In a recent Tax Notes letter to the editor, Chris Cushing, Washington, D.C.-based federal and state policy team leader at Nelson Mullins, describes and analyzes the perfect storm brewing in Washington right now as legislators and Treasury officials prepare for important reforms to the U.S. Tax Code. The article is co-authored by Michael DiRoma, former deputy assistant secretary of the Treasury for legislative affairs and co-founder of DiRoma Eck & Co., A Washington Advisory.
Cushing and DiRoma note that Treasury Secretary Janet Yellen has assembled a talented tax team, and when combined with smart, reform-minded Democrats on Capitol Hill and a legislative calendar that is quickly evaporating, business executives should reconsider their level of concern when assessing the administration's efforts to reform the tax code. "The details of these more technical tax policy items matter," write Cushing and DiRoma, "and so the time to give input and address potential negative outcomes is now."
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The impending confirmation of Lily Batchelder, President Biden’s nominee for Treasury’s next assistant secretary for tax policy, should cause business executives to reassess their level of concern when it comes to the administration’s efforts to reform the tax code. Until now, many executives have taken a wait-and-see approach given Democrats’ slim hold on Congress and the difficulty of passing tax reform legislation in the best of times. But Treasury Secretary Janet Yellen has quickly assembled a team of highly accomplished and motivated professionals to enact her tax policy agenda. Batchelder, who will join Treasury from the faculty of the New York University School of Law, previously served as chief tax counsel to the chair of the Senate Finance Committee and worked in the Obama administration as deputy director of the National Economic Council. She knows the machinery of government well. Rebecca Kysar, Kimberly A. Clausing, Itai Grinberg, and other recent appointees joined Yellen’s tax team from academia, where their research insights have been swiftly translated into actionable Treasury proposals. In short, Treasury has hit the ground running.
Democrats throughout Washington are eager to leave their mark on the tax code in the aftermath of their strenuous opposition to the Republican-led Tax Cuts and Jobs Act. For many years, the two parties had attempted to cooperate on tax reform. Modeling the successful reform efforts of 1986, Batchelder’s former boss, then-Finance Committee Chair Max Baucus and then-House Ways and Means Committee Chair Dave Camp released proposal after proposal demonstrating potential avenues for bipartisan tax reform. But while many good ideas came to the fore during President Obama’s second term, the idea of broadening the base in ways that would allow Congress to lower tax rates predictably riled certain industries and delayed the reforms that everyone claimed to desire. It took a Republican electoral sweep in 2016 to propel tax reform to the top of Washington’s to-do list. Unfortunately, competing political agendas left little room for bipartisanship and tax reform became a one-party affair. Democrats are eager to take their turn at bat before the midterm elections draw near.
Combine the legislative calendar with a smart team at Treasury and reform-minded, competent tax experts on the Democratic side of the aisle in Congress, and you have a recipe for making 2021 a consequential year for tax policy in the United States and around the globe. Not taking these efforts as genuine would be a mistake. Moreover, succumbing to the distraction of the corporate tax rate itself, in the midst of so much other noise involving things like a global minimum tax, means that some of the more complicated items — such as an increased rate on global intangible low-taxed income or the elimination of the foreign-derived intangible income deduction — could become law while the focus of rank and file Democrats is elsewhere. If moderate Democrats publicly take wins on the corporate rate (increasing it to 25 percent rather than 28, for example) or on the SALT deduction cap (perhaps a modest but notable increase), the White House and Treasury may have their way on the more complex, technical, base-broadening changes deemed crucial to Biden’s agenda.
The details of these more technical tax policy items matter, and so the time to give input and address potential negative outcomes is now. Legislative staff meet with interested parties on every conceivable topic, and as they shape the imminent reconciliation package, they need to hear about how reforms would affect U.S. companies and their employees: what the impact might be on their ability to compete globally, what a point or two change in rates would do to productivity, how a minimum tax might affect research and development, or what foreign parents depend on in terms of certainty and access to the U.S. market. Treasury officials will also benefit from proper input from the business community. Accepting the reality of the 2020 election and deferring to the stated goals of those in power, it is in everyone’s best interest to give Treasury and Congress information and analysis that minimizes harm to individual businesses and the economy writ large.
Consider, for example, the potential impact of the administration’s GILTI and stopping harmful inversions and ending low-tax developments (SHIELD) proposals on investment funds, pension funds, and sovereign wealth funds. As proposed, U.S. subsidiaries would lose deductions for payments to related parties if those payments are not subject to an effective tax rate of at least 15 percent. While the actual outcome of the OECD negotiations surrounding a global minimum tax will not be known for some time, query whether typical investment fund jurisdictions, both offshore and onshore, would satisfy this 15 percent rate. Treasury’s proposal would provide authority for the Secretary to exempt payments to investment funds, pension funds, international organizations, or non-profit entities, but it is unclear how these exemptions would be articulated or how this proposal would apply to blocker corporations, other intermediate investment entities, or investment entities that are integrated with an active trade or business. The investment community may need to participate more actively in shaping the design of the SHIELD proposal and potential exemptions. For the moment, policymakers are all ears.