NUMBER OF THE WEEK: 201

The number of times Sen. Orrin Hatch (R-UT), the presumed chairman-in-waiting of the Senate Finance Committee, has called for tax reform in press releases on the Ranking Member page of the Senate Finance Committee’s website.

In this week’s Tax Policy Update…. the election’s impacts on tax policy, extenders in the lame-duck, FIRPTA fix lurking, EU “state aid” tax investigations expected to soar, SCOTUS to hear Obamacare tax subsidy challenge.

LEGISLATIVE LANDSCAPE

Election Recap. Last Tuesday’s midterm election results signaled major changes coming to Capitol Hill in 2015. For the first time in eight years, Republicans have won control over both houses of Congress, picking up at least seven seats in the Senate, for a 52-seat majority, with results outstanding in Alaska and Louisiana, where incumbent Senator Mary Landrieu (D) will face a runoff election against Republican challenger Bill Cassidy on Dec. 6.

House Republicans bolstered their majority by as many as 14 seats, although several election results are not yet finalized.

Impacts for Tax Policy. With majorities in both houses of Congress, Republicans have a mandate to show they can govern, and tax policy — or more specifically, tax reform — is a key area that needs more than lip service after years of claiming it as a Republican Party priority.

Although Republicans won’t have the 60 votes needed to prevent a Democratic filibuster, they can still get laws passed if they can recruit between six and eight Democrats to join them (depending on the final outcome of the outstanding elections in Alaska and Louisiana). As a result, moderate Democrats will be very important players in this new dynamic. Think Senators Mark Warner (D-VA), Bill Nelson (D-FL), Tom Carper (D-DE) and Michael Bennett (CO), among others.

Come 2015, Sen. Orrin Hatch (R-UT) will assume the chairmanship of the Senate Finance Committee, and Paul Ryan (R-WI) is widely expected to chair the House Ways & Means Committee. Both men have long been vocal proponents of tax reform (See: “Number of the Week” above), and Ryan recently told reporters on the campaign trail that he intends to work with the Senate Finance Committee to put out a new tax reform draft sometime in 2015.

But a draft doesn’t mean tax reform will happen. Republicans will have nine months to a year at most before attention on the 2016 presidential and congressional elections will supplant any momentum for politically sensitive compromises.

Most people would agree that one year is not enough time to get comprehensive tax reform done.

Could they pass reforms piecemeal? Ryan and Hatch have both said they are against doing corporate tax reform on its own. Other smaller sector-specific reforms are possible, however, like reforming education tax provisions on their own.

A Score for Republicans? The Joint Committee on Taxation (JCT) will also play a role in whether and how tax reform happens. At the outset of the 114th Congress, Paul Ryan will chair JCT, and Hatch will co-chair (the chairmen of Senate Finance and Ways and Means alternate every year). Ryan has already made it clear that he would prefer JCT to use macroeconomic scoring of tax legislation, accounting for anticipated economic growth that results from changes to the tax code. This is commonly referred to as “dynamic scoring.” Ryan and Hatch could have a significant impact on the way tax proposals are scored, and this, in turn, could dramatically change the prospects for “revenue neutral” tax reform.

Lower Hanging Tax Fruit . Other areas of tax policy where compromise is more realistic in the short-term include: repeal of the medical device tax and replacing the Obamacare 30-hour threshold for classification as a full-time employee for purposes of the employer mandate with a 40-hour threshold. These have been priorities for Hatch, and House Speaker John Boehner (R-OH) and soon-to-be Senate Majority Leader Mitch McConnell (R-KY) also alluded to making these changes right out of the gate in a Wall Street Journal op-ed last week.

Members Come, Members Go. On the Senate Finance Committee, Republicans will pick up at least one additional seat, and perhaps two. Roy Blunt (R-MO) is reportedly a top contender to join Senate Finance, as is Dean Heller (R-NV), although Heller is angling for the top spot on the Republican Senatorial Campaign Committee, too. Meanwhile, retiring Democrat Senator Jay Rockefeller (D-WV) will not be replaced with another Democrat, and Sen. Mark Warner, the latest addition to the tax-writing panel, could lose his seat depending on the final ratio of Dems to Republicans after all Senate election results are known.

On the House Ways and Means Committee, Sander Levin (D-MI) is expected to remain Ranking Member and Rep. Chris Van Hollen (D-MD) is expected to fill the seat being vacated by retiring Rep. Allyson Schwartz (D-PA). On the Republican side, Reps. Kristi Noem (R-S.D.) and Pat Meehan (R-Pa.), are widely expected to top the list.

Committee assignments will become more clear after lawmakers hold caucus meetings next week.

In Case You Missed It… You can click here to watch “The Elections: What’s Next for U.S. Tax?,” a Bloomberg BNA and KPMG event held last week featuring major players in federal tax policy, including McGuireWoods partner, Russ Sullivan, who moderated a panel on dynamic scoring.

