Tax reform

Congress Continues Down the Road to Comprehensive Tax Reform

For some time now, NAIOP has been consistent in advising its membership that Congress would pursue comprehensive tax reform, despite the political hurdles that such an endeavor faces. With the unpredictability (some would say lunacy) of the presidential race as it currently stands, it is easy to think that nothing is happening until this year’s elections are settled. In a narrow sense, it is true that nobody predicts legislation will actually be passed and signed into law by the current president. But the underlying forces necessitating change to our tax system have not gone away, and in the meantime, Congress continues to take steps down the road toward a fundamental rewrite of our tax code.

Why is tax reform so high on the public policy agenda for many in Congress? A major reason is that our corporate tax rate has become an albatross around the necks of American companies trying to compete overseas. Since 1986, the last time comprehensive tax reform was enacted in the U.S., other countries have modernized their international tax rules and reduced corporate tax rates, while tax policy in our country has remained largely unchanged when it comes to the impact it has on the ability of our companies to compete internationally. Despite the partisan nature of tax debates, there is a bipartisan consensus that our outdated tax code is costing us jobs. In short, America’s largest corporations are an important force behind the tax reform push.

In December of last year, Congress took action to make comprehensive tax reform more achievable by passing the “Protecting Americans from Tax Hikes Act” (known as the PATH Act), which made some temporary provisions of the tax code – known as “tax extenders” – permanent, rather than allowing them to expire or maintaining them as temporary. House Ways & Means Committee Chairman Kevin Brady, the chief architect of tax legislation in the House of Representatives, alluded to this when he stated that the PATH Act was “an important step forward on the path to fundamental tax reform.” The reason lies in how the Congressional Budget Office (CBO) measures the impact of tax bills on future tax revenues. If these tax extender provisions (essentially tax credits and deductions) had been allowed to expire, the expected future revenue (the “CBO baseline”) to the federal government would have been $600 billion higher. In order to be bring in the same amount of tax receipts to the federal government, (a condition known as “revenue neutrality”), any tax reform legislation would have to generate this additional amount. Since getting more revenue requires having higher tax rates, lowering the required revenue amount translates into lower tax rates.

Revenue neutrality is important to Democrats in Congress. Lower tax rates are important to Republicans. Passage of the PATH Act makes achieving both easier, and was therefore the first necessary step for Congress to take in order to reduce future obstacles to tax reform.

Speaker of the House Paul Ryan and tax-writing committee Chairman Kevin Brady took another step this month with the creation of a task force on tax reform. The mission statement of the tax reform task force is instructive as to the future direction House tax writers are trying to establish. The goal is to come up with a tax reform plan that will “create jobs, grow the economy, and raise wages by reducing rates, removing special interest carve-outs” and make the “broken tax code simpler and fairer.” Some of the operating principles of the task force include:

  • Make the tax code simpler, fairer, and flatter;
  • Close loopholes, eliminate special-interest carve-outs, and limit deductions, exclusions and credits;
  • Ensure that businesses, both large and small, have a competitive tax system by providing a fair and competitive tax rate for job-creating businesses, and facilitating the growth of employers regardless of size or form;
  • End the tax code’s encouragement of the shift of jobs overseas;
  • Promote economic growth by increasing private sector employment, wages, and personal consumption, and investment in business capital;
  • Not increase the tax burden on any income group; and
  • Rely on controlling Washington spending, rather than higher tax burdens, to reduce the national debt.

While many might reasonably conclude (based on past experience) that a congressional task force is something where, not more, but “less than meets the eye,” is a proper description, the importance in this case is more than symbolic. House Republicans want to lay the foundation for future tax negotiations with whomever wins the presidency. The creation of the task force provides a venue for input from stakeholders on issues important to their industry within the context of their larger policy goals, and is another concrete example of their determination to put themselves in position to achieve the first major revamping of our tax system in 30 years.

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