In his first address to a joint session of Congress, President Donald Trump called for action on tax reform to “restart the engine of the American economy – making it easier for companies to do business in the United States and much harder for companies to leave.” While offering few details, President Trump said that his economic team is “developing historic tax reform that will reduce the tax rate on our companies so that they can compete and thrive anywhere and with anyone.” President Trump also said that his plan “will provide massive tax relief for the middle class.”
During his campaign, President Trump proposed a 15-percent tax rate for corporations and pass-through businesses and a top rate of 33 percent for individuals. White House officials recently said that the President’s updated tax reform plan will be released in the next few weeks.
President Trump called on Congress to “repeal and replace Obamacare, with reforms that expand choice, increase access, lower costs, and at the same time provide better health care.” He outlined goals for new health care reform legislation that include ensuring Americans with pre-existing conditions have access to coverage, a stable transition for individuals currently enrolled in health care exchanges, help to purchase coverage through tax credits and expanded Health Savings Accounts, and the provision of resources and flexibility for states managing Medicaid.
The President also highlighted efforts to reduce federal regulations, including his recent Executive Order requiring that agencies identify two regulations to be withdrawn for every new proposed regulation.
In addition, President Trump asked Congress to approve legislation that provides $1 trillion to rebuild US infrastructure with both “public and private capital.” The President also called for action to reform and enforce US immigration laws, provide paid family leave, “break the cycle of poverty” and the “cycle of violence,” promote clean air and clean water, rebuild the US military, and defeat ISIS. “Everything that is broken in our country can be fixed,” President Trump said. “Every problem can be solved. And every hurting family can find healing, and hope.”
While noting the national debt increased significantly under the past administration, President Trump made no direct reference to reducing federal budget deficits or reforming federal entitlement programs, which are the fastest growing parts of the federal budget along with interest on the debt. The federal budget deficit for FY 2016 was $587 billion, or 3.2 percent of GDP, and the Congressional Budget Office (CBO) projects that the federal budget deficit will reach 5.0 percent of GDP by 2027 under current law.
In his address to Congress, President Trump set an ambitious agenda for legislative action by Congress and called on Republicans and Democrats to join him in “dreaming big and bold and daring things for our country.”
President Trump may gain bipartisan support for many of the goals he outlined in his address to Congress, but differences may arise over how to meet those goals. Senate Minority Leader Charles Schumer (D-NY) has stated previously that Democrats in Congress want to work with President Trump to rebuild US infrastructure.
At the same time, House and Senate Democrats have expressed strong opposition to the President’s proposals to repeal and replace the Affordable Care Act (ACA). Many Congressional Democrats also have expressed concerns about President Trump’s campaign tax reform proposals to lower significantly income tax rates for upper-income individuals and have questioned whether proposed reductions in business tax rates can be enacted on a revenue-neutral basis.
Congress already has begun efforts to repeal and replace the ACA using “budget reconciliation” procedures that allow legislation to be approved in the Senate with a simple 51-vote majority, instead of the 60 votes generally needed to advance legislation. Republicans currently have a 52-seat majority in the Senate.
While some Republicans continue to express hopes for bipartisan tax reform, House and Senate leaders have said that they are prepared to use budget reconciliation procedures to enact tax reform legislation.
Senate Majority Leader Mitch McConnell (R-KY) recently stated that he expects passage of tax reform legislation will have to rely on Republican votes, noting that the current political environment is very different from 1986 when President Ronald Reagan signed tax reform legislation passed by a Democratic-controlled House and Republican-led Senate.
ACA repeal and replacement to come before tax reform
President Trump has said previously that ACA repeal and replacement legislation must be completed before tax reform legislation can be enacted, but currently there is no agreement among House and Senate Republicans on the specifics of how to repeal and replace the ACA.
Congress currently is operating under an FY 2017 budget resolution that provides “budget reconciliation” instructions for ACA repeal and replacement legislation.
House Speaker Paul Ryan (R-WI) has set a goal of having Congress complete work on a bill to repeal and replace the ACA by the end of March. Speaker Ryan in mid-February released an outline of an ACA replacement plan that included proposals to repeal all ACA tax provisions, create a new tax credit to help individuals purchase health insurance, expand Health Savings Accounts, and make significant changes to how the federal government provides Medicaid funding to state governments.
