
- Individual Income Tax Co-Chairs: Senators Chuck Grassley (R-IA), Mike Enzi (R-WY), and Debbie Stabenow (D-MI)
- Business Income Tax Co-Chairs: Senators John Thune (R-SD) and Ben Cardin (D-MD)
- Savings and Investment Co-Chairs: Senators Mike Crapo (R-ID) and Senator Sherrod Brown (D-OH)
- International Tax Co-Chairs: Senators Rob Portman (R-OH) and Chuck Schumer (D-NY)
- Community Development & Infrastructure Co-Chairs: Senators Dean Heller (R-NV) and Michael Bennet (D-CO)
Each of the Workings Groups has been tasked with submitting policy proposals by the spring and may suggest legislative text if they so choose. According to Chairman Hatch, these Working Groups will be particularly helpful in achieving his goal “to get something done on tax reform this year.”
Congressional Democrats Introduce Inversion Legislation
As mentioned in previous coverage, Democrats in both the House and Senate have vowed to continue their push to stop corporate tax inversions. Last week, House Ways and Means Committee Ranking Member Sandy Levin (D-MI) and Senator Dick Durbin (D-IL) reintroduced H.R. 415 and S. 198 (respectively), the Stop Corporate Inversions Act of 2015. The bills, which would apply to inversions completed after May 8, 2014, would: (1) treat a combined foreign corporation as a domestic corporation under two circumstances: (i) if the shareholders of the former U.S. corporation own more than 50 percent of the new combined foreign corporation, or (ii) if the affiliated group that includes the combined foreign corporation is managed and controlled in the United States and engages in significant domestic business activities in the United States; (2) repeal the 60 and 80 percent ownership tests as well as the inversion gain applicable under such circumstances; and (3) maintain the foreign substantial business exception under Section 7874 by exempting the affiliated group if it has substantial business activities in the foreign country where the new combined corporation is incorporated.
Despite a continued push by Democrats to address inversions through standalone legislation, Chairman Hatch has emphasized that overhauling the tax Code is the best way to tackle the issue.
Lawmakers Look to Repatriation as Source of Highway Funding
Last week, Senator Rand Paul (R-KY) announced that he and Senator Barbara Boxer (D-CA) are close to an agreement that would fund the Highway Trust Fund with revenue generated from the taxation of repatriated earnings. Specifically, Senator Paul has suggested that allowing corporations to repatriate their earnings at a reduced tax rate could generate between $30 and $60 billion dollars in new revenue. The legislation is expected to be introduced in the near term.
On the House side, with discussions of a gas tax hike fading, more lawmakers appear open to using repatriation to fund the Highway Trust Fund, including House Transportation Committee Chairman Bill Shuster (R-PA). However, given that details on Senator Paul’s plan have not yet been released, it is unclear what level of support such a proposal would have with fellow Republicans.
This Week’s Hearings:
- Tuesday, January 27: The House Ways and Means Committee will hold a hearing titled “U.S. Trade Policy Agenda.”
- Tuesday, January 27: The Senate Finance Committee will hold a hearing titled “President Obama’s 2015 Trade Policy Agenda.”
- Tuesday, January 27: The House Budget Committee will hold a hearing titled “The Congressional Budget Office’s Budget and Economic Outlook.”
- Tuesday, January 27: The Joint Committee on Taxation will hold an organizational meeting to elect a Chairman and Vice Chairman of the Committee and review its ongoing operations.