Need to Know . . .
- While the proposal is unlikely to move forward in its current form this year or next year, it should serve as a blueprint for future tax reform
- Reform discussions typically rely on rhetoric, but Camp’s proposal picks the winners and losers required for paying for changes
- Manufacturers should keep a close eye on tax extenders discussions
After more than 30 hearings, the creation of numerous subgroups, and a tax reform tour across the country, House Ways and Means Committee Chairman Dave Camp (R-MI) released his comprehensive tax reform plan in February. Under the Joint Committee on Taxation's (JCT) conventional analysis, the proposal would raise about $3 billion in revenue over 10 years. Using a macroeconomic method of analysis, the JCT projects an additional $50 billion to $700 billion in revenue; however, this "dynamic" scoring estimate is unpopular with many Democrats, including new Senate Finance Committee Chairman Ron Wyden (D-OR).
Although there is little chance of a tax reform bill passing this year, the Tax Reform Act of 2014's discussion draft should not be discounted. Camp’s plan reflects a thoughtful approach to comprehensive reform and moves beyond just rhetoric.
Much of the tax reform controversy between Democrats and Republicans concerns revenue. While both sides agree on the need for reform, generally speaking, Republicans prefer revenue-neutral reform whereas Democrats seek additional revenue generation.
Discussions on lowering the tax rates often fail to address details on how to pay for the changes, but Camp's proposal takes on the task of picking winners and losers for tax deductions and credits. Camp has thus highlighted the difficult choices required for any reform.
The plan deserves careful review, particularly because it serves as a comprehensive list of proposals that could be picked off for targeted reform and is something of an à la carte menu of possible revenue raisers to pay for tax reduction and/or spending proposals. With Congress looking to consider the package of expired tax extenders this spring, the list is timely.
Individual Taxation: Proposal Highlights
- Lowering rates and creating two tax brackets of 10% and 25%. An additional surtax of 10% would be imposed on individuals earning $400,000 and married couples earning $450,000, effectively creating a third bracket. This would reduce the number of brackets from seven to three
- Repealing the alternative minimum tax
- Increasing the standard deduction to $11,000 for individuals and $22,000 for married couples
- Eliminating several tax credits, deductions, and other provisions, including: eliminating the deduction for state and local taxes, reducing the mortgage interest deduction and earned income tax credit, modifying charitable deduction and education incentives, and making changes to 401(k) and Roth IRA retirement savings rules
- Modifying how dividends and capital gains are taxed by repealing their preferential rate and instead taxing them as ordinary income, but exempting 40% of such income from taxation. This would effectively result in capital gains and dividends receiving similar treatment as they do today
Business Taxation: Proposal Highlights
- Reducing the top corporate rate to 25%, a change that would be phased in for all corporations through 2019
- Making permanent a modified research and experimentation tax credit. All expenditures would have to be amortized over a five-year period
- Phasing out the Section 199 deduction for domestic production activities
- Repealing the corporate alternative minimum tax
- Repealing the medical device excise tax
- Limiting the net operating loss carryforward or carryback to 90% of a corporation’s taxable income for the year and repealing certain rules
- Repealing bonus depreciation
- Making permanent Section 179 expensing at the 2008-09 levels, allowing small businesses to expense up to $250,000 of qualified investments each year
- Lengthening the cost of recovery by eliminating the Modified Accelerated Cost Recovery System and replacing it with rules similar to the Alternative Depreciation System
- Repealing the last-in, first-out method of inventory accounting
- Repealing many energy tax incentives
- Making changes to non-qualified deferred compensation plans and the limits on the ability of public companies to deduct compensation
Foreign Income Taxation: Proposal Highlights
Many of the significant changes echo Camp’s 2011 discussion draft on international taxation:
- Moving the United States toward a territorial-type system, with a 95% exemption for foreign dividends to a U.S. corporate shareholder who owns at least 10% of the foreign corporation
- Imposing a one-time transitional tax on a corporation’s tax-deferred earnings, with the proceeds of this deemed repatriation going to the Highway Trust Fund
- Creating anti-base erosion provisions by modifying the Subpart F rules
- Making permanent the CFC look-through rules
Chairman Camp deserves credit for releasing his nearly 1,000-page plan. Although it will not move forward in its current form this year—and probably not next year, considering Camp’s upcoming departure from Congress—this proposal is an important step in moving the discussion forward. At some point Congress will have to address the tax code, and this plan should serve as a blueprint.
In the short term, stakeholders need to keep a close eye on tax extenders discussions. Camp has laid out a list of revenue-generating provisions, and Congress might use those items to pay for another temporary extension of the package of tax provisions that expired last year.