If it Looks Like a Duck and Talks Like a Duck… Can it Still Pass Extenders? As we noted in last week’s “Lame-Duck Extender-Ganza” report, the long-awaited time to mete out a deal on the 50-plus expired or expiring tax breaks is finally here. Leaders in both houses of Congress are optimistic about reaching a deal before the end of the year. Don’t believe the rumors about a possible one-year (retroactive) extension deal. Some House rank-and-file members might be in favor of it, but more seasoned lawmakers know it would wreak havoc for businesses, individuals, and any political good will Congress might have left. We expect a hybrid package of mostly two-year extensions and a small selection of provisions made permanent — almost certainly without any offsets.

FIRPTA Fix In the Future? Efforts to reduce taxes on foreign investment in U.S. real estate may have new momentum headed into the lame-duck session of Congress, people involved in legislation on the issue told Bloomberg BNA. The Joint Committee on Taxation is analyzing a bill by Reps. Kevin Brady (R-TX) and Joseph Crowley (D-NY) at the request of House Ways and Means Committee Chairman Dave Camp (R-MI); and the sponsors have revised the measure to include budget offsets, which could help secure votes if the bill doesn't ride on some other legislation.

The bill, the Real Estate Investment and Jobs Act (H.R. 5487), would increase from 5 percent to 10 percent the allowable ownership interest in real estate investment trust stock for a taxpayer to claim an exemption from the FIRPTA tax, which is imposed on capital gains from real estate.

REGULATORY WORLD

Leaked Luxembourg Tax Docs Expected to Spur More EU “State Aid” Investigations. A massive cache of tax documents revealing hundreds of multinational corporations’ tax strategies – including many U.S. multi-nationals — in Luxembourg gained global attention last week, ahead of a meeting of the G20 Finance Ministers in Australia set for next weekend. The documents were leaked as part of a project by a consortium of international investigative journalists. The Guardian newspaper said the leaked documents “paint a damning picture of an EU state which is quietly rubber-stamping tax avoidance on an industrial scale.” Read the full story here.

Financial Transaction Tax Inches Ahead. Eleven European Union countries that have pledged to impose a tax on financial transactions have moved closer to finding a compromise on the levy, according to the Wall Street Journal. Finance ministers reported reaching agreement on Nov. 7 on a lower tax rate than was originally proposed but with application to a larger number of financial products than had been discussed in prior meetings. Technical experts now have until December to define what products could be taxed and at what rate, to prepare the ground for further discussion among ministers. Read more here.

IRS Releases Final Rules on E&P Allocation, Tax Attributes. The Internal Revenue Service released joint final rules on Nov. 7 on the distribution of tax attributes and allocation of earnings and profits in reorganizations. The rules represent a big shift, adding both certainty and taking away some of the choices taxpayers previously had in these transactions, according to a Bloomberg BNA analysis. One section of the rules (REG-141268-11) addresses the allocation of earnings and profits in tax-free transfers of property from one corporation to another under tax code Section 312. Another set of rules (REG-131239-13) deals with the definition of an acquiring corporation in a reorganization under tax code Section 381— rules that impact how taxpayers can use the tax attributes in such transactions. The rules are available in their entirety here.

COURTS & LEISURE

SCOTUS To Hear Challenge to Obamacare Subsidies. The U.S. Supreme Court agreed Nov. 7 to consider a challenge to tax subsidies that help more than 4 million people afford health insurance under the Affordable Care Act. The high court’s decision to hear the case comes days before the start of the law’s second open-enrollment season. A decision will come by June. Read more here.

LOOKING AHEAD

Wednesday, November 12

  • The Senate and the House return for the lame-duck legislative session.

Thursday, November 13

  • EU Economic and Financial Affairs Council’s Taxation Workshop 
    Brussels, Belgium 
    The workshop, “Taxing Wealth: Past, Present, and Future,” will gather lead academics and speakers from the IMF, OECD, the European Commission, national administrations and policy-makers to present their work and views in this area. The workshop will comprise a first session on the state of play and the rationale behind the taxation of wealth, including some example of recent experiences by Member States and a second session that looks into specific instruments (e.g. transmission taxes, housing taxes) and the specific challenges associated with them. The two sessions will be followed by a general panel discussion covering both topics. More information can be found here.

Friday, November 14

  • The EU’s Economic and Financial Affairs Council Monthly Meeting 
    Brussels, Belgium 
    The Council will hold its monthly meeting to discuss EU policy including economic policy coordination, economic surveillance, monitoring of Member States' budgetary policy and public finances, the euro, financial markets and capital movements and economic relations with third countries. It decides mainly by qualified majority, in consultation or co-decision with the European Parliament, with the exception of fiscal matters which are decided by unanimity.

Saturday, November 15

  •  G20 Leaders’ Summit 
    11/15-11/16- All Day, Brisbane, Queensland 
    The principal meeting venue will be the Brisbane Convention and Exhibition Centre, and as many as 4,000 delegates and 3,000 media representatives are expected to attend. Finance Ministers from the G20 will also be meeting on Saturday and Sunday – no agenda has been published yet. More information is available here.