Guest post by Todd Simmens
Achieving bold tax reform is an arduous task. Even where the same political party occupies the White House and both houses of Congress, nothing is certain. During the 2016 presidential and congressional campaigns, tax reform was front and center, and in the days after the election, significant tax reform seemed like only a matter of time. In the weeks and months since, however, the prospect of significant reform diminished.
Tax reform to any degree involves many dynamics. For example, there must be some conceptual agreement as to the framework of a package, including the type(s) of tax or population of taxpayers at issue. When the same party controls the White House and both houses of Congress, in theory, this should be more straightforward. While the administration, House and Senate each will have their own specific legislative priorities, they must be prepared to agree on the contents of one final package. There also may be procedural hurdles that could halt or significantly delay efforts, and that must be considered in getting any legislation through.
As a member of the staff of Congress’s Joint Committee on Taxation during passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. 107-16) (“EGTRRA”), I was involved first hand in every step of the process leading to enactment of the law. With a new Republican president and with the GOP controlling both sides of the legislative branch, significant tax reform at first seemed likely. Many tax reform priorities have remained the same since 2001—lowering tax rates, simplifying the code and estate tax repeal. But also, still at play in the Senate are the legislative filibuster and the Byrd rule.
The legislative filibuster allows any Senator to delay or entirely prevent a bill from moving forward, and in considering tax legislation, could effectively prevent comprehensive reform from moving forward. To overcome a filibuster, three-fifths of the Senate, or 60 members, would need to vote in support of cloture. With the makeup of the Senate today, achieving a 60-member supermajority to invoke cloture is far from certain.
Under the reconciliation process, certain legislation may be passed with a simple majority in the Senate without threat of filibuster. Reconciliation protection, however, comes at a cost. Under the Byrd rule (named after the former Senator from West Virginia), a senator can block such legislation if it significantly increases the federal deficit beyond the ten-year budget window (or is otherwise an extraneous matter). Federal tax legislation that would decrease taxes and, therefore, reduce federal revenues and would increase the federal deficit outside the ten-year window, allowing for the use of the Byrd rule.
In 2001, there were not 60 senators in support of EGTRRA. Congress faced this very situation— a legislative filibuster or, if included as part of reconciliation, Byrd rule implications. In order to craft a package that met the Byrd rule, legislators created a ten-year shelf life for the legislation.
With the makeup of the 2017 Senate (a razor-thin Republican majority), it is a very real possibility that any tax legislation would face a potential legislative filibuster or, if under reconciliation, the parameters of the Byrd rule. Without the support of 60 senators, any tax package would likely be effective only for the ten-year budget window, reverting in ten years to the law that existed the prior to its passage. While such policy is frustrating when it comes to tax rate changes, thresholds and exemption or deduction amounts, it is unworkable when looking at wholesale reform, such as changes to our worldwide tax system or repealing the estate tax. Application of the Byrd rule–as it did with EGTRRA–can amount to essentially just one year of estate tax repeal. When looking at changing from a worldwide to territorial tax system, that would cause a one-year change, only to revert to the old system.
Is it possible that there may be 60 senators in support of a tax reform package? Maybe. There are some Democratic senators up for reelection in 2018 that are viewed as vulnerable, and there could be unexpected vacancies where a governor can appoint a replacement. But, it’s unclear if these scenarios would lead to a supermajority. With the makeup of the Senate today, it seems quite unlikely that there could be cooperation among 60 senators to assure a permanent tax reform package.
While fundamental or bold reform looks grim, a tax cut may have a better chance at passage. A less expensive, less expansive tax package may be more appealing to on-the-fence senators. In that case, there may be a greater chance of support from 60 senators, which would allow for a permanent tax cut to some degree. If, however, if the supermajority proves unachievable, a ten-year package would likely be in play.
Considering where we are in late 2017, I believe we are probably looking at a package of tax cuts with a ten-year shelf life. The longer it takes, however, to get tax legislation moving, the less likely it is that will see anything before the 2018 midterm elections.
Todd Simmens is BDO’s National Managing Partner of Tax Risk Management. Todd also served as counsel to the Joint Committee on Taxation.