Tax Reform: What We Know and What's Next by Holland & Knight

TAX REFORM: WHAT WE KNOW AND WHAT'S NEXT The Trump Administration has released its framework for reforming the country's current tax code. The nine-page document, a "Unified Framework for Fixing Our Broken Tax Code," was created with the leadership from the White House (including the Treasury Secretary and Director of the National Economic Council), the U.S. Senate, the U.S. House of Representatives, the House Ways and Means Committee (WMC) and the Senate Finance Committee (SFC) – the so-called "Big Six." With the release of this framework, which omitted a number of significant details, the tax reform process now moves to the committees of jurisdiction, specifically, the WMC and SFC, which will take the framework and craft its concepts into legislation. Although the framework includes new details added since the April concept document, many of the specifics – such as what, if any, other tax provisions will remain post-reform and how the legislation will be "paid for" – will remain unanswered and fluid until there is an actual bill introduced in Congress.

THE FRAMEWORK IN A NUTSHELL Still, the framework provides some initial metes and bounds to the tax reform process, including the below key highlights.  Reduces the corporate tax rates to 20 percent, which the framework notes is below the average 22.5 percent rate in the industrialized world  Consolidates personal tax brackets: Under current law, taxable income is subject to seven tax brackets. The framework recommends three: 12 percent, 25 percent and 35 percent  Doubles the standard deduction for individuals to $24,000 for married taxpayers filing jointly and to $12,000 for single filers  Addresses pass-through entities: Sets the maximum tax rate structure for small businesses conducted as sole proprietorships, i.e., pass through entities, to 25 percent, with measures to ensure that personal income is not re-characterized as corporate rates  To simplify the tax code, the framework "eliminates most itemized deductions," but would retain the mortgage interest and charitable giving deductions  Eliminates most other itemized deductions, including the deductions for state and local taxes, and specifically states that the Section 199 production deduction will no longer be necessary because of the substantial rate reduction  Allows immediate expensing of new investments (so-called "full expensing") for at least five years and partially limits interest deductibility to help offset the cost  Eliminates most business credits, though the framework explicitly preserves two credits it states "have proven to be effective in promoting policy goals important to the American economy," specifically the research and development (R&D) and low-income housing tax credits  Repeals the estate tax

 Provides a larger child tax credit, which would be expanded from $1,000 per child under 17 to an unspecified amount so that family income limits could be adjusted, thus allowing eligibility of more families  Eliminates the Alternative Minimum Tax

WHAT'S NEXT? In formally announcing this framework, the Trump Administration has indicated that it would like Congress to pass tax reform by the end of 2017. This is an aggressive schedule, but it may be possible if Congress is able to develop widespread support. It is also important to note that process will matter as this moves forward, as explained below. Several issues – including a budget resolution, the use of dynamic scoring and how to pay for the tax reform – will be key elements to watch. Under the Constitution, tax measures must originate in the House. Thus, the WMC will begin consideration and writing specific legislative language very soon. The SFC is likely to hold parallel hearings and potentially draft its own legislation at the same time. These committees could then report legislation to their respective chambers for consideration. Although the House has streamlined provisions to pass legislation and can do so without support from the minority party, the Senate is different. Typically, legislation in the Senate must have the support of 60 senators. However, there does not appear to be widespread bipartisan support for the framework based on initial public comments of minority leadership. Notwithstanding the 60-vote Senate threshold, legislation making changes to taxes and mandatory spending can use a special expedited process known as reconciliation that reduces the Senate's vote threshold to 50, though the process has some limitations (such as not increasing budgets outside of a 10-year budget window). To use this process, the House and Senate must pass a unified joint budget resolution, which is not signed by the President, that includes what is known as a reconciliation instruction. The reconciliation instructions will establish certain targets for the congressional committees (in this case, the WMC and SFC), with instructions covering mandatory spending, revenue or debt limit changes. This will be a key first step in moving forward. Still, the framework is a nine-page document that covers a tax code that is thousands of pages and is filled with deductions and credits that have constituencies, many of them significant ones. Key elements have been left out that will affect the outcome and potentially the feasibility of tax reform. Two of these items, dynamic scoring and the so-called "pay-fors" (the deductions and credits that will be eliminated), will be of significant importance to some members. Although the tax bill may enjoy lower vote thresholds in the Senate, assuming it is a majority-only bill, it would take only three Republican senators to stop the effort. Some have concerns regarding the cost of the tax reform and if it would increase the deficit. This is where concepts such as dynamic scoring and the underlying assumptions will be key, as they can resolve or lessen the deficit and budget issues. The pay-fors will be more complicated and often more provincial in nature. Members of Congress will hear from constituents and companies alike about the effects if certain deductions and credits are eliminated, and members do not like to vote against their local interests. Thus it bears paying close attention to the WMC and SFC hearings and markups, as well as the amendment process on both floors as the two chambers flesh out the details that the framework omits. These procedural milestones will provide stakeholders and the public an opportunity to add to the design of what will be a very complicated end product.