The January 20 swearing-in of Donald Trump as President - and the resulting change in control of the Administration to Republican hands – will result in significant changes in tax policy.
What can tax professionals expect as we begin tax season and beyond?
- IRS Commissioner: IRS Commissioner John Koskinen's term expires one year from now, in November 2017, but he has said on numerous occasions that he would tender his resignation if the President requests it. Given that Republicans have for the past year suggested they would try to impeach Koskinen, what is likely to happen?
Tax season will formally begin within a few days of Trump's swearing-in, which means that the performance of the IRS during tax season, good or bad, will be attributed to the Trump Administration. Furthermore, at this point neither a Treasury Secretary or Assistant for Tax Policy has been named, and those individuals would likely have a significant say in how and when a transition to a new Commissioner should occur. As a result, former Republican tax officials, veterans of the Treasury and Capitol Hill, are unanimously recommending a go slow approach. Many also believe that, even if hard right members of the House of Representatives want to have a vote on the impeachment of Koskinen, that vote is not likely to go their way.
- Tax Reform: A GOP tax reform plan is likely to be approved in the House fairly quickly after the new Congress comes to town.
The draft plan, which is light on specifics, was first issued last summer as a "Blueprint". Barbara Angus, the Chief Tax Counsel of the House Ways and Means Committee, in a speech this week said the blueprint contemplates comprehensive tax overhaul, including individual, business and international changes and a restructuring of the Internal Revenue Service.
On the individual side, the Blueprint provides for lower and flatter tax rates and for further reductions in the taxes on investment income, capital gains, dividends and interest, Angus said. It eliminates the individual alternative minimum tax and the estate tax, and it contemplates the elimination of special credits and deductions in favor of lower rates.
On the business side, the Blueprint proposes a 20 percent corporate tax rate and a 25 percent business tax rate for income earned through passthroughs or a sole proprietorship, Angus noted.
The Blueprint also provides for immediate and full expensing of investments in tangible and intangible assets, she said. It provides for the elimination of deductions on net interest and for the carryforward of net operating losses with interest. It also eliminates the corporate alternative minimum tax.
The Blueprint is somewhat different than the proposal outlined by candidate Trump during the campaign, so the overall plan will be have to adjusted. One of the first clues to how to meld the two proposals is likely to be in the Administration's budget proposal that will be delivered to Capitol Hill in March.
The Senate is likely to take a much more deliberative approach than the House, with the result that a tax reform plan is unlikely to receive final approval until summer at the very earliest, and more likely in the fall.
As we have seen over the last few years, Senate passage of most contentious bills – and tax reform would be a contentious bill – is held up because it takes 60 votes in the Senate to force a vote (the so-called cloture rule). With only 52 Republican Senators, tax reform is therefore likely to be taken up as part of a budget reconciliation bill, which can be considered on a simple majority vote. A budget resolution would not be introduced after the receipt of the
Administration's budget in March, however, so there is a time lag if this procedure is used.
Another downside to the budget reconciliation process is substantive, however: a budget reconciliation bill must be revenue neutral over a ten year budget projection. So, if tax reform calls for a significant reduction in rates, thereby losing revenue, other items in the budget, whether reductions in other government spending or elimination of tax deductions, must be included to "balance the budget."
This balancing act is likely to result in significant political warfare, especially if the Administration insists on the massive infrastructure construction/repair program advanced by candidate Trump, because the revenue has to come from somewhere. Many of the Republican Party's more conservative lawmakers, including the members of the hard-right House Freedom Caucus, got their start in politics over concerns about the deficit. Battles over spending levels, the national debt and tax rates are likely to occur within factions of congressional Republicans during the tax overhaul process.