NUMBER OF THE WEEK: 120
House Republicans are preparing to hit the campaign trails with another tax-cut package in tow. Ways and Means Chairman Kevin Brady (R-TX) is hoping to provide a public preview of Tax Cuts 2.0 in August; this should give lawmakers enough time to review the package of tax proposals before a floor vote in the fall.
Those who have been tracking Tax Cuts 2.0 already know that the centerpiece of the legislation will focus on making permanent the individual and select business tax cuts enacted in 2017. In addition to permanency, the tax package is also expected to include provisions addressing retirement savings and education benefits. The Tax Policy Update team has heard that lawmakers are interested in consolidating some of the education tax benefits. And according to a Ways and Means staffer, the retirement provisions under consideration do not include “Rothification,” whereby the pre-tax benefits of certain retirement plans would be limited or eliminated.
For fans of tax extenders, Tax Cuts 2.0 will likely disappoint, as some lawmakers have already indicated that they would not be included. Although President Trump would like to use the forthcoming tax package to cut the corporate tax rate further down to 20 percent from the current 21 percent, the inclusion of such a proposal is highly improbable. It just wouldn’t make a good sound bite ahead of the midterms.
Programming Note: Faithful readers of McGuireWoods’ Tax Policy Update may have already noticed that we have gradually expanded the weekly update to examine other non-tax federal issues that are a part of the bigger political conversation in Washington. For example, this year we’ve covered immigration, trade, and appropriations. Some may consider this a form of “mission creep.” We’d like to think of it as an “expansion pack.”
As the Tax Policy Update moves into the latter half of 2018, we will be adding a new section covering other timely federal issues that everyone should care about, whether you’re a tax practitioner or just a casual Washington observer. Worry not — the good stuff that is federal tax policy will always remain up top.
Change is good. Stick with us. As always, thank you for reading.
Et Tu, Brute? Senate Finance Chairman Orrin Hatch (R-UT), one of President Trump’s fiercest defenders in Congress, has become a vocal critic of the administration’s protectionist trade policies. “I’d like to kill ‘em,” Hatch said of the recent tariffs. The chairman is apparently agitated enough to consider moving legislation in committee to limit the president’s authority under Section 232, which allows for the imposition of tariffs on national security grounds.
Although nearly all of the GOP senators are opposed to the recent rounds of tariffs, few have actually been stirred to action. Hatch is not the first member to consider using legislation to rein in the administration’s unpopular trade policies. Sens. Bob Corker (R-TN) and Pat Toomey (R-PA) have been trying to get a vote on a proposal that would subject certain tariffs to congressional approval.
Attempts by Hatch, Corker, and Toomey to curtail the president’s authority on trade would require tough votes in an election year. It remains to be seen whether such bills would garner any real support from congressional Republicans — most are still mindful of the president’s popularity among the base.
Look at This Map. The Trump Administration’s 25-percent tariff on Chinese goods came into effect on July 6. China retaliated immediately with its own set of tariffs, which, interestingly, targeted U.S. goods produced in counties that voted for the president. The Wall Street Journal has a cool little info map showing the trade war’s uneven impact across the United States:
Okay Ladies, Now Let’s Get in (Capital) Formation. Since the passage of the bipartisan Senate banking regulatory relief bill, the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), in May, the House Financial Services Committee has held four markups on a series of bills related to capital formation, small business investment, and disclosure simplification. It’s no secret that Chairman Jeb Hensarling (R-TX) is looking to advance a follow-up bill to S. 2155. Some of the bills that have recently cleared the committee will likely end up in the forthcoming banking package. Hensarling is still working to put a bill together and have it ready for a floor vote before the August recess. Here are some of the measures to watch for:
- H.R. 5877 – the Main Street Growth Act would allow for the registration of venture exchanges.
- H.R. 5970 – the Simplifying Disclosures for Investors Act would direct the SEC to implement rules to simplify the quarterly financial reporting regime.
