Washington Insider: Lots of Tax Reform Possibilities

Both Congress and the administration are worried about passing tax reforms this year and Republicans are struggling to find overhauls that don't add to the federal deficit, Bloomberg says. They are focusing especially on "a kind of compromise: mixing permanent revisions with temporary rate cuts for individuals and businesses."Mixing and matching proposals -- making some permanent and others temporary --- could be a potential workaround for GOP leaders who want to use budget reconciliation to prevent Senate Democrats from blocking the legislation. That course limits the scope of the overall bill because it requires that any tax changes that add to the nation's long-term deficit would have to expire."It's the best of both worlds," said Daniel Clifton, a former tax lobbyist who was involved in the tax-cut negotiations under former President George W. Bush in 2001. "But if you're a purist for tax cuts or a purist for tax reform, it's going to be neither."Critics argue that temporary changes won't spur the level of economic growth that President Donald Trump and congressional leaders have targeted.A hybrid plan isn't a new idea, but it may be gaining traction now that the controversial border-adjusted tax on imports has been dropped. Without it, tax writers are forced to find other revenue raisers to offset rate cuts if they want permanent changes.White House advisers, along with some top congressional leaders, said last month their plan "places a priority on permanence," but some have individually signaled openness to shorter-term changes. Treasury Secretary Steven Mnuchin said in May: "Permanent is better than temporary, and temporary is better than nothing."House Speaker Paul Ryan, R., Wis., has been more resistant, pushing especially for the corporate rate cut to be permanent, Bloomberg says.The White House says no decisions have been made yet on the issue.The one-page outline of a tax plan that the White House released in April called for cutting the corporate tax rate to 15 percent, down from the current 35 percent. It also would condense the existing seven individual income tax rates to three, cut the top rate to 35 percent from the current 39.6 percent and double the standard deduction. Overall, the plan might cost as much as $5 trillion over 10 years, according to the nonpartisan Committee for a Responsible Federal Budget.Administration officials disagree, but even coming up with half of it by raising new revenue, closing out deductions and other benefits or cutting federal spending would require a delicate balancing act that has bedeviled negotiators in the past.Trump has repeatedly emphasized that one of his main objectives is to provide the middle class with a tax cut.The corporate side is more complicated but necessary, some say—and it must be permanent before companies commit to hiring new workers or building more factories in the U.S.—and, in order to achieve the White House's goal of 3 percent annual economic growth.Some companies would prefer a smaller cut—to no less than 25 percent -- even if it's just for 10 years. It's not clear how long a temporary corporate rate cut could last without adding to the deficit.A study Speaker Ryan requested from the Joint Committee on Taxation showed that cutting the corporate rate to 20 percent for just three years would result in lost revenue more than a decade later. A temporary cut more likely benefits shareholders according to that June report, while a permanent cut's benefits trickle down to workers.Meanwhile, there's broad agreement that rules to shift the U.S. tax code to a territorial system with most foreign profits exempt from U.S. taxes would be beneficial. Currently, the U.S. taxes business income no matter where on Earth it's earned, though businesses can defer taxes on offshore income until they return it to the U.S. Those features of the tax code spur companies to shift their profits offshore, and leave them there.As a result, GOP officials are discussing how to pair a territorial system with another mechanism to prevent such profit-shifting.Other tax proposals -- such as a costly one that would allow companies to fully deduct their capital spending from income immediately instead of over years -- are being evaluated on becoming temporary or permanent. Allowing full and immediate expensing on a temporary basis could encourage companies to accelerate their investment plans and help get the growth the White House is banking on.The tax puzzle is as difficult as ever, and current politics make it more so. Assuming the pitfalls that await a returning Congress are avoided, that the government stays open and that the debt ceiling is raised, Congress faces a tough fight over taxes that producers should watch closely as it unfolds, Washington Insider believes.