By Amber Thomas, Vice President – Marketing, Communications & Advocacy at AMT – The Association For Manufacturing Technology.
Since the election, there has been increased commentary on the prospects for comprehensive tax reform in the 115th Congress. The election of President Trump and a Republican majority in Congress represent the first real opportunity for comprehensive tax reform in 30 years, but dissent within the party and a full agenda may doom the effort.
Much of the groundwork on the House proposal is done. The House Ways & Means committee, led by Chairman Kevin Brady (R-TX), spent the last two years researching, holding hearings, and soliciting comments for a blueprint that is now part of the Republican “A Better Way” plan introduced by House Speaker Paul Ryan (R-WI) last Congress. Ryan, who chaired Ways & Means before Brady, played a major role in the reform plan.
President Trump is expected to send his plan to Congress for consideration, but few details are currently available. The President has voiced conflicting messages on his support for major provisions of the House plan. Senate leaders, led by Finance Committee Chairman, have raised their own concerns with the plan and are considering drafting their own proposal. These differences must be resolved to move forward.
Here are the details we have so far:
Rates: It’s widely known that the United States has the highest corporate tax rate in the industrialized world, and the third highest in the entire world. A major aspect of every proposal is lower rates. The House Blueprint would reduce the federal corporate rate to 20 percent. It would also create a new 25 percent maximum rate for pass-through entities. President Trump would lower taxes to 15 percent to all businesses. It’s unclear if businesses would be required to incorporate to be eligible for the lower 15 percent rate.
AMT & Death Tax: The corporate alternative minimum tax and estate tax would be repealed.
Expensing: Under the Blueprint, the cost of capital investment would be fully and immediately expensed rather than depreciated over time. It would be automatic and available for all business investment (including buildings, tangible and intangible assets). The deduction for net interest expense would be disallowed. The intent is to move away from an income system to one based on consumption.
Tax Credits and Deductions: With the exception of the R&D tax credit, just about every deduction and tax credit would be repealed. That includes the deduction on interest as a business expense.
Repatriation: Currently, the United States is the only country among the G-7 nations that has a worldwide system of taxation. Under a worldwide system, a corporation headquartered in the United States pays taxes on all its income, regardless of where it’s earned. The foreign earnings are taxed when they are “repatriated” by bringing the income back to the United States. Under a territorial system, the United States would tax U.S. income and would exempt foreign income. This would allow U.S. companies to play on a more level playing field.
The House plan would adopt a territorial system by first levying an immediate 8.75 percent on existing offshore earnings held in cash/cash equivalents and taxing other earnings at 3.5 percent, both payable over eight years. From then on, there would be a 100 percent exemption on earning from foreign subsidiaries. The President has said he would impose a one-time repatriation tax of 10 percent payable over 10 years and keep the worldwide system of taxation.
Border Adjustment: The border adjustment included in the House plan is causing the most contention. The Blueprint would apply a border adjustment that would rebate tax on U.S. exports and tax imports, converting the current business income tax to a destination-based cash flow tax. The adjustment is intended to be consistent with the border adjustments applied by other countries. The President has made conflicting statements on border adjustability so it remains to be seen if an adjustment is included in the proposal he sends to congress. Meanwhile, some in the Senate leadership have voiced their opposition to the border adjustment. Right now, there is no formal proposal in the Senate.
Elimination of the border adjustment is a non-starter in the House. Without it, lawmakers have no obvious way to pay for big business tax rate reductions.
Next steps: House tax writers are still soliciting input from stakeholders. Your participation in the process is essential to making Congress aware of the varying impacts on companies in different parts of the manufacturing supply chain. Contact the Ways & Means Committee at https://waysandmeans.house.gov/blueprint-feedback/ to get involved.