The House Ways and Means and the House Energy and Commerce Committees were expected to act on ACA repeal and replacement legislation as early as this week, but the timing for committee action is unclear at this time. House Ways and Means Chairman Kevin Brady (R-TX) on February 27 reportedly said that House GOP leaders are updating drafts of an ACA repeal and replacement bill “almost on a daily basis” and are in a “continuous loop” of discussions with CBO and Joint Committee on Taxation staff on scoring the budgetary effects of various options.
FY 2018 budget resolution needed to clear path for tax reform
Congress is expected to approve a new FY 2018 budget resolution to set spending levels and deficit reduction goals for the federal government. The FY 2018 budget resolution also is expected to provide budget reconciliation instructions for the House Ways and Means and the Senate Finance Committees to report tax reform legislation.
Congress first must complete work on ACA repeal and replacement legislation under FY 2017 reconciliation procedures before giving final approval to a new FY 2018 budget resolution. This is due to the fact that Senate rules do not allow two sets of budget reconciliation instructions to be in effect at the same time.
It remains to be seen how Congressional Republicans will fund President Trump’s policy agenda while also proposing to balance the federal budget in 10 years, a goal Republicans have included in past budget resolutions.
The FY 2018 budget resolution also may address the need for an increase in the federal debt limit. The debt limit will be reinstated on March 16, 2017, but the Treasury Department can use “extraordinary measures” to postpone the need to enact an increase in the statutory debt limit until later in 2017.
In addition to approving a new FY 2018 budget resolution, Congress must act on legislation to fund federal departments and agencies beyond April 28 when a short-term FY 2017 spending measure is set to expire.
Congressional tax reform efforts
House Republican leaders in recent weeks have been working to build support for the tax reform “Blueprint” that they released in June 2016. Ways and Means Chairman Brady and his staff also have continued work on drafting statutory tax reform legislation based on the Blueprint and have been meeting with stakeholders to seek input on key issues.
The Blueprint proposes to lower corporate and pass-through business tax rates, reduce individual tax rates, and provide full expensing for business costs (with no deduction for net business interest expense) under a border-adjustable destination-based cash-flow business tax system. In addition, the Blueprint would move the United States from a worldwide international tax system to a “territorial” dividend-exemption system, and impose a mandatory “deemed” repatriation tax (8.75 percent for cash or cash equivalents and 3.5 percent for other accumulated foreign earnings).
Under the Blueprint, the top US corporate income tax rate would be reduced from 35 percent to 20 percent. A new pass-through business income tax system with a top rate of 25 percent would apply for owners of C corporation business entities, including S corporations, limited liability companies, partnerships, and sole proprietorships. The top individual income tax rate would be reduced to 33 percent.
Speaker Ryan in mid-February met with the Senate Republican Conference to address questions over the border adjustment tax system, which is projected by some economists to offset more than half of the projected cost of lowering the corporate tax rate to 20 percent. After the meeting, some Republican Senators said they remain undecided and need additional information, while others expressed opposition to the border adjustment tax proposal. For more on the House Republican Blueprint, see our WNTS Insight “House Republican Blueprint: A Destination based cash-flow tax.”
President Trump did not comment directly on the House Republican tax reform plan in his address to Congress, but he did say “we must create a level playing field for American companies and workers.” He cited specifically “very high tariffs and taxes” imposed on US exports by other countries while “we charge them nothing or almost nothing.” Administration officials have suggested that President Trump’s updated tax plan may call for some type of “reciprocal” tax treatment for US exports and imports.
Senate Finance Committee Chairman Orrin Hatch (R-UT) in early February said that the Senate is working on its own tax reform plan.Without Democratic support, Chairman Hatch said, “we’ll basically need universal Republican support to pass anything through [budget] reconciliation.”
President Trump and the Republican-controlled Congress have reaffirmed their intent to push for action on comprehensive tax reform that would lower both individual and business tax rates. Despite that shared commitment, there are many issues that will be difficult to resolve, and significant differences exist between the two political parties. It will be challenging for President Trump and Congress to address tax reform as well as the many other policy goals set by President Trump in his address to Congress.
For more details on key tax reform issues, see PwC’s “2017 Tax Policy Outlook – Decision Time for Tax Reform.”
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