- H.R. 6139 – the Improving Investment Research for Small and Emerging Issuers Act would require the SEC to conduct a study to evaluate the issues affecting the provision of and reliance upon investment research into small issuers.
The three bills above received unanimous approval from the committee. This week, the House is set to take up additional financial services bills that have cleared the committee — some of these could end up in the legislative package coming this month. Even if Hensarling is able to get his bill through the House, its chances in the Senate are slim without Democratic support and leadership’s commitment to provide floor time.
You Will Comply. The Internal Revenue Service’s (IRS) Large Business and International Division announced five new compliance campaigns:
- Restoration of Sequestered AMT Credit Carryforward – the goal of this campaign is to educate taxpayers on the proper treatment of sequestered AMT credits. According to the IRS, taxpayers may not restore the sequestered amounts to their AMT credit carryforward.
- S Corporation Distributions – taxpayers are expected to properly report certain gains and non-dividend distributions.
- Virtual Currency – taxpayers with unreported virtual currency transactions are urged to correct their returns. However, there is no current plan to establish a voluntary disclosure program to address noncompliance.
- Repatriation via Foreign Triangular Reorganizations – IRS Notice 2016-73 curtails the claimed “tax-free” repatriation of basis and untaxed CFC earnings following the use of certain foreign triangular reorganization transactions. The goal of the campaign is to identify and challenge these transactions by educating and assisting examination teams in audits of these repatriations.
- Section 965 Transition Tax – the IRS aims to raise awareness of filing and payment obligations under this provision.
I, Robot. The IRS is looking to artificial intelligence (AI) to guard against cybersecurity threats, according to a June 27 request for information. The agency wants an AI platform that can utilize near real-time data to monitor, identify, and analyze various cyber threats across networks. The request for information will allow the IRS to better assess the technologies that are available in the marketplace, helping to guide the agency in any future acquisitions. Public comments are due July 26.
Many thanks to McGuireWoods’ summer interns, Megan Plombon, Rebecca Harbison, and Derek Wu, for their contributions below!
Brady Praises Tax Law, Worries About Tariffs. (By Megan Plombon) – On June 26, The Washington Post interviewed policymakers, business leaders, and policy experts concerning the effects that the GOP tax reform has had on the American people in the first six months. House Ways and Means Chairman Kevin Brady (R-TX) was among the featured speakers, praising the tax law’s positive impact on the economy. Despite his general optimism about tax reform, Brady expressed his concerns over recent trade policies that have created uncertainty among local manufacturers and energy industries. He proposed an exemption and exclusion process for fairly-traded products to protect local small business manufacturers unduly hurt by the tariffs.
Regarding the estimated timeline for Tax Cuts 2.0, Brady said that his committee is aiming to circulate a draft to House Republicans after the July 4th recess.
Senate Banking Talks Corporate Governance. (By Rebecca Harbison) – On June 28, the Senate Committee on Banking Committee conducted a hearing on corporate governance. The committee heard from witnesses that represented a range of businesses interests regarding recent legislation proposed by the committee. The hearing examined the various issues that proxy advisory firms pose to corporate governance — specifically, the lack of transparency and conflicts of interest. The witnesses generally agreed that there should be some regulation for proxy firms. However, the witnesses disagreed on the degree to which they should be regulated and whether it should be done through existing rules or new legislation.
In addition, the witnesses were questioned on the need for more disclosure of short positions and the creation of a FINRA relief fund for cheated investors. The witnesses also discussed legislation on disclosing decisions relating to cybersecurity on their proxies and the gap of time a firm learns of non-public information. The witnesses mostly disagreed on the scope of regulation necessary for these various aspects of corporate governance. A high-level summary of the hearing is available here.
Drama-Free Confirmation Hearing for Rettig. (By Derek Wu) – On June 28, The Senate Finance Committee held a hearing to consider the nomination of Charles P. Rettig to be commissioner of the Internal Revenue Service.
