After more than a year since the release of the House Tax Reform Blueprint, President Trump and the Big 6 tax negotiators released a framework today for drafting tax legislation in Congress. The Big 6 - House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, Treasury Secretary Steve Mnuchin, Finance Committee Chairman Orrin Hatch, Ways & Means Chairman Kevin Brady, and White House Economic Advisor Gary Cohn - spent the last few months negotiating a common position between the Executive and Legislative Branches to give the House Ways & Means Committee and Senate Finance Committee guidance on drafting legislative text for tax reform.

The framework's goals are to simplify the tax code, raise paychecks, create jobs, and repatriate funds locked offshore by deferral. Its changes to the tax code for individuals include repeal of the alternative minimum tax, the estate tax, and the generation skipping tax. It also provides a 25% rate for business income of small and family-owned sole proprietorships, partnerships and S corporations. One theme in the framework is that the complex details are left to Congress – for the 25% rate, "the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal rate."

The corporate rate is set at 20%, and the corporate alternative minimum tax is repealed too. Starting today, September 27, 2017, business investments in depreciable assets other than structures can be expensed immediately, for at least five years. Interest expense, however, will be partially limited. No further information is given, although a limitation of 30% of EBITDA was thought to be under consideration. Chairman Brady has said that existing debt will be grandfathered, and special exceptions made for certain industries, possibly including lending and agriculture. The framework states that "the Committees may also consider methods to reduce the double taxation of corporate earnings" without specifying any details. This may be a reference to Senate Finance Committee Chairman Hatch's dividends paid deduction proposal.

Except for preserving the R&D credit and low income housing credit, the framework says that business tax credits should be repealed. But it gives the tax committees leeway to decide whether budgetary limitations allow other tax credits to be maintained. The section 199 manufacturing deduction, along with other special exclusions and deductions, will be repealed in exchange for the 20% rate. The framework leaves for later the rules affecting specific industries and sectors, including energy and real estate, and states that their rules will be modernized to reflect economic reality and prevent tax avoidance.

The framework provides for a 100% exemption for dividends paid from foreign subsidiaries in which a US parent owns at least a 10% stake. However, accumulated foreign earnings are subject to current taxation at an unspecified rate, paid over a period of years, and with a lower rate for illiquid assets. The tax committees are charged with drafting anti-base erosion rules and rules "leveling the playing field" between US companies and foreign headquartered companies.

In addition to filling in the details, other hurdles remain. During a recent hearing Chairman Hatch stated that the Finance Committee will work its will in drafting legislation and will not be bound by the terms of the framework. It also remains to be seen whether the tax committee membership and rank and file members of both houses of Congress will support legislation following the framework's ideas. To consider the committees' tax bills under the expedited process called Budget Reconciliation, both Houses of Congress will also have to pass a Budget Resolution. That's a time-consuming process that permits the minority party in the Senate to force politically difficult votes. Finally, legislation based on the conceptual framework will need to be scored by the Joint Committee on Taxation to determine how it will impact the federal budget deficit. It's likely that many of the provisions will be phased in over time to balance the scoring table and reduce the revenue loss.