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Category: Tax & Finance

Budget? Budget?

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The Senate Budget Committee will take its first steps on a framework for federal spending and tax cuts in FY 2018 this week.

The Senate Budget Committee released its FY 2018 draft resolution on Friday that would establish the path for consideration of revenue, spending, and other fiscal legislation.

Senate Committee will debate overall limits on discretionary spending for the coming fiscal year and 10-year projections, as well as mark up the resolution on Wednesday and Thursday. If adopted, it could become an enforcement tool — through points of order — during the annual appropriations process. House and Senate majority were attempting to use   the FY 2018 budget as a means to further repeal the ACA — the House included language to instruct committees to do so — but all language instructing the Senate Committees to do similar has been stripped. Rather, the Senate focuses on tax reform, signaling a pivot in the Majority’s priorities.

The focal point of the legislation is the draft language instructing the Senate Finance and the House Ways and Means committees to increase the deficit by $1.5 trillion over the next decade. That number gives the tax-writing panels the opportunity to alter the tax code.

The whole Senate will begin its annual Budget consideration process, known as “vote-a-rama,” the week of October 16th.

Meanwhile, the full House plans to vote Thursday on its own budget resolution, which also would advance what would be the most sweeping tax overhaul in more than three decades. That plan would require Congress to cut at least $203 billion from entitlement programs over 10 years. House leadership has suggested the Senate version is more likely to prevail in a final compromise and the language on entitlements is likely to be stripped on the House floor.

There are other notable differences between the House and Senate budgets. For instance, the House budget includes instructions for a tax plan that does not increase the deficit, but the Senate budget would let tax writers add $1.5 trillion to the deficit over a decade. The Senate provides $549 billion for defense spending and $516 billion for nondefense discretionary programs, which are levels in line the the Budget Control Act caps. The House measure provides $621.5 billion for defense programs and $511 billion for nondefense discretionary programs. Since the House provides levels significantly beyond the BCA caps, enacting such a measure would take an act of legislation (and a signature by the President), which is beyond the scope of a typical Congressional budget, a document that only binds Congress and is not signed by the President.

Eventually, the two chambers would have to agree on a budget for Congressional Republicans to use reconciliation.

Big Six Reveal Tax Reform Framework

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As expected, the long-awaited proposal released Wednesday. Negotiated by the “Big Six” — Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Majority Leader Mitch McConnell, House Speaker Paul Ryan, House Ways & Means Chairman Kevin Brady, and Senate Finance Committee Chairman Orin Hatch —  is heavy on promoting the Republican tax cut desires and light when it comes to explaining whose taxes will have to go up to help control costs. There is still a lot unknown about the plan with any specificity. While there is an agreement that the tax cut proposal will have some deficit impact, the plan will partially defray the cost with offsetting tax increases, but how and what will do so remains unclear.

The full blueprint is here and a one-pager is here.

Tax Provisions in the FY 2018 Administation’s Budget Proposal

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In an effort to set the agenda for tax reform later in the 115th Congress, the New Foundation for American Greatness Budget for FY 2018 does contain a number of tax provisions in various sections. The White House Budget provides few specific details about the Administration’s plans for tax reform, noting that details “will be released at a later date.” No Green Book has been issued.

Core principles:

  • Lower individual income tax rates
  • End the Alternative Minimum Tax
  • Expand the standard deduction
  • Protect charitable giving

 

Specific provisions within the FY 2018 Budget include:

