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As ‘Big Six’ Releases Framework, White House Says JCT Will Rule

Posted on September 28, 2017 by Jonathan Curry Luca Gattoni-Celli

As Republican “Big Six” tax reform negotiators unveiled a unified framework September 27 with lower top statutory rates and a pledge to maintain progressivity, the White House said the Joint Committee on Taxation will serve as the scorekeeper to lawmakers as they hash out revenue offsets.

“We will use the JCT model for purposes of scoring the [tax reform] bill and getting it through the House and Senate,” a White House spokesperson told Tax Analysts in an email. Whether agreement between the six House, Senate, and Trump administration leaders extended beyond the written document summarizing their framework was unclear.

Most notable, a senior White House official said on a press call September 26 that the itemized state and local tax (SALT) deduction would be eliminated, yet the document did not mention the provision, and a House GOP Conference website hedged on it.

The same site also said workers and families would benefit from lower taxes on capital gains, dividends, and interest income — but the White House spokesperson said the framework did not address those issues, even if Congress wants to, “as evidenced by their materials.”

The office of House Speaker Paul D. Ryan, R-Wis., did not respond to a request for comment on a possible capital gains tax reduction or the status of the SALT deduction. The White House official also told reporters September 26 that the framework would preserve tax-free municipal bonds, but the document did not mention them either.

The House GOP site called for “death tax” repeal to be permanent, although the framework did not go that far. “Our goal is to make them permanent,” the White House spokesperson replied when asked if that stipulation extended to other individual tax changes in the framework.​ 

The House GOP site was revised later September 27, removing its previous references to capital gains taxation as well as to permanence in the context of estate tax repeal.

Specific Provisions

The framework did outline other specifics, though, starting with lowering the top statutory rates for corporations, qualifying small and passthrough businesses, and individuals to 20 percent, 25 percent, and 35 percent.

“We’re not writing legislation through the Big Six process, we are providing a framework,” the White House officials told reporters in a media primer the day before the unveiling. They defended the framework’s lack of specifics on many details, like base broadeners, saying the document sets “guideposts” while leaving room for committee members to have input on the legislation that will ultimately come out of the regular order process. 

On the business side, the framework calls for reducing the corporate tax rate to 20 percent while capping the maximum applicable tax rate for small business passthrough entities at 25 percent. The framework also calls for anti-gaming measures to be included to prevent passthrough businesses from reclassifying wage income as business income in final legislation.

The framework says that companies may immediately expense “new investments in depreciable assets other than structures made after September 27, 2017, for at least five years,” which is the closest the document comes to addressing the permanence or retroactivity of its proposed changes.

The White House official asserted that the provision was not retroactive, because it did not reward investments made before the framework’s release. “I am not aware of any retroactive features of the bill,” the official said.

The framework adds that “the committees may continue to work to enhance unprecedented expensing for business investments, especially” by small businesses.

Along with expanding cost recovery, the framework would “partially limit” C corporations’ deduction for net interest expense, a change that neither the framework nor the administration officials previewing it discussed in any further detail. “The committees will consider the appropriate treatment of interest paid by non-corporate taxpayers,” the framework adds, likely meaning passthroughs. The corporate alternative minimum tax would also be repealed.

More broadly, the framework says the section 199 domestic production deduction would no longer be needed, adding that “numerous other special exclusions and deductions will be repealed or restricted.” However, the framework specifically retains the research credit as well as the low-income housing tax credit. Leaving further leeway, the framework says that although it “envisions repeal of other business credits, the committees may decide to retain some [others] to the extent budgetary limitations allow.”

White House officials during the September 26 press call promised to create a “pure” territorial international corporate system. The framework calls for a 100 percent exemption for dividends from foreign subsidiaries in which the U.S. parent company owns at least a 10 percent stake.

Transition to the new system would include a deemed repatriation of accumulated foreign earnings, with unspecified bifurcated rates — applying a lower one to those held in illiquid assets than to those held in cash or cash equivalents. Payment would be spread over several years, but the officials on the call said they expected earnings to flow back to the United States quickly.

The framework calls for additional anti-base-erosion measures, which “will be spelled out during the committee process,” the officials said. The framework says it contains rules to protect the U.S. base “by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.” In that context, the officials emphasized companies operating in “tax haven countries.”

Separately, despite some speculation earlier in September that the framework might feature a proposal for corporate integration, the document merely states that “the committees also may consider methods to reduce the double taxation of corporate earnings.”

A bevy of proposed changes to the individual tax code focused on middle-income tax relief and ensuring the tax code is no less progressive than it is currently, the officials said. As expected, the framework calls for reducing the number of tax brackets from seven to three, with rates set at 12 percent, 25 percent, and 35 percent. However, in the interest of maintaining or potentially increasing progressivity, the framework also provides the taxwriting committees the discretion to create a fourth, top tax bracket above 35 percent to apply to wealthy individuals, the officials said. The framework defers to the committees on setting income levels for the new brackets.

