On Wednesday, the Republican Steering Committee tapped Rep. Kevin Brady (R-TX) to succeed Speaker Ryan as the committee’s chairman. Both he and his challenger, Rep. Pat Tiberi (R-OH), are strong allies of S corporations and pass-through businesses, so we excited to see him take on the gavel.
What does Brady’s ascension mean for tax policy? The Wall Street Journal has an interview with the new Chairman this morning, where Brady makes clear he wants to move a robust tax extender package (yea!) this fall then spend next year pushing the “step one, step two” plan for tax reform outlined by Paul Ryan in the past year:
Q: What’s the first thing you’re going to try to get accomplished this year?
A: We’re going to continue to tee up pro-growth tax reform. There’s two steps we can take that are real, one of them immediate, which is to negotiate a package of permanent provisions among those [expired tax breaks]. One, because it creates certainty for the economy. Two, you get a better bang for the buck for the tax provisions. And three, it’s honest scorekeeping. It identifies what truly are permanent parts of the code. I will pick that up and see if we can’t conclude a package that works for both parties.
The second one in 2016 is to conclude discussion on international tax reform and an innovation box. It could be a significant down payment on overall tax reform, done right, allow U.S. companies to bring those stranded profits home to reinvest in the U.S. and ensure America isn’t isolated on the innovation side of the economy.
We applaud the new Chair’s focus on extenders and pressing the case for making as many of these provisions permanent as possible. On the international front, everyone is waiting to see the revised “innovation box” proposal from Representative Charles Boustany (R-LA) and how willing the Administration is to seriously negotiate something the business community can support. Most everyone supports making our tax code more competitive, but exactly how much progress can be made with the current Administration remains to be seen.
White House Opposes Rate Cuts for Pass Thrus
Speaking of the White House, recent comments by the President’s chief economic advisor make clear the gulf between the White House and Congress approaches over tax reform continues to be the principal reason Congress has been unable to do anything meaningful this year.
Jason Furman, Chairman of President Obama’s Council of Economic Advisors, spoke to the Brookings Institute Tax Policy Center earlier this week and gave the Administration’s take on tax reform, identifying the key area of disagreement with Congress:
But there was an “impasse” over whether to lower individual rates, which some Republicans argued was necessary to maintain the competitiveness of large businesses that filed through the individual side of the code.
To cut the top individual tax rate as Republicans want is impossible without tilting the tax code in favor of the rich, Furman said at Tuesday’s event.
The continued opposition of the Obama Administration to rate cuts isn’t news, but the disconnect between their insistence on corporate cuts yet opposition to similar cuts for domestic pass through businesses is head scratching. Why is one important and economically necessary but the other just a give-away to the rich? Recall that those pass through businesses employ more people and contribute more to the national economy than their corporate cousins. Apparently, the opposition stems from the myth that private businesses don’t pay their fair share:
He also suggested that cutting the tax rates of businesses that filed as individuals would work against the purpose of tax reform. Furman cited Congressional Budget Office statistics indicating that the owners of those companies, known as “pass-throughs,” pay lower effective tax rates than do the owners of companies arranged as corporations, even though pass-throughs have lower rates on paper.
This is an argument the CBO has made in the past, as have recent papers from CRS and Treasury. We have a number of critiques of these papers, but the primary concern is that they fail to compare apples to apples or, in this case, businesses of similar size. When you do that, as our study from Quantria did, you find that large S corporations pay the highest effective rate of all business types. Policymakers need to be aware of that as they debate the future of tax reform.
Valuation Discount Update
Are you asking yourself what happened to those new regulations out of Treasury on minority discounts? We are.
As we previously reported, for the past year Treasury has been working on new rules limiting the ability of family-owned businesses to apply minority discounts under certain circumstances. Exactly what those regulations would do and when they would be released, however, has always been a mystery.
Now BNA reports that a senior IRS official this week provided a little clarity on both fronts.
Guidance on restrictions on estate valuation discounts for certain corporations and partnerships is expected very soon and won’t be based on previous administration proposals, Leslie Finlow, an IRS senior technician reviewer, said today.
Tax code Section 2704(b) gives the Treasury Department the power to issue new regulations disregarding additional restrictions on liquidations of interests if the restrictions reduce the value of the transferred interest but not the value of the interest to the transferee.
However, Finlow told certified public accountants at the American Institute of CPAs Fall Tax Division Meeting, that the Internal Revenue Service isn’t looking to a 2013 Obama administration proposal that called for further restrictions on valuations of family business interests. Instead, she said the guidance will focus on “the statute as it looks now.”
So the rules are due soon, but it appears they won’t be as expansive as previous Obama Administration budget proposals. Something to keep an eye out for.