  • Exclusion of scholarship and fellowship income — Scholarships and fellowships are excluded from taxable income to the extent they pay for tuition and course-related expenses of the grantee. Similarly, tuition reductions for employees of educational institutions and their families are not included in taxable income.
  • Tax credits and deductions for post-secondary education expenses — The budget would not allow credits for particular activities, investments, or industries.
  • Deductibility of student loan interest — The budget accepts current law’s general rule limiting taxpayers’ ability to deduct non-business interest expenses.
  • Qualified tuition programs — The budget generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income.
  • Exclusion of interest on student-loan bonds —The budget generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income.
  • Exclusion of interest on savings bonds redeemed to finance educational expenses —The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income.
  • Discharge of student loan indebtedness — Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, would be included in taxable income.
  • Education Individual Retirement Accounts (IRA) —The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income.
  • Parental personal exemption for students age 19 or over —Under the baseline tax system, a personal exemption would be allowed for the taxpayer, as well as for the taxpayer’s spouse and dependents who do not claim a personal exemption on their own tax returns. To be considered a dependent, a child would have to be under age 19.
  • Exclusion of employer-provided educational assistance —Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, would be included in taxable income because they represent accretions to wealth that do not materially differ from cash wages.
  • Exclusion of interest on bonds for private nonprofit educational facilities —The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income.
  • Expensing of research and experimentation expenditures (normal tax method) —The baseline tax system would allow a deduction for the cost of producing income. It would require taxpayers to capitalize the costs associated with investments over time to better match the streams of income and associated costs. Research and experimentation (R&E) projects can be viewed as investments because, if successful, their benefits accrue for several years. It is often difficult, however, to identify whether a specific R&E project is successful and, if successful, what its expected life will be. Because of this ambiguity, the reference law baseline tax system would allow expensing of R&E expenditures.
  • Credit for increasing research activities —The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries.
  • Exclusion of employee meals and lodging —Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, would be included in taxable income.

 

Trump Tax Plan Released

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The Trump Administration released its initial tax proposal. There are still lots of questions and items to be negotiated. The rollout came via a press conference held by Treasury Secretary Mnuchin and National Economic Council Director Gary Cohn. The highlights are below.

Personal Tax Reform

  • For individuals, income tax rates would be set at 10%, 25%, and 35%; these are different than Trump’s campaign proposal rates of 12%, 25%, and 33%, which were aligned with those in the House Blueprint on tax reform.
  • The plan calls to double the standard deduction, but repeals all itemized deductions for individuals aside from the mortgage interest and charitable contribution deductions (includes eliminating deduction for state and local taxes).
  • The plan calls for repeal of the Alternative Minimum Tax (AMT) and the estate tax immediately with no phase out.
  • The top capital gains and dividends rate would remain at 20%.
  • The 3.8% net investment income tax, enacted under the Affordable Care Act, would be repealed.
  •   It would provide tax relief for child and dependent care costs.

 

Business Tax Reform:

  • It calls for a 15% business tax rate (which has been very covered in the news).
  • There is a one-time tax on the repatriation of foreign earnings of US companies at an unspecified rate, which Treasury Secretary Steven Mnuchin said would be negotiated with Congress along with other details.
  • For the first time, the Administration called for a switch to a territorial system of taxing foreign earnings. Note, Trump had called for a worldwide system and elimination of deferral in 2015, during the campaign, but had not addressed his preference on the issue for some time. Today’s plan, as outlined by Secretary Mnuchin and during the press briefing, does not address the House border adjustability proposal.
  • Eliminate “tax breaks for special interests”

More Movement Seen on Senior Administration Officials Front

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Late Monday, recently appointed White House National Security Advisor Michael Flynn resigned from his post. The resignation was prompted by what he shared with Vice President Pence about his call with the Russian ambassador to the United States almost immediately following the Presidential election in November.

Flynn had reportedly told Pence that he did not discuss with the ambassador the sanctions levied against Russia by the Obama Administration. The Vice President then publicly supported Flynn’s claim. It was revealed late last week that the subject of the sanctions may have been discussed during the call between Flynn and the ambassador.

On the Cabinet front, Steve Mnuchin, a long-time executive at Goldman Sachs, was confirmed by the Senate mostly along party lines on Monday as the Treasury Secretary. Also on Monday, David Shulkin was confirmed unanimously by the Senate to lead the Department of Veterans Affairs. In 2015, Shulkin was nominated by President Obama and confirmed by the Senate to head the Veterans Health Administration.

A number of other Cabinet confirmations remain, including those for Secretary of Department of Labor and Director of the White House Office of Management and Budget.