The framework also envisions “a more accurate measure of inflation” for indexing the tax brackets and other parameters. Ray Beeman of EY posited that this provision would involve the use of the chained consumer price index. Chained CPI can produce lower inflation values when compared with traditional CPI by assuming that consumers purchase cheaper goods during inflation. (Before letting it fall away in later budgets, President Obama proposed using chained CPI in his fiscal 2014 budget, which would have resulted in $100 billion of additional revenue over 10 years as tax collection would increase on the margin.) Chained CPI was not mentioned in the earlier joint statement from the Big Six.

Other provisions include calls for repealing the estate tax and the alternative minimum tax; nearly doubling the standard deduction to $12,000 for individuals and $24,000 for married joint filers; increasing the child tax credit to an amount “significantly higher than $1,000” per child and making the first $1,000 of the credit refundable; and repealing the “marriage penalty” in the calculation of its phaseouts, which would also be increased.

The framework also proposes a $500 nonrefundable tax credit for non-child dependent care expenses. And it states that the committees will pursue “additional measures to meaningfully reduce the tax burden on the middle-class.”

The White House officials suggested that additional tax reform details have already been ironed out, telling reporters that the tax exemption for municipal bonds would be left untouched and that the SALT deduction would be repealed.

The officials pushed back on the suggestion that lower-income taxpayers could end up worse off if the bottom tax rate were raised to 12 percent and personal filer and spousal exemptions were repealed. They said with the changes to the standard deduction and the increased child tax credit, those taxpayers will be “more than compensated for the loss of personal exemptions.”

As with the business side, the framework leaves the details of determining what deductions and tax breaks should be eliminated as offsets primarily up to the committees, but “eliminates most itemized deductions” while explicitly preserving those for home mortgage interest and charitable contribution, while also retaining tax incentives for retirement savings, higher education, and work. However, the officials left the door open to potentially altering some of these incentives from their current form, suggesting that committees will have “flexibility to make changes.”

The officials also did not rule out the so-called Rothification of retirement savings, which would tax contributions instead of withdrawals, noting that their goal was to promote and increase retirement plan participation and savings.

The document also called for repeal of the “death” and generation-skipping transfers taxes. But whether the estate tax would truly die remains unclear.

The framework does not mention the carried interest provision, which administration officials, including Treasury Secretary Steven Mnuchin, have long pledged to close for hedge funds.

The White House spokesperson declined to comment on a Wall Street Journal report citing administration officials that said the estate tax “will be excluded from its calculations of the distribution of the tax burden.”

Cost of Expensing

Although many details were left out, the contents of the framework spurred widespread speculation about what direction the Republicans’ tax reform effort was heading on several provisions.

Kyle Pomerleau of the Tax Foundation said that five-year expensing would cost “significantly less” than full expensing over a 10-year period, adding that although it’s perhaps “counterintuitive . . . it’s not half the cost, but maybe a quarter, or an eighth of the cost.”

The reason for that savings, Pomerleau said, “is that you have this little reversal that happens in year six, that, when expensing expires, the federal government actually ends up raising revenue relative to what it otherwise would have in the absence of any change whatsoever.” He explained that reversing full expensing  to the existing modified accelerated cost recovery system “front loads a lot of tax payments that companies need to make. And looking at the 10-year window, what you get is additional revenue, even though it’s just temporary.”

“Because it’s over a 10-year window, lawmakers can kind of game this reversal by making temporary expensing look very cheap,” Pomerleau added.

Pomerleau also noted that the framework now says that “structures” would be excluded from expensing. This is a departure from the House Republican “A Better Way” tax reform blueprint, which called for full expensing but only excluded land.

Excluding structures could potentially cut the revenue cost of allowing full expensing in half, Pomerleau said, although he cautioned that this was only a tentative estimate. It would also “significantly reduce” the economic growth effect of expensing, because “buildings tend to be the much larger share of total capital stock in the U.S.,” he added.

Limited Interest

The framework also marks a departure from the House Republican blueprint regarding interest deductibility, calling for “partially limited” interest deductibility for C corporations and potentially limiting it for passthrough entities.

What that might mean remains a mystery, Steven M. Rosenthal of the Urban-Brookings Tax Policy Center told Tax Analysts. But he warned that, unlike previous tax reform plans — like the blueprint, which eliminated the interest deduction while allowing full expensing, or like President Trump’s campaign tax plan, which would have allowed taxpayers to choose one or the other but not both — the framework suggests that those two provisions will be combined, which potentially could lead to real-estate tax shelters.

“Maybe the limitation on structures stems from that kind of concern — that real estate would be overbuilt,” Rosenthal suggested.

Pomerleau theorized that the partial limitation could refer to an “across-the-board cap” that limits the deduction to 30 percent of interest income earnings, which, he said, is a “pretty common policy throughout the developed world.” He also noted that interest deductibility is already limited under the tax code through “thin capitalization” rules that are intended to prevent U.S. multinational companies from loading up on debt domestically and then paying interest to overseas subsidiaries, thus stripping the U.S. tax base.

‘Fiscal Fantasy’

Although the framework calls for “fiscally responsible tax reform,” deficit hawk Maya MacGuineas of the Committee for a Responsible Federal Budget said in a statement that the plan is “nothing more than a fiscal fantasy.”

