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AHCA Saga a Cautionary Tale for Tax Reform, EY Observers Say

Posted on May 8, 2017 by Jonathan Curry

The House Republicans’ initial failure and recent success at advancing the American Health Care Act (AHCA) to the Senate should help to inform the tax reform efforts of congressional GOP leaders and the White House, several EY observers said May 5.

Nick Giordano of EY said he thinks the House Republican leadership will now seek more input from additional members on tax reform, and rank-and-file lawmakers will likely feel emboldened to help develop the plan. On the top end, there will be more reaching out, and from the bottom up, “we’re going to see more players come out and try to put their imprint on this,” Giordano said during a webinar hosted by the firm.

Giordano also predicted that one of the major takeaways for leadership would be an assertion made by National Economic Council Director Gary Cohn about reaching consensus with the disparate GOP factions.

Cohn said May 5, during an interview with Fox Business Network, that unlike the prior healthcare reform effort, the White House is "out talking to all the groups that are going to be interested in our tax plan,” including "conservative thought leaders," the House Freedom Caucus, and industry groups.

“By the time we get a bill drafted, we’re going to know everyone’s issues. We’re going to have dealt with those issues, and we think it’s going to make it substantially easier to get that through Congress,” Cohn said.

Michael Mundaca, co-director of EY's national tax department, agreed that there would be more engagement all around on tax reform, including from the White House, in part because of how the AHCA played out. In particular, he predicted the more moderate Tuesday Group and the conservative House Freedom Caucus would be thinking of ways to replicate the involvement they had with healthcare reform.

But one potential consequence of having more engagement in the tax reform process is that it threatens to slow down even further the already glacial pace at which tax reform has been moving.

“The idea that they’re going to be more inclusive, try to vet a lot of issues up front, is likely to slow the tax reform process down a little bit,” Giordano said.

Mundaca agreed, noting that much of the Senate's attention will likely be focused on healthcare reform and that it’s possible that enacting tax reform could be pushed to early 2018. Giordano said, however, that leaders like House Ways and Means Committee Chair Kevin Brady, R-Texas, have maintained that the goal is still to complete tax reform by the end of 2017. Even if the formal legislative process doesn’t begin until later in the fall, they could still have discussed and vetted it enough to be in a position to move forward, Giordano said.

Mundaca pointed out that the healthcare reform experience “makes it clear it’s difficult to pass a big deal despite the makeup of the White House and Congress.”

Comes With the Territory

While there was no mention of the border-adjustable tax in the White House’s brief, one-page tax plan released April 26, Mundaca cautioned that excluding it from the final tax package would have consequences beyond just a simple revenue loss.

One noteworthy change in the White House tax plan, as compared with the campaign tax plan iterations, is that it supports a territorial tax system, bringing the Trump administration into alignment with Republican leadership in the House and Senate. But if the territorial system is paired “with a tax system that doesn’t include full border adjustability, we will need anti-base erosion protections,” Mundaca said.

“There’s got to be an anti-base erosion proposal if the border-adjustable tax is not part of the final package,” EY’s Jose Murillo agreed. He added that the 2014 tax reform discussion draft proposed by former House Ways and Means Committee Chair Dave Camp offers some solutions that Republicans could turn to, including a new category of subpart F income and somewhere for U.S. companies to locate that income and those assets in the United States.

The move to a territorial system would necessitate other international tax changes like establishing a transitional tax in the form of repatriation of foreign profits, Murillo said. He added that Camp's plan proposed a two-tiered rate structure depending on whether profits are cash and other short-term profits, or reinvested in the business. Republicans appear largely to agree on repatriation, but the White House tax plan doesn’t spell out a specific rate, said Murillo, adding that foreign tax credits and tax treaties also would have to be modified.

Making major changes to the tax system would increase pressure to ensure the tax reform package is permanent, but the budget reconciliation process that Republicans are expected to use could make that a challenge.

“If you have more fundamental changes to the tax code, no one’s going to want to see those sunset after 10 years,” Mundaca said, adding that a shift to a territorial tax system “would be difficult to administer if you thought it might all go away in 10 years.”

“It is hideously complex to work through all the process issues around this,” Mundaca said.

Giordano said the reconciliation process imposes many restrictions, and while there are ways of dealing with them, “there’s going to have to be a major decision made about whether this is a bill they will try to have be revenue neutral, either through offsets or sunsets, or are they just going to have a big net tax cut.”

Those restrictions were also a key talking point for getting reluctant House Republican lawmakers on board to support the second AHCA vote, EY’s Heather Meade said. The argument had less to do with the content of the healthcare bill and was more about agreeing to move forward, particularly on tax reform, Meade said. The inclusion of nearly $1 trillion in tax cuts from eliminating Affordable Care Act taxes would be offset by commensurate spending reductions in the bill, leaving room for deeper tax cuts in the upcoming tax bill, she added.