On June 27, Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) released a Dear Colleague letter laying out a beginning framework for comprehensive business and individual tax reform.
The Dear Colleague indicates that the Committee will begin deliberations on tax reform with a “blank slate” approach (i.e., assuming all tax expenditures will be eliminated) and requests Senators provide to the Committee by July 26 detailed proposals for those tax expenditures and other provisions that should be maintained, repealed or added to the Code.
high bar for retention of tax preferences
While the Committee acknowledges that a “blank slate” is a starting point, rather than an end point, this approach demonstrates that the Committee leadership is setting a high bar for retaining tax preferences in the Code.
In the letter, Chairman Baucus and Ranking Member Hatch set forth their rationale for allowing the inclusion of an expenditure in the Code. Specifically, the letter states, in part:
To make sure that we clear out all the unproductive provisions and simplify in tax reform, we plan to operate from an assumption that all special provisions are out unless there is clear evidence that they: (1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives.
Today, we write to ask you to formally submit legislative language or detailed proposals for what tax expenditures meet these tests and should be included in a reformed tax code, as well as other provisions that should be added, repealed or reformed as part of tax reform. In order to give your proposals full consideration as we work to craft a bill, we request these submissions by July 26, 2013. We will give special attention to proposals that are bipartisan.
Commitment to fundamental Tax Reform
This is the latest is a series of steps that both Chairman Baucus and House Ways and Means Committee Chairman Dave Camp (R-MI) have taken in preparation for moving large-scale tax reform. Chairman Baucus has announced that he will not seek reelection in 2014, and Chairman Camp will be term-limited out of his Chairmanship in 2014; their public and private statements make it clear that both are committed to enacting comprehensive tax reform legislation within that timeframe.
Earlier this year, both the Senate Finance and House Ways and Means Committees forged ahead on options for tax reform, convening closed-door sessions that produced options papers on the Senate side and structuring working groups for public input on the House side. Over the next few months, we expect both Committees to continue to seek input from their Committee membership on a legislative product.
We further expect both Chairmen, and a number of senior Congressional leaders, to continue to look for ways to accelerate the tax reform process. For example, Chairman Camp and many House Republicans have indicated that legislation to raise the nation’s debt limit, which is necessary later this year, should include binding instructions compelling a tax reform process to occur in a time certain, concluding in 2014.
Given current dynamics, it is imperative to plan as though tax reform may occur in the near term, even though, at this stage, the timing of comprehensive reform remains uncertain. If a Senator or Senators do not request the retention of a provision on the tax-expenditure list, there is an increased risk that proponents of the provision will face a more difficult battle in the future.
Similarly, if Senators do not demonstrate support for changes that have been discussed and that certain taxpayers would like to see enacted, such as specific changes in the taxation of the foreign investment of domestic corporations, the chances of achieving those changes may be diminished.
Senators will have a choice of whether to submit one letter or multiple letters. While Senator submissions will not be made public by the Committee, individual Senators may choose to release copies of their requests.
The Joint Committee on Taxation’s most recent publication on tax expenditures can be found here. (The publication lists tax expenditures by category on Pages 30 through 40.) This is not an exclusive list. As the publication notes, the list does not include tax provisions with a low expenditure cost in the estimation window and some provisions that are difficult to estimate. Neither does it include items that are not formally classified by the Joint Committee on Taxation as “expenditures,” including certain ordinary and necessary business expenses such as interest.
The following list includes some of the most significant tax expenditures, many of which will be scrutinized in fundamental reform. (Interested parties should consult the Joint Committee on Taxation publication for a full list.)
- Preferential rates on long-term capital gains and qualifying dividend income
- Deferral of active income of controlled foreign corporations (CFCs)
- Depreciation of equipment in excess of alternative depreciation system
- Research and development credit/expensing of research and experimental expenditures
- Deduction for income attributable to domestic production activities
- Deductibility of home-mortgage and student-loan interest
- Exclusion of interest on public purpose State and local government debts
- Credit for low-income housing
- Inventory methods and valuation (LIFO accounting)
- Deferral of gain on like-kind exchanges
- Exclusion of investment income on life insurance and annuity contracts
- Deductions for charitable contributions
- Exclusion of interest on State and local government qualified private activity bonds for student loans
- Exclusion of tax on earning of qualified tuition programs
- Exclusion of benefits provided under cafeteria plans
- Exclusion of employer contributions for health care, health insurance premiums, and long-term care insurance premiums
- Deduction for health insurance premiums and long-term care insurance premiums by self-employed
- Net exclusion of pension contributions and earnings
- Individual retirement arrangements
Patton Boggs believes it is important to voice support for the tax expenditures affecting your company.