Lead Republican Tax-Writers Offer Reform Ideas; Senate Finance Republican Staff Report Largely Mum on Tax Credits

Published by Michael Novogradac on Saturday, December 13, 2014 - 12:00am

As the 113th Congress approached its end, the outgoing House Ways & Means Committee Chairman Dave Camp, R-Mich., officially introduced his tax reform bill as H.R. 1, The Tax Reform Act of 2014 on Dec. 11. There were no changes from his discussion draft, which was released Feb. 26 and proposed to retain the low income housing tax credit (LIHTC) with significant reform, postponed consideration of extending the new markets tax credit (NMTC), and repealed the historic rehabilitation tax credit (HTC) and the renewable energy tax credits (RETCs). Although it will not advance, the legislation will serve as a benchmark against which any future comprehensive tax reform legislation will be compared.

On the same day, the Senate Finance Committee Republican staff released a detailed comprehensive tax reform report to lay the groundwork for upcoming discussions. Their report, called “Comprehensive Tax Reform for 2015 and Beyond,” included suggestions on individual, business and international tax reform–but not much on tax credits.

The 340-page document featured a forward by Sen. Orrin Hatch of Utah, the current ranking member of the committee who will become the chairman in January. Hatch wrote that tax reform is “necessary and vital to our nation’s economic well-being” and he acknowledged the difficulty of the suggested undertaking. Hatch said there are numerous competing priorities in tax reform and said that the goal should be to “engineer a tax system that embraces efficiency, fairness and simplicity.”

The report contained detailed background and history of tax reform efforts on all aspects of the tax code, but no specific reform proposals or legislative language. The report does state a goal of reducing the corporate tax rate from 35 to 25 percent, as H.R. 1 proposes to do.

So what does that mean to the tax credit community? The report doesn’t mention the LIHTC, NMTC, HTC or RETCs, but it recommends the business research and development (R&D) credit should be enhanced and made permanent, as Hatch proposed in 2011. The document pushes for what it calls “permanence and certainty” in the tax code, which could be welcome news for the tax credit community if it includes long-term or permanent extension of the credits.

However, aside from the R&D credit, the Republican staff report certainly does not endorse community development tax credits, and in order to meet the goal of reducing the corporate tax rate to 25 percent will likely mean most corporate tax expenditures will be eliminated cut, as H.R. 1 proposes to do. Indeed, the report states, “Similar to the taxation of individuals, the corporate tax base needs to be broadened with an elimination of almost all corporate tax expenditures … [m]ost of the economic literature supports elimination of most tax incentives in the corporate tax code, with exceptions such as subsidies for research and development.”

Furthermore, the report lists the LIHTC as the sixth-largest corporate tax credit, raising its profile as a potential source of revenue to offset the cost of lowering rates.

Hatch’s staff has put together a detailed report to provide an expansive philosophical rationale to advocate for comprehensive tax reform. As the new session of Congress starts in January, it’s expected that this document will serve as an ideological framework to guide Senate Finance Committee tax reform deliberations, while continuing to demonstrate why tax reform is a threat to tax credits.