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Tax cut plans: Let the games begin

01/18/2017  |  By: Brian McCuller, JD, CPA, Shareholder, Practice Leader Tax, Andrew E. Hill, JD, Manager, State and Local Tax

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As the Trump Administration begins, the rubber is meeting the road on tax reform — and the trip could be a little bumpy.

During the election campaign, candidate Donald Trump supported a cut in corporate tax rates, changes in individual income taxes, curtailment of incentives for U.S. companies to locate operations and profits abroad, and a variety of other tax initiatives. House Republicans had their own plan, similar in many ways but with some important differences.

Now comes the hard part: Translating these platforms into a bill that can pass Congress and secure the President’s signature. Complicating that process are conflicting priorities for powerful interest groups that would be affected by a tax bill and competition from other issues — such as replacing the Affordable Care Act — that demand time and attention by the administration and Congress. (The ACA also has tax issues of its own.)

The issues are many, and the details and potential arguments are too numerous to lay out here, but here are some highlights:

Curtailing incentives for offshore business
While the Trump plan and the House plan have the same ultimate goal, they get there in very different ways. Under the Trump plan, U.S. companies that locate plants abroad would have to pay a 35 percent fee (some would call it a tariff) on sales in the U.S. The House plan would significantly change the overall rationale behind corporate taxes and would impose taxes based on where products are sold. Products sold in the U.S. would be taxed; those sold abroad would not. That would have the impact of taxing imports but not exports.

Business reaction to these ideas has been extremely divided. Retailers and oil refiners, for example, have objected to the House plan because, as big importers, they would feel the brunt of a sales-based approach. Others say this plan would greatly reduce the incentive for U.S. companies to move headquarters and plants abroad, since they would still have to pay taxes on products sold in the U.S.

Trump’s plan has been criticized on a number of grounds, such as its potential for greatly upsetting international trade and possibly running afoul of the numerous tax treaties to which the United States is a party. This will be a vigorous debate, to say the least.

Individual tax deductions
Both the Trump plan and the House plan would raise the standard deduction, although by different amounts. In addition, the Trump plan would cap total deductions at $100,000 for single filers and $200,000 for married couples.

This, too, brings powerful interests into conflict. Both the House plan and the Trump plan would reduce the top tax rate, which could have powerful appeal to some. But among other things, the Trump plan could have substantial impact on the housing market, since it would potentially limit the amount of mortgage interest some taxpayers could deduct, while also greatly reducing the number of taxpayers who file itemized returns. That brings the housing industry, parts of the retail industry and other influential stakeholders into the debate.

Another potential sticking point: the big political issues raised along class lines. Some perceive the intent behind plans for individual tax cuts — and cuts in the corporate tax rate — as a way to benefit the very rich. That could make the plans hard to sell.

Where’s the money?
Business and individual tax cuts, the cost of whatever might replace the ACA, and Trump’s plans for spending on infrastructure all raise questions about how this will be paid for. One answer is that tax cuts could stimulate growth and the taxes on that growth will provide a big funding mechanism. Others say the numbers don’t add up and the result could be a big decline in federal tax revenues. Historically, Republicans haven’t wanted to add to the national debt. So what are the politics of all this?

Timing and the use of political capital
During the first two years of the Obama administration, there was a Democratic majority in both the House and Senate, and it still took two years to pass the ACA. That was followed by mid-term elections in which the Democrats lost control of the House. As the Trump administration begins, the ACA is back on the table, along with tax policy, highly significant foreign policy issues and a host of other big domestic issues.

A natural question to ask is how much can a President and a Congress tackle at one time, even when they control both branches? How much political capital, not to mention time and energy, is available?

These are interesting times.

Brian McCuller is shareholder in charge of the tax practice at LBMC, a Tennessee-based professional services firm. Contact Brian at bmcculler@lbmc.com or 615-690-1971. Andrew Hill is a senior in that practice. Contact him at ahill@lbmc.com or 615-309-2685.

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