BKD, a national CPA and advisory firm with a presence in Colorado Springs, joined forces last week with the National Association of Manufacturers for a webinar to review new and proposed business tax regulations, as well as to compare reform proposals in the House of Representatives with those of President-elect Donald Trump.
The webinar was facilitated by Chris Kramer, the East Region tax leader for BKD National Manufacturing & Distribution Group; Dorothy Coleman, vice president of tax and domestic economic policy at NAM; and Carolyn Lee, NAM’s senior director of tax policy. Lee is responsible for portions of NAM’s tax portfolio, including pass-through taxes, energy taxes and capital cost recovery.
According to Coleman and Lee, tax policy in 2016 was affected by several variables — gridlock, inversions (when corporations relocate some operations to lower-tax havens) and uncertainty over the Trump administration’s policies.
Regarding corporate tax reform in the coming year, Coleman said there’s an “increasing drumbeat” to address tax reform at the Capitol, thanks to high tax rates and outdated code. Coleman said legislative gridlock has blocked progress in the past, but with Republicans controlling the White House and both houses of Congress, that gridlock may give way to actual reform.
The facilitators offered a comparison of the House GOP plan to Trump’s proposals.
Firstly, the House’s and Trump’s plans overlap in their desire to reduce the corporate tax rate.
The House GOP plan calls for a top corporate tax rate of 20 percent, a top pass-through rate of 25 percent and a territorial tax system with 100 percent dividend exemption.
Other GOP business tax reforms include eliminating the corporate alternative minimum tax and allowing capital investment costs to be fully deductible.
The GOP plan also calls for the creation of a fully territorial tax system, exempting 100 percent of dividends from foreign subsidiaries.
Trump’s plan is more ambitious, cutting both the top corporate tax rate and the pass-through rate to 15 percent. His plan would also, among other things, allow firms engaged in manufacturing in the U.S. to choose between writing off capital investment or deducting interest paid. Trump wants to eliminate the domestic production activities deduction and all other business credits, except for research and development credit.
Coleman offered two likely scenarios in 2017 that would lead to changes.
Under one scenario, congressional staffers begin working on “filling in the blanks” of the House GOP plan to close 2016. In the first quarter of 2017, Trump unveils additional details of his plan; House tax writers complete their markup of a tax bill; and the House completes action on legislation and sends it to the Senate. By spring or summer, Coleman said, the Senate Finance Committee marks up legislation and the Senate approves the package, the House and Senate agree on a joint bill and both Houses approve a conference report and send it to the White House.
The second scenario, Coleman said, would include the House and Senate Budget Committees drafting budget plans with ”reconciliation” instructions that allow for a tax reform plan. The plans would be approved by the respective congressional bodies and a joint conference would agree on a compromise budget plan.
By summer, congressional tax writers complete markup of separate tax reform plans as directed by reconciliation instructions, the House and Senate approve their respective tax bills, the House and Senate conference agrees on a joint bill, then both Houses approve the conference report and send it to the White House.
According to Coleman, most signs point to reform in the new year — partisan power, as well as bipartisan recognition that “the code is broken” and the economy is still lagging.
Lee played devil’s advocate, saying there were still headwinds that could stall reform in 2017. Those include a potential increase in the federal deficit and debt, a divided business community regarding border adjustability, World Trade Organization concerns and business tax cuts that “could trigger populist opposition.”
GROWING THE DEFICIT?
According to taxfoundation.org, an independent tax policy research organization, the House-proposed individual income and business tax plans “would increase the long-run size of the economy by 9.1 percent.”
The larger economy would result in 7.7 percent higher wages and a 28.3 percent larger capital stock. The plan would also result in 1.7 million more full-time equivalent jobs.
“The larger economy and higher wages are due chiefly to the significantly lower cost of capital under the proposal, which is due to the lower corporate income tax rate and the full expensing of capital investment,” the organization said on its website.
Taxfoundation.org’s overview of Trump’s proposed revisions predicts his individual income and business tax plans would also benefit the economy in the long run.
“The larger economy would result in 5.4 percent higher wages and a 20.1 percent larger capital stock under the higher-rate assumption, or 6.3 percent higher wages and a 23.9 percent larger capital stock under the lower-rate assumption.”
But the group also expects the plan to reduce federal revenue between $4.4 trillion and $5.9 trillion on a static basis — leading to increased deficits.