U.S. Tax Reform – Is It Permanent?

Ever since President Trump announced his candidacy for President, both he and the Republican Party have been pushing for tax reform primarily consisting of massive tax cuts. On September 27, 2017 President Trump released a document entitled “Unified Framework for Fixing Our Broken Tax Code” where he outlined his proposals.  On November 2, 2017 the House Republicans released the “Tax Cuts and Jobs Act H.R. 1” which echoed a significant number of President Trump’s proposals.  On November 9th, 2017 the staff of the Joint Committee on Taxation released document JCX-51-17, the Description of the Chairman’s Mark of the “Tax Cuts and Jobs Act” which is scheduled for Markup by the Senate Committee on Finance on November 13, 2017 (aka the Senate proposals).  There are quite significant differences between the Republican House and the Senate proposals.

The Joint Committee on Taxation is a nonpartisan committee of the United States Congress, originally established under the Revenue Act of 1926.  The Joint Committee is chaired on a rotating basis by the Chairman of the Senate Finance Committee, Orrin G. Hatch (R-Utah), and the Chairman of the House Ways and Means Committee, Kevin Brady (R-Texas).  The current Chairman is Senator Hatch.

Both the Republican House and Republican Senate plans call for lowering the individual and corporate tax rates, repealing numerous tax credits, eliminating the alternative minimum tax (AMT), enhancing the child tax credit, doubling the estate tax exemption, amongst other items.   Assuming that the versions will be reconciled and go to the President for signature and subsequent enactment, the question then becomes “Will these changes be permanent?”

Under current legislation the answer is no (ignoring any Democratic objections, the impact of Roy Moore on the Alabama Senate elections, etc.).  There is a provision in the Congressional Budget Act of 1974 process called the “Byrd rule”, named after the late Senator Robert Byrd of West Virginia.   This rule allows Senators, during the Reconciliation Process, to block a piece of legislation if it purports significantly to increase the federal deficit beyond a ten-year term or is otherwise an “extraneous matter” as set forth in the Budget Act.  A vote of 60 Senators is required to overturn the ruling.

The Joint Committee (JCX-54-17) estimates the static revenue loss from the (House) plan to total US $1.5 trillion over a decade.  Whether the increased deficit can be offset by revenue growth, generated by increased business activity in the economy, is a question of fact.

Since the current proposals are not revenue neutral, the legislation can only be made permanent if there are at least 60 votes in the Senate (to override the Byrd rule). Currently the Senate is comprised of 52 Republicans, 46 Democrats and 2 Independents (who caucus with the Democrats).  As such the Republicans do not have enough votes to override the Byrd rule.  The proposals, as they stand, would require significant changes to make them Byrd-rule compliant.  One option is provide sunset provisions of some of the tax cuts after a decade (anyone remember President Bush’s 2001 Economic Growth and Tax Relief Reconciliation Act estate tax provisions?).  Clearly the fun is just beginning.

The above  information is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of section 10.37(a)(2) of U.S. Treasury Department Circular 230. The contents of this document are intended for general information purposes only.

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