Tax Policy Group February 15, 2018 Review of the FY 2019 Budget Request On Feb. 12, President Trump submitted his FY 2019 budget request* (“Budget”) to Congress. The 160-page document opens with a message from the president, in which he highlights some of the administration’s successes from year one: a stronger economy, robust job creation, and the addition of nearly $5 trillion in new wealth to the stock market. The Budget intends to build upon this economic foundation to deliver “safety, prosperity, and security” to the American people. The top three priorities in the Budget are (1) ending wasteful spending; (2) expanding economic growth and opportunity; and (3) strengthening U.S. national security. The president has also included the construction of a border wall near the top of the to-do list. Even though congressional appropriators will toss the president’s Budget aside when it’s time to work on their own FY 2019 budget blueprint and spending bills, there are still some important numbers and policy proposals worth noting. In the sections below, McGuireWoods’ Tax Policy Update team has flagged a number of provisions that may be of interest to our clients. Yes, this Budget isn’t going anywhere, but some of these provisions may resurface as potential offsets down the road. *All FY 2019 Budget documents are available here. Top Numbers (figures are not exact due to rounding) FY 2019 Total Receipts: $3.42 trillion FY 2019 Total Spending: $4.41 trillion FY 2019 Deficit: $984 billion Unlike previous Republican budget requests, the FY 2019 proposal does not attempt to balance the budget, which has invited the ire of House Budget Chairman Steve Womack (R-AR). However, the Budget does toe the party line when it comes to cutting government spending. The Budget’s policy proposals would reduce the deficit by $4.45 trillion in 10 years. Most of the reduction comes from the administration’s projected economic growth and cuts to both mandatory and discretionary spending ($1.8 trillion and $1.5 trillion over 10 years, respectively). Like last year’s budget request, the rosy economic growth assumptions and unrealistic cuts to non-defense discretionary spending in the Budget have attracted criticisms from lawmakers, economists, and public policy think tanks in Washington. Overview of Select Provisions Because of the enactment of the GOP tax cut bill in 2017, there aren’t many revenue proposals in the Budget this year. As a result, for the second year in a row, the Treasury Department did not issue a “Greenbook” with detailed explanations of the tax proposals in the president’s budget request. Interestingly, the Committee for a Responsible Federal Budget noticed that the FY 2019 Budget’s baseline assumes that the individual tax provisions in the new tax law would be extended beyond 2025 at a cost of $600 billion. Tax Administration Deficit Reducers • Implement tax enforcement program integrity cap adjustment (- $44 billion) • Require SSN for Child Tax Credit and Earned Income Tax Credit (-$10 billion) • Provide more flexible authority for the IRS to address correctable errors (-$678 million) • Increase oversight of paid tax return preparers (- $457 million) GOOD TO KNOW The president requests $12.3 billion for the Treasury Department (a 3-percent decrease from 2017 level). The Internal Revenue Service (IRS) would receive $11.1 billion — most of the money would be put towards IT upgrades. And tucked away in the appendix is an additional $362 million for the agency’s program integrity activities. The administration’s request for the IRS reflects a 6 percent decrease from 2017 levels. Senate Finance Chairman Orrin Hatch has said that the funding cut is a mistake given that the agency will do most of the implementation work for the new tax law. Energy & Environment Deficit Reducers • Reauthorize the Oil Spill Liability Trust Fund excise tax (- $5 billion) • Restart Nuclear Waste Fund Fee in 2021 (- $3 billion) • Repeal enhanced geothermal payments to counties (- $40 million) Healthcare Deficit Boosters • Require Medicare Part D plans to apply a substantial portion of rebates at point of sale (+$42 billion) • Give Medicare beneficiaries with high deductible health plans the option to make tax deductible contributions to HSAs and MSAs (+$11 billion) • Establish a beneficiary out-of-pocket maximum in the Medicare Part D catastrophic phase (+$7 billion) Deficit Reducers • Repeal and replace Obamacare (- $675 billion) • Modify payments to hospitals for uncompensated care (- $69 billion) GOOD TO KNOW The Department of Energy’s funding request comes in at $31 billion, which is a slight increase from the current $30 billion. Part of that increase goes towards the Fossil Energy R&D program, which would receive $502 million for FY 2019. The Budget eliminates funding for the Advanced Research Projects