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Familiar Salvos in Opening W&M Tax Reform Hearing

Posted on May 19, 2017 by Dylan F. Moroses Asha Glover

The House Ways and Means Committee’s first hearing on tax reform of the 115th Congress addressed broad topics, including fiscal responsibility and permanence, but did little to signal the direction Republicans are taking in drafting legislation.

Business executives invited to testify by committee Republicans at the May 18 hearing promoted the importance of corporate tax reform that encourages investment, while Democrats emphasized their commitment to tax relief for middle-income families.

In his opening remarks, Ways and Means Committee Chair Kevin Brady, R-Texas, touted the benefits of the 20 percent corporate tax rate included in House Republicans’ “A Better Way” tax reform blueprint, but did not mention the blueprint’s controversial border-adjustable tax proposal.

“To unleash job creation and increase paychecks, we know these rates must come down,” Brady said. “In addition to lowering rates, we also know that bold policies, such as full and immediate expensing, are incredibly pro-growth for jobs, paychecks, and our economy as a whole.”

Ranking minority member Richard E. Neal, D-Mass., argued that tax reform “should be about moving the dial to help middle-class families prosper.”

Neal criticized the White House’s tax reform outline, saying it does not meet Democrats’ goals. “Democrats will oppose any tax plan that helps the rich get richer and does nothing for those who really need help. And all of us should oppose any tax reform that results in the middle class carrying even more of the tax burden,” he said. 

Ways and Means Tax Policy Subcommittee Chair Peter J. Roskam, R-Ill., made the argument for tax reform permanence rather than the temporary tax cuts under a budget reconciliation bill. He called for urgent action, claiming: “Who loses if we dither over tax reform? Not the wealthy. It’s the folks at the lower end of the economic spectrum.”

Permanent tax reform was also a focal point of testimony from Standard & Poor's President Douglas L. Peterson, who told lawmakers, “Permanence creates certainty, [and] certainty reduces risk.”

Democratic committee members, including John B. Larson of Connecticut, Ron Kind of Wisconsin, and Earl Blumenauer of Oregon, urged the majority to consider holding additional hearings beyond the May 23 meeting scheduled on the border-adjustable tax. Other Democrats asked witnesses whether they supported infrastructure investment, revenue-neutral and distributionally neutral tax reform, and middle-income tax relief.

While Republicans focused on how permanent, comprehensive tax reform could stimulate economic growth, Rep. Suzan K. DelBene, D-Wash., argued that business investment may not result in more jobs for individuals. She cited a New York Times report that technological advances and automation technology could result in companies like AT&T Inc. — whose CFO John J. Stephens testified during the hearing — shrinking their workforce by two-thirds, resulting in fewer jobs even after more investment from tax reform.

The hearing was applauded in submitted testimony by the American Made Coalition, a group of over 25 businesses that support the blueprint. The organization emphasized support for creating an international tax system instead of just cutting tax rates, arguing that “the global economy is a lot different than it was in 1986, the last time Washington came together to overhaul the tax code, and we are long overdue for major changes that will make our economy more competitive. In that vein, a simple, temporary rate cut would not go far enough to address these challenges.”

The coalition also backed the adoption of a destination-based cash flow tax, saying that it would put the United States’ tax code on equal footing with other developed countries.

Expensing

Some committee members sought information on how the blueprint’s elimination of net business interest expenses in favor of full and immediate business expensing would help the witnesses’ companies.

Eliminating interest deductibility “in isolation” would be “extremely problematic,” but perhaps “necessary as part of a broader solution,” Stephens said. He urged members to “utilize reasonable transition rules that do not penalize past choices companies made under a vastly different tax system.” 

Brady recently said the committee is working on language to “grandfather existing debt.”

Blumenauer made the case for raising the federal gas tax, urging Brady to hold hearings and get testimony from Republican state legislators who have raised their state gas taxes as a way to generate infrastructure revenue. Republicans were silent, although Emerson Electric Co. CEO David Farr reiterated his support for “finding the money to invest in infrastructure,” without supporting a gas tax increase.

Ways and Means Oversight Subcommittee Chair Vern Buchanan, R-Fla., asked questions about passthrough business tax policy, advocating rate parity between corporate and passthrough business income tax rates.

In a prelude to the May 23 committee hearing, Zachary Mottl, Atlas Tool Works chief alignment officer, made the case in his testimony that a form of border-adjustable tax is integral to any tax reform that makes domestic business competitive. Mottl also suggested a border-adjustable profit tax, something he described as similar in function to the destination-based cash flow tax in the blueprint.

Brady, asked whether the blueprint's border-adjustable tax provision will definitely be included in final tax reform legislation, told reporters: “We’re working towards a unified tax plan. It is in the House blueprint right now; it plays a critical role in full growth tax reform.”

He also said the upcoming hearing would have a diverse set of witnesses, including some opponents of the tax, although the witness list will not be available until May 22. “Next week we’re really talking about competitiveness and how we keep U.S. jobs from leaving America. More importantly, how do we bring it back here? And clearly border adjustment will be part of that discussion, and we expect, as we heard today, to hear both sides on that and that’s fair,” he said.

Neal also made a case for keeping tax incentives for retirement savings, and said that tax reform needs to be fiscally responsible. “The words ‘dynamic scoring’ and ‘supply-side economics’ are thrown around a lot these days, but make no mistake, tax cuts do not pay for themselves and anything to the contrary is a non-starter,” Neal said.

But Mottl pointed to European countries that have implemented a cash-flow tax system, suggesting they “are not too worried about deficits . . . they’re more worried about getting the jobs, research, and manufacturing” in their country.