“Tax cuts shouldn’t be handed out like Halloween candy. To grow the economy, they must be paid for, and the details of this plan appear to come up $2 [trillion] to 2.5 trillion short,” MacGuineas said. She urged lawmakers to abandon plans for a fiscal 2018 budget resolution that would allow a $1.5 trillion tax cut, warning that it would create a “massive tax bill for future generations.”

However, one tax lobbyist with close ties to the Big Six praised the framework’s emphasis on economic growth over other concerns like revenue neutrality or distributional neutrality. Too often, the lobbyist said, ambitious tax reform plans succumb to political pressures that then “suddenly make growth 14th on your list.”

“I’m really happy that for once [this plan] emphasizes economic growth,” the lobbyist added.

Distributional Uncertainty

The framework promises that tax reform will keep the tax code at least as progressive as it currently is, but Rosenthal questioned how lawmakers would go about accomplishing that.

If the progressivity of the changes is determined only by looking at changes to the individual tax brackets, then “on balance, the change in progressivity is not substantial,” Rosenthal said, noting that the framework allows room for the committees to “turn the dials” and includes some middle-income tax relief provisions.

“But people should keep their eye on the ball,” said Rosenthal, and judge whether the plan is truly distributionally neutral by looking at the whole tax package, including business tax cuts. “The tax cuts on the business side are just immense, and the beneficiaries of these business tax cuts, whether they’re corporate earners or passthrough owners, is skewed to high-income taxpayers and, often, foreigners,” he said.

Those business tax cuts “lose a huge amount of revenue and reduce progressivity substantially,” Rosenthal said.

He cautioned that the Trump administration may “try to play hide the ball” on who benefits from the tax cuts by pointing to the potential for a higher top individual income tax rate for the wealthiest taxpayers and claiming that the corporate income tax cuts primarily benefit workers. That view has been promoted by many members of the Trump administration, including Mnuchin, and Council of Economic Advisers Chair Kevin Hassett.

The incidence of the corporate tax burden “has been widely accepted as an 80-20 division between capital and labor, but now it may be considered 25-75 the other direction,” Rosenthal said. “It’s like Alice in Wonderland — everything is now upside down.”

The Treasury Department’s Office of Tax Analysis also appears to have removed from its website an analysis from May 2012 explaining the department’s method for determining the incidence of the corporate income tax burden, which had found that 82 percent of the corporate income tax burden fell on capital income while 18 percent fell on to labor income.

Treasury had not responded to Tax Analysts’ request for comment at press time.

‘Historic Tax Relief’

Trump took the stage in Indianapolis the afternoon of September 27 to call attention to the framework, emphasizing that it would be the largest tax cut in history and would provide “historic tax relief to the American people.”

Trump highlighted key features of the framework, appearing to finally embrace a 20 percent corporate tax rate after months of insisting on a 15 percent rate. He called the cut a “revolutionary change” and said that “the biggest winners will be the everyday American worker[s].”

The framework is “the right tax cut at the right time,” Trump said, calling for Democrat and Republican lawmakers to “come together, finally, to deliver this giant win for the American people.”

Trump also repeatedly said that the plan’s primary goal is to focus its benefits on middle-income earners. He said the framework “includes our explicit commitment that tax reform will protect low-income and middle-income households, not the wealthy and well-connected — they can call me all they want, it’s not going to help.”


Stakeholder reactions to the framework ranged from the unabashedly enthusiastic to the cautiously realistic.

“Today’s release is progress towards tax reform, but the hardest part lies ahead,” said John Gimigliano of KPMG LLP. “Congress still needs to figure out how to make the math work, both politically and procedurally, and then . . . convert that to legislation. And if Congress is serious about using ‘regular order’ to move a bill, it could take months, not weeks, for legislation to get to the president’s desk.”

Among the thorny issues that still need to be resolved, Beeman highlighted the challenge of developing antiabuse provisions for the new 25 percent passthrough business tax rate. “Easily the most difficult policy development and drafting exercise continues to be how to prevent passthrough owners from recharacterizing personal income into business income that would be eligible for the new reduced rate on such income,” said Beeman, a former House Ways and Means Committee tax counsel and special adviser for tax reform.

Meanwhile, conservative groups sensed momentum and had no shortage of praise for the framework.

David McIntosh, president of the Club for Growth, said his group is very encouraged and pleased with the tax reform framework. He said the outline “is both aggressive and very pro-growth with its rate reductions,” and added that the Club for Growth “will continue to support the pro-growth efforts of the Trump administration and Congress as they seek to make tax reform a reality.” He also said the group will work with Congress to pass a budget “in order to get reconciliation tax instructions.”

Freedom Partners Vice President of Policy Nathan Nascimento characterized the framework as “a giant step for a stronger economy” in a statement. “Making it a reality would let taxpayers keep more of their hard-earned money, increase America’s global competitiveness, and send a message that there will be no better place in the world to invest and create jobs than the United States.”

Andrew Velarde contributed to this article.

Follow Luca Gattoni-Celli (@TheGattoniCelli) and Jonathan Curry (@jtcurry005) on Twitter for real-time updates.