Anti-base-erosion measures and individual incentives for adoption are among the provisions in the House Republican tax bill that require additional revision, according to Ways and Means members, although it remains unclear as of November 7 whether those issues will be resolved.
House Ways and Means Republicans said those and a host of other provisions are still under development after House Ways and Means Committee Chair Kevin Brady, R-Texas, issued a new chair’s amendment November 6 to the Tax Cuts and Jobs Act (H.R. 1) in the first day of markup, with changes to the tax treatment of carried interest and provisions designed to combat international base erosion.
Committee member Carlos Curbelo, R-Fla., told Tax Analysts that the base erosion portion of the bill will likely see more changes. “Everyone knew when we stepped back from the border tax that we needed anti-base-erosion measures. We cannot just sit back and watch American jobs and investments flow away from our country. So this is one of those measures. It has already been refined once, and it may need some more tweaking, but to not include base-erosion measures in this package would be highly irresponsible.”
Incorporating feedback from outside stakeholders may lead to another change in the anti-base-erosion language, but the fix in the November 6 chair’s amendment to the affiliated payments excise tax to provide for foreign tax credits may be enough, committee member James B. Renacci, R-Ohio, suggested. “I know that the chairman is trying to work with as many entities as he can, so you’ll have to see. I do think, as I understand, that by getting a foreign tax credit, you actually eliminate the consequences of that,” Renacci said.
The chair’s amendment also would exempt foreign affiliates’ routine returns, exclude acquisitions of property priced on a public exchange, compute a foreign affiliate’s profits based on foreign profit margins instead of global profit margins, and coordinate with existing withholding tax rules.
Curbelo is unclear whether any new changes will be incorporated during the markup or addressed later in the process. “[Brady’s] goal is to keep improving this bill, so it is possible that we see more changes. If the chairman can collect all the ideas and consolidate them, that saves time.”
Outside of Ways and Means, some House Republicans have concerns about the anti-base-erosion language in the bill. House Republican Study Committee Chair Mark Walker, R-N.C., told Tax Analysts that he will review the provision, and look to offer changes to the broader tax bill. “What I’m trying to figure out is how does that impact the business community, and does it impact people in our particular areas as far as jobs or a particular burden. We’re just kind of digging it out ourselves,” Walker said on his way to meet with House Speaker Paul D. Ryan, R-Wis., to discuss the tax bill.
Walker said that he “is aware there are many different businesses that are beginning to raise the flag on that particular issue,” but he has yet to offer a position for or against the excise tax provision.
Other areas of H.R. 1 also could see changes. Ways and Means member Lynn Jenkins, R-Kan., told Tax Analysts there could be further refinements to how a 25 percent passthrough business income rate would be administered. “We’ll have to talk about the difference from the rate, because there might be some incentive to go ahead and incorporate, but we’re going to have that discussion,” Jenkins said.
Concerning the deductibility of state and local taxes, committee member Tom Reed, R-N.Y., said he might offer his proposal to replace the state and local deduction with a tax credit, although it is unclear whether he would offer an amendment during committee markup or pitch the idea later in the process.
“There’s a comfort level with deductions, and a lot members when we talked to them off the committee, they just weren’t there with the idea of a credit. . . . If that normalization process [with the credit] occurs with members off the committee, then I think then maybe there’s a possibility of that being a solution,” Reed said.
Adoption Tax Credit
Walker also said that the Republican Study Committee has some ideas about tax reform that they would like to see included, using House Ways and Means members as their liaisons. “The way that we’re going about doing it, for example, [is] I am pushing hard in permitting back into the tax reform the adoption child tax credit, so I have a couple people on Ways and Means who are working on that particular issue. Right now a lot of us have particular issues that we are working on through members on the committee.”
Curbelo also noted committee work on the adoption tax credit, highlighting that it currently tends to disproportionately benefit wealthy families. He said taxwriters need to strike a balance between offering narrow incentives and creating broader benefits when considering retaining the adoption credit. “There’s been a lot of discussion about it, and obviously everyone on the committee supports adoption. I think the broader question that we’re all struggling with is do we want a tax code with many specific benefits for smaller groups of Americans, or do we want a tax code that is simple, and fair, and beneficial for all Americans?” Curbelo said.
Democratic Amendments Defeated
The committee considered and defeated eight amendments to the tax proposal during the second day of its markup session.
Rep. Earl Blumenauer, D-Ore., sponsored an amendment that would call for reinstatement and application of the 1986 tax code after two years in the event the country’s deficit exceeds current projections. That amendment failed on a 23-16 vote.
House Republican taxwriters decided to retain the property tax component of the state and local deduction but to cap it at $10,000. However, Rep. Bill Pascrell Jr., D-N.J., introduced an amendment to restore the full state and local tax deduction. It also failed on a 23-16 vote.
Pascrell said the capped property tax deduction won’t hold up in the Senate.
“I hate to break it to my colleagues but you got rolled on this deal,” Pascrell told his fellow committee members. “You shouldn’t be surprised when [Senate Finance Committee] Chairman Hatch — prepare yourselves — drops a bill later this week repealing SALT deduction outright. Then what are you going to do? What are you going to say?”
If the Senate fails to agree to the capped itemized property deduction, “we will fight the Senate,” said Rep. Peter J. Roskam, R-Ill. “And I will be very vociferous in making sure that this property tax [deduction] or some level of protection is maintained.”
The committee also defeated 23 to 15 an amendment sponsored by Rep. Ron Kind, D-Wis., to repeal the state and local tax deduction for corporations. It voted 23 to 16 to defeat another Kind amendment to restore the work opportunity tax credit, and one from Rep. Danny K. Davis, D-Ill., to restore the adoption tax credit and make it refundable, reinstate the exclusions for employer-related dependent care and adoption assistance programs, and improve the child and dependent care credit by boosting credit amounts and making them refundable.
An amendment from Rep. Linda T. Sánchez, D-Calif., to increase the child tax credit to $3,600, index it for inflation, eliminate the $3,000 refundability earnings threshold, and make permanent the supplemental $300 credits for parents and non-child dependents also failed 23 to 16.
The committee also defeated on a voice vote an amendment offered by Rep. Lloyd Doggett, D-Texas, that he said called for taxing profits earned abroad the same as profits earned at home. “When you set up a system as has been done in this bill that creates one rate abroad that is basically zero and at home is 20 percent, guess where the money is going to flow?” he said. “It will flow out of America just like the jobs will flow out of America.”
Roskam spoke in opposition to the amendment and said the tax bill’s call for a territorial system is a better approach. “There are basically two views that are competing here. One view says that let’s maintain the international system and get rid of deferral. In the underlying bill what we’re proposing is something different and I think more competitive and better,” Roskam said.
The committee also defeated an amendment offered by Rep. Terri A. Sewell, D-Ala. She said her amendment is identical to H.R. 1190, the Workforce Development Tax Credit Act, which would allow employers to claim an income tax credit for wages paid to employees who join an apprenticeship program.