In various forums over the past few days, House Ways and Means Committee Chairman Kevin Brady (R-TX) has discussed his tax priorities over the coming year and his vision and timing generally for tax reform.

In Brady’s view, tax reform is being pursued in stages.  The first stage, now completed, was the enactment in December 2015 of the PATH Act, the legislation that made a number of expired tax provisions permanent, while extending others for five years and the rest for two.   The PATH Act set the foundation for tax reform by creating a more realistic baseline for the tax system (by making some of the larger extenders permanent, the baseline now reflects the reality that less revenues would have raised over the ten-year budget cycle, given that most of the provisions would likely have been periodically extended), while giving the tax writers the ability to trade some of the revenues now in the baseline that fund the extenders for lower rates.

The second stage of tax reform, which the Chairman intends to pursue legislatively this year, concerns international tax. This stage addresses growing concerns about the potential acceleration of inversions – when American companies shift their domiciles overseas in order to remove their future foreign earnings from the US system of worldwide taxation and to take advantage of lower corporate rates in foreign jurisdictions.  In that regard, Chairman Brady has restarted the international tax reform discussions that were under way last fall with the now Speaker of the House, Paul Ryan (R-WI) and Senators Charles Schumer (D-NY) and Rob Portman (R-OH).   Chairman Brady has pointed out that there is a great deal of bipartisan common ground on international tax reform within the Congress and with the Administration.  Key issues will involve moving to a territorial system, which would allow future foreign earnings to come back to the US at low rates,  a one-time tax on accumulated foreign profits to bring an end to the current deferral system, the establishment of an innovation box to encourage the development and commercialization of high-tech products in the US, and the adoption of base erosion provisions to prevent US companies from moving operations to extreme low-tax jurisdictions.

The chairman shares the view of many of his colleagues on both sides of the aisle that an agreement cannot be reached with the current Administration on a reduction in individual tax rates and, as a result, comprehensive tax reform will have to wait until 2017.  However, the proposals to reform the international tax system do not involve rate reductions. As a result, a consensus is possible with the Administration.  At the same time, the tax writers will work intensively this year to lay the groundwork for comprehensive tax reform, the third stage of the process of creating a new tax code.

Two other comments by Chairman Brady are notable.  Last fall, a dispute arose in Congress over the use of funds collected as a result of a one-time tax on accumulated foreign profits. Senator Schumer insisted that every penny so raised be used to fund infrastructure, while many Republicans would have preferred using the funds to pay down the rates. The dispute ultimately held up progress on international tax reform. The chairman suggested a potential way out of the dispute, stating,  “I’m convinced if we start trying to figure out how to spend the money rather than getting the policy right we’re making a mistake,” implying that a compromise could emerge.  Moreover, last fall, Congress adopted a transportation bill that otherwise funds infrastructure for three years, and the PATH Act gives the tax writers other revenues to buy down lower rates, potentially making a compromise on these revenues possible. 

The other notable comment by the Chairman relates to the corporate rate.  Although the target has been to reduce the rate to 25 percent, Chairman Brady now contemplates reducing the rate to “under 20 percent,” a recognition that while the US has failed to enact tax reform, its trading partners have brought their rates down even further than originally contemplated, and a 25 percent rate may no longer be competitive.

Congress cannot change the tax laws without the President’s support.  Republican members of Congress, who are meeting this week to discuss their agenda, have concluded that while comprehensive reform should be debated and drafted this year for enactment under the next President, international reform should not wait any longer. They are hoping President Barack Obama will make the adoption of provisions that stem the flight of American companies overseas one of his legacy issues.   Chairman Brady intends to move forward with the process of completing an international reform plan in order to give the President the opportunity to do just that.