On To Tax Reform!

With the unanticipated withdrawal of health care legislation from House consideration on March 24, and what appears to be the demise of that legislation at least in the near term, public attention is now focused on major tax reform.  Like the “repeal and replace” of the Affordable Care Act, reducing business and individual taxes was one of President Trump’s signature issues during the presidential campaign.  

At this time, there are so many unknowns which will impact the road to tax law change.  And there are seemingly new developments every day.  How will the events of last week impact the tax reform process?  Will tax reform now be harder or easier to accomplish without the repeal and replacement of the Affordable Care Act?  Needless to say, funding for the Affordable Care Act – including the 3.8% Net Investment Income Tax and the 0.9% Additional Medicare Tax – remain in force.   How engaged will the Trump Administration be throughout the legislative process for tax reform?  Will the Administration submit its own proposal for tax reform to Congress, and, if so, how will it compare to its campaign proposal and to Speaker Ryan’s plan?  Might there be multiple bills under consideration simultaneously? How important will it be for Congress to have a revenue neutral bill?  Or will a bill that increases the deficit be acceptable?  Do keep in mind that while the taxes that fund the Affordable Care Act would have been repealed by the health care legislation, that legislation would have freed up significant dollars through substantial Medicaid savings.  As a result, that money is no longer available to help fund tax reform.  In addition, the Administration also campaigned on a major infrastructure program, which itself will be exceedingly costly if ultimately approved by Congress.

As the legislative process moves forward, special attention should be directed to the “border-adjustable tax” that is contained in the current tax reform proposals.  In reality, that is “where the money is” in tax reform as currently conceived, but that tax is not without its own challenges.  Major players, both financially and politically, have lined up on both sides of this issue.  This tax is projected to raise some $1 trillion over 10 years by effectively taxing imports and excluding exports from tax.   The Administration has yet to endorse the border tax as now proposed – though variations on the concept are certainly possible.  It is safe to say that the funding of tax cuts of size is significantly more problematic if some form of border tax is not included in the legislation.  However, since the failure of the health care initiative, there has also been some talk of a less ambitious tax reform package - limited perhaps to a lesser amount of business and individual tax relief -- that would not include the border tax and thereby avoid that contentious issue. 

It is safe to say that tax reform will be a daily item in the news for the immediate future.  Stay tuned!