As One Congress Winds Down, Talk of Business Tax Reform Rises for the Next Congress

Published by Michael Novogradac on Monday, December 8, 2014 - 12:00am

In post-election news conferences, President Barack Obama, presumptive Senate Majority Leader Mitch McConnell, R-Ky., and House Speaker John Boehner, R-Ohio, all mentioned tax reform as a potential bipartisan policy priority for 2015.

But in more recent public events involving three influential lawmakers—McConnell, Obama and incoming House Ways & Means Committee Chairman Paul Ryan, R-Wis.—the discussion of tax reform became more specific, focusing on business tax reform as opposed to comprehensive tax reform tacking both the individual and corporate sides of the tax code.

For example, according to Bloomberg, Ryan recently said that “A revamp of the U.S. tax code focused on corporations and other businesses would mark significant progress even if tax changes for individuals have to wait.”  Furthermore, he remarked, “the two parties may be too far apart on individual taxation because the Obama administration favors high rates on upper-income individuals.”

Similarly, The Hill quoted McConnell as saying, “Corporate tax reform will happen in the next Congress  if lawmakers agree to lower tax rates for small businesses as well as major corporations.”

Lastly, Obama met with the leaders of the Business Roundtable on Dec. 3, and Bloombergreports that he told the business leaders, “There is definitely a [tax reform] deal to be done,” adding that while he’s committed to simplifying the tax code for both corporations and individuals, it would be easier to accomplish by starting with businesses taxes.

The main motivation behind this shift away from comprehensive tax reform to business tax reform is practical.  Obama and Congressional Republicans have very different visions of individual tax reform.  Obama would like to raise as much as about $1 trillion in revenue through individual tax reform while Republicans are dead set against such revenue-raising.

As evidenced by the recent deliberation on tax extender legislation, Obama also wants to make the temporary enhancements to two individual tax expenditures that target low-income people—the earned income tax credit (EITC) and the child tax credit (CTC)—permanent, and given their concerns about the fraud rate with those credits, the Republicans are reluctant to do so.

Furthermore, Obama views the resetting of the individual tax income rates for higher-income people to Clinton-era rates in the American Taxpayer Relief Act of 2012 to be a significant achievement. He would not approve of an individual tax reform proposal that shifted the tax burden from high-income taxpayers to middle-income taxpayers by repealing individual tax expenditures that target the middle class and use the resulting savings to lower rates, which could primarily benefit high-income taxpayers.

The positions on business tax reform are closer. Both Obama and Congressional Republicans want to repeal corporate tax expenditures and use those savings to lower statutory corporate tax rates, which are the highest among developed economies across the world. Obama also has said that he wanted revenue-neutral corporate tax reform, although he also has proposed using corporate tax reform to provide one-time investment for infrastructure investment. Republicans want revenue-neutral reform.

And both Obama and Senate Republicans have an incentive to find a deal on business tax reform in 2015. Obama would like to build his legacy during his final two years in office with significant legislation that demonstrates he can work with Congressional Republicans.  And Senate Republicans will face a similar challenge in the 2016 election that Senate Democrats faced in the 2014 midterm election:  24 Republicans will be up for re-election, compared to only 10 Democrats, and many of those Republicans up for re-election will be in states that tend to favor Democrats.  Furthermore, the overall electorate is likely to be more Democratic-friendly than the midterm election, as presidential election years tend to attract more voters from groups more likely to vote to Democrats.  Helping to pass significant tax reform legislation will demonstrate that Senate Republicans can govern and help make their case for re-election.

One of the main obstacles to business tax reform is the fact that most businesses are actually taxed on the individual side of the tax code, so reforms to the corporate side would not directly help those businesses.  However, Congress could chose to reform the code to unify tax treatment of corporate and non-corporate businesses without changing taxation of individuals.

Even with such business tax reform, there will be significant challenges to finding a bipartisan consensus.  Tax reform in the abstract is always easier than actual pending legislation, which targets many favored tax expenditures.  Also, there likely will be political challenges in giving businesses a tax break while individuals receive no tax relief (or even worse, if some individual tax expenditures are used to pay for lower business tax rates).

The tax credit community is not without risk from this business tax reform effort.  The tax reform discussion draft from outgoing House Ways & Means Committee Chairman David Camp, R-Mich., repealed the historic tax credit (HTC) and the renewable energy tax credits (RETCs), postponed discussion on whether the NMTC should be extended, and proposed significant reforms to the low income housing tax credit (LIHTC) that would substantially reduce affordable housing production.  While Ryan has said that he is not adopting Camp’s draft as his own, it still is the first draft against which whatever Ryan drafts will be compared.

Business tax reform, however, may also provide an opportunity for the tax credit community.  Relatively low-cost proposals that make the successful tax credits work even better could be included in tax reform legislation.  We encourage you to send us your ideas to [email protected].