October 20, 2017
With more than 30 years of experience in federal legislative and regulatory affairs, Jim O’Connell focuses on HR and PAYROLL POLICY ISSUES, keeping customers informed about fast-changing and complex compliance regulations and workforce trends. Follow him on Twitter JOCWashDC
On September 27, a group of six Republican leaders from the U.S. Senate, House of Representatives and the White House announced a new tax reform framework.
Congress last accomplished comprehensive tax reform 31 years ago under President Ronald Reagan, which is testament not only to the substantive and political difficulty of reforming the tax code but to the reality that updating America’s tax law is long overdue. Creating a 21st Century tax code that would be simpler, fairer and more supportive of economic growth and innovation has long been a goal of Democrats and Republicans.
This blog is the first in a series about the new framework, covering why it matters for employers, and its main pillars. Subsequent blogs will explain the controversy over repealing long-standing tax breaks to pay for rate cuts, as well as the process expected to unfold as Congress works to enact tax reform this year.
Employers small, medium and large are paying close attention to what happens on Capitol Hill with regards to tax reform for two main reasons: One, unlike the effort to repeal the Affordable Care Act, today’s Internal Revenue Code has few defenders. Tax reform in principle is something everyone can support and for Republicans and President Trump in particular is “must-do” legislation. Insiders believe tax reform will happen in 2017 and take effect in 2018.
Two, tax reform has the potential to upend the present law tax treatment of employee health and retirement benefits in the competitive scramble to keep tax reform “revenue neutral.” Historically, tax reform has involved simple arithmetic: losses in federal tax revenue from cuts in individual and corporate taxes are “paid for” or “offset,” dollar-for-dollar, by new tax revenue from eliminating or curtailing preferences, incentives, credits and loopholes, called “broadening the revenue base.” Total U.S. Treasury revenue stays more or less the same over time, but the burden is redistributed – so tax reform is “revenue neutral.”
Employers are rightly concerned that a push for revenue neutral tax reform, particularly with a very large middle class tax cut, will inevitably produce winners and losers among tax code preferences, and that one of the losers could be employer-sponsored health and retirement benefits.
The big picture: the nonpartisan Committee for a Responsible Federal Budget (CRFB) estimates that the tax cuts in the group of six framework plan would cost the federal government about $5.8 trillion (a trillion is a thousand billion!) over 10 years through 2027.
Tax cuts would be partially “offset” by revenue increases of $3.6 trillion, attributed to cutting back various present law tax benefits, credits and preferences. The plan would therefore result in a net tax cut of $2.2 trillion over 10 years, as annual federal budget deficits rise potentially by some $200 billion a year.
The battle over eliminating certain sacrosanct tax preferences is expected to be fierce and could easily derail the entire project. For example, the Framework implies that the present law deduction for state and local income and property taxes will be thrown under the bus, resulting in some taxpayers in states like NY, NJ, CA and CT facing higher taxes.
The group of six White House and congressional leaders believe that if the framework tax reform plan is ultimately signed into law this year it will achieve five major goals:
While Republicans and most Democrats agree on the broad goals of tax reform, employers can expect partisan warfare on Capitol Hill over specifics, especially efforts to pay for mammoth tax cuts by eliminating or paring back favored tax preferences like the state and local tax deduction.
The present law tax exclusion for employer-sponsored health benefits, as well as the tax deduction for contributions to defined benefit and defined contribution retirement plans, could very well get caught in the crossfire.
The next installment of this series will explore the most contentious issues in tax reform 2017 and explain why health and retirement benefits may be vulnerable.