Republican members of the panel used their questions to identify necessary reforms and modernizations of IRS systems and procedures they would like Mr. Rettig, if appointed, to explore, all while commending his willingness to serve. While many Democratic members did encourage Mr. Rettig to publicly affirm his independence from the administration and to elaborate on his management experience, no direct attacks were made on the nominee’s character or qualifications. Additionally, no public objections were made with regard to the nominee’s confirmation.
Republican members also voiced their support for tax reform legislation, implemented a few months ago, and expressed their hope that Mr. Rettig would oversee the successful implementation of its provisions. On the other hand, Democratic members criticized the reform bill for complicating the tax code and creating widespread confusion amongst taxpayers. They urged Mr. Rettig to ensure that the IRS would provide clear and timely guidance to the nation’s lower income taxpayers.
Notably, Mr. Rettig’s lack of government experience and in-depth knowledge of IRS operations was on display at various moments during the hearing. Rather than provide detailed answers as to how he would address the various problems plaguing the agency, the nominee’s responses were generally just affirmations that issues existed. Despite his inability to outline more specific reform strategies he would explore as commissioner, the overall atmosphere of the hearing along with the tone in which lawmakers questioned the witness suggest that Mr. Rettig will be confirmed without significant difficulties. A high-level summary of the hearing is available here.
- CFPB Deputy Director Leandra English announced that she would be stepping down the week of July 9 in view of Kathy Kraninger’s nomination to be the next director of the bureau. English unsuccessfully challenged the directorship of Mick Mulvaney after the departure of former Director Richard Cordray. Kraninger’s confirmation hearing is expected to take place on July 19 before the Senate Banking Committee.
- The first round of U.S. tariffs on $34 billion of Chinese goods went into effect on July 6. China retaliated immediately with its own set of tariffs on select U.S. products, including soybeans, dairy, and meat products. The Trump Administration may add another $16 billion worth of tariffs in the coming weeks.
- After months of battling a series of ethical investigations, Scott Pruitt has finally stepped down as EPA administrator. Deputy Administrator Andrew Wheeler is expected to take over as acting administrator on July 9.
- FERC Commissioner Rob Powelson announced that he would step down in August. Powelson is headed for the National Association of Water Companies, where he will serve as president and CEO.
- House appropriators are putting together the next “minibus” spending package for floor action the week of July 16. The package is expected to include the FY 2019 Financial Services bill and the Interior-Environment bill.
In the Queue
Senate Finance Committee
Hearing to examine the importance of paid family leave for working families.
House Small Business Committee
Hearing on “Innovation Nation: How Small Businesses in the Digital Technology Industry Use Intellectual Property.”
House Energy and Commerce Committee
Subcommittee hearing on “Protecting Customer Proprietary Network Information in the Internet Age.”
House Financial Services Committee
Markup of a series of bills: Expanding Investment in Small Businesses Act; Enhancing Multi-Class Stock Disclosures Act; Middle-Market IPO Underwriting Fee Act; Promoting Transparent Standards for Corporate Insiders Act; Investment Adviser Regulatory Flexibility Improvement Act; National Senior Investor Initiative Act.
Senate Banking Committee
Hearing on “An Overview of Credit Bureaus and the Fair Credit Reporting Act.”
House Financial Services Committee
Full committee hearing on the annual testimony of the secretary of the Treasury on the state of the international financial system.
House Financial Services Committee
Subcommittee hearing on “Countering the Financial Networks of Weapons Proliferation.”
Meeting to discuss priorities, agenda, and current initiatives to reform the London Interbank Offered Rate, including the development and adoption of alternative interest rate benchmarks and the effect of such reform on the derivatives markets.
Bipartisan Policy Center
Join BPC and Results for America for a discussion of issues related to improving evaluation and oversight of federal tax expenditures. JCT Chief of Staff Tom Barthold will be among the speakers.
Discussion on whether Fannie Mae and Freddie Mac should be shrinking or expanding their activities.