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Tax Reform in the Next Congress
Friday, November 11, 2016

It is clear that the next Congress and President-elect Trump very likely will to try to do corporate tax reform — particularly international tax reform. Among the reasons this is the case is that there is an emerging consensus among both parties from a policy perspective that improving the business tax code could make America more competitive. Another reason is that aspects of tax reform are revenue generators — added revenue can be used to finance other national priorities, such as an infrastructure bill. Also, a lot of work during this Congress has already gone into an international tax package, and this work has been done by key members of Congress. And finally, there are early signs that President-elect Trump’s concept for a tax reform package — lowering rates on businesses, and including some form of repatriation of U.S. corporate profits located overseas at a reduced tax rate — is consistent with Speaker Ryan’s. This is a promising start.

There is also a lot of discussion on Capitol Hill about connecting a tax reform package to an infrastructure bill. Democrats, President-elect Trump and some Republicans have said they’d like to focus on an infrastructure package. Aspects of tax reform could help finance that package. Or if Congress finds other ways to pay for an infrastructure bill such as an infrastructure bank or other revenue source, perhaps the proceeds from tax reform that raise revenue could be used to finance other priorities. Or it’s possible that a tax reform bill might actually cost the Treasury revenue or be revenue-neutral, rather than generate revenue. Even if this is the case, a tax reform package could still be considered alongside infrastructure legislation in order to generate the political will to do them both, or it could be passed on its own as a priority for economic growth.

The heft of the leaders at the table on tax reform add to its likelihood of success. Senator Schumer is about to become Minority Leader and he has helped lead the way on the Senate Finance Committee in a tax reform working group with Senator Portman who was just reelected. While Schumer will likely leave the Committee as he assumes his leadership duties, and that may open up an opportunity for another Committee Democrat to help lead on this package, Schumer should remain heavily involved. And Speaker Ryan has initiated his own efforts and should be expected to continue to do so.

Examining a couple of individual provisions that could end up in a package, Technology, Health Care and other sectors are interested in tax incentives to encourage a repatriation of corporate assets held abroad as part of the financing for an infrastructure bill or otherwise. Democrats are split on whether corporate tax reform should happen, whether it should include partial tax forgiveness for repatriated monies, and what to do with the revenue that repatriation could generate. Yet the potential that repatriation could generate economic development here at home and add new revenue makes it an incredibly attractive concept for many on Capitol Hill. It’s quite possible that the reduction in the rate applied to this repatriated money could be by more than half.

Also, there will be work on a possible patent box or similar provision as part of tax reform, that incentivizes domestic research & development and manufacturing, and that would allow international technology and health care companies and companies from other sectors that do a lot of R&D abroad, to bring back their existing intellectual property, possibly providing direct economic benefits here at home.

It is likely that some progressive stakeholders will mobilize to oppose efforts on a corporate tax reform package, as a giveaway to corporations. Likewise, some conservative stakeholders may react negatively in particular to any revenue raisers in a tax reform package, especially if they believe that Congress will spend those new revenues on new initiatives they oppose. Both sets of potential opponents will find allies on the Hill, and that will make finding a compromise more difficult.

Finally, Congress might try to institute broader structural change to our international tax laws. There is interest in moving towards a form of territorial tax system, common among many of our trading partners. The way the current U.S. system is structured, a number of loopholes have been established that reduce disadvantages of not having a territorial system. Congress might have to revisit those loopholes if it looks seriously at moving to a territorial system. Adding those layers of complexity could make getting to yes more difficult, and ultimately encourage negotiators towards a more modest package. Time will tell.

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