Agency-Energy (ARPA-E) and makes significant cuts to funding for renewable energy research. Not surprisingly, the Environmental Protection Agency (EPA) has taken the biggest hit in the administration’s push to cut government spending. The EPA’s funding request sits at $6.1 billion — a 25 percent cut. Had Congress not increased the spending caps in the bipartisan budget deal, the agency would have faced a 34 percent cut. • Exclude manufacturer discounts from the calculation of beneficiary out-of-pocket costs in the Medicare Part D coverage gap (- $47 billion) • Continue Medicaid DSH allotment reductions (- $19 billion) • Increase Medicare Part D plan formulary flexibility (- $5 billion) • Test allowing State Medicaid programs to negotiate prices directly with drug manufacturers and set formulary for coverage (- $85 million) • Reform title IV-E adoption assistance savings provision (no cost estimate) • Allow for federal/state coordinated review of dual eligible Special Needs Plan marketing materials (no cost estimate) • Improve appeals notifications for dually eligible individuals in Integrated Health Plans (no cost estimate) GOOD TO KNOW The Budget requests $68 billion for the Department of Health and Human Services – the addendum to the request would provide an additional $27 billion. Part of the funding boost goes to the fight against the opioid epidemic. The Budget retains the Obamacare repeal-and-replace effort, throwing support behind the Graham-Cassidy-Heller-Johnson proposal and focusing on high-quality value spending while modernizing Medicaid. The Budget also places a spotlight on the need to reform the drug pricing and payment system with plans to speed development of generics to market and to make some generic drugs free, but it proposes no real action to change the current system of how drugs are delivered to consumers from the manufacturers. Financial Services Deficit Boosters • Establish National Flood Insurance Program affordability assistance (+$434 million) Deficit Reducers • Increase and extend G-fees charged by GSEs (-$25 billion) • Improve PBGC solvency (-$16 billion) • Restructure CFPB (-$6 billion) • Eliminate SEC Reserve Fund (-$408 million) • Reform FSOC and Office of Financial Research (-$107 million) GOOD TO KNOW The Budget shows that the administration has no plans to slow down its aggressive deregulatory agenda. The Consumer Financial Protection Bureau (CFPB) remains a favorite target. The Budget caps the agency’s budget at $485 million – that’s about $145 million less than the amount requested for FY 2018 when former Director Richard Cordray was in charge. The Budget also seeks to bring the watchdog agency under the regular congressional appropriations process. All this is consistent with the administration’s desire to kneecap and rein in the regulatory reach of the bureau. Transportation & Infrastructure Deficit Boosters • Reform Air Traffic Control (+$125 billion) • Encourage increased state, local, and private infrastructure by awarding competitive incentive grants (+$100 billion) • Address need for investment in rural infrastructure (+$50 billion) • Support transformative projects (+$20 billion) • Expand existing federal infrastructure credit programs (+$14 billion) • Establish a Federal Capital Revolving fund (+$9 billion) • Establish a Public Lands Infrastructure Fund (+$7 billion) • Expand PABs (+$6 billion) • Reform Essential Air Service (+71 million) ### GOOD TO KNOW While the Budget makes big cuts elsewhere in the federal government, it sets about $200 billion aside for the administration’s ambitious $1.5 trillion infrastructure plan unveiled on Feb. 12. It is still unclear where the $200 billion would come from, especially since there’s little appetite among congressional Republicans to raise the federal gas tax. However, in a meeting with lawmakers on Feb. 14, the president appeared to have endorsed a 25-cent gas tax increase, despite the fact his legislative affairs director, Marc Short, has said that the administration is not going to raise taxes to pay for the infrastructure plan. If Trump is serious about increasing the gas tax, the revenue will go a long way to help pay for country’s infrastructure upgrades. McGuireWoods Tax Policy Group: Russell Sullivan Partner email@example.com Rosemary Becchi Partner firstname.lastname@example.org Harold Hancock Partner email@example.com Charlie Iovino Vice President firstname.lastname@example.org Lai King Lam Assistant Vice President email@example.com Radha Mohan Assistant Vice President firstname.lastname@example.org Anne C. Starke Research Associate email@example.com Daniel Chung Associate firstname.lastname@example.org McGuireWoods marketing communications are intended to provide information of general interest to the public. 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