Washington Bulletin 12/3

December 4, 2017
Washington Update

On Capitol Hill

Senate Passes Tax Bill in Sprint to Finish by Year-End

The Senate early Saturday, December 2 passed a bill to overhaul the tax code in a bid to get a signature piece of legislation to President Donald Trump before the new year.

The Senate-amended bill passed on a vote of 51-49. The vote came after last-minute negotiations between Senate leadership and key holdouts who had concerns about the treatment of pass-through entities, the state and local tax deduction, and the effect the cuts would have on the budget.

Many Republicans who had been withholding support for the legislation in recent days announced they could vote for the bill Friday, December 1 after getting a commitment from Senate leaders to address their concerns with the plan.

In the past few days, Senators Ron Johnson (R-WI) and Steve Daines (R-MT) negotiated to increase the deduction for pass-throughs to 23 percent from 17.4 percent. The change means that top earning pass-through owners—those taxed at the 38.5 percent rate—would pay about 29.6 percent on their business income.

What’s Next

Before it goes to President Trump, lawmakers will have to resolve differences between the Senate bill and legislation the House passed last month. Although both versions share common topline elements, negotiations on individual provisions inserted to win votes, particularly in the Senate, may be protracted and difficult.

The House-Senate conference committee is a specially appointed, temporary panel that will be charged with hashing out the differences in the bills and preparing a final version for both chambers to consider. Party leaders will select a small group of lawmakers, likely from the House and Senate tax-writing panels in each chamber, who would then be approved by each chamber.

That work could start as early as Monday, December 4, with many high-stakes issues to be worked through. House leaders are bringing members back that evening to hold the procedural votes to begin the talks.

The deadline of Sunday, December 31 is an artificial one, though — aimed partly at securing a victory well in advance of the 2018 congressional elections. Republicans would have until the end of 2018 before they lose their ability to clear final passage in the Senate without a filibuster.

House and Senate Differences

The bills’ differences range from the taxation of business income to the amount set for the child tax credit — and Senate negotiators may have the upper hand during talks. That’s because the wafer-thin two-vote majority in the Senate will make it harder to usher a final bill back through that chamber.

Both the House (H.R. 1) and Senate (S. 1) measures would cut the corporate tax rate to 20 percent from 35 percent — though the Senate version would set that lower rate in 2019, a year later than the House bill would. Also, the Senate bill, unlike the House version, would provide only temporary tax relief to individuals, ending tax cuts for them in 2026. Both bills are expected to add more than $1.4 trillion to the federal deficit over 10 years, before accounting for any economic growth.

Senator Bob Corker (R-TN), who had cited concerns over the bill’s effects on federal deficits, was the only Republican dissenter. Senate Majority Leader Mitch McConnell (R-KY) rejected revenue scores that suggested the bill’s tax cuts would add to the deficit. He predicted it would be a “revenue producer” by stimulating economic growth. Congress’s official tax scorekeeper this week said otherwise.

The House and Senate bills also align on the contentious issue of individual deductions for state and local taxes: They would eliminate all but a deduction for property taxes, which would be capped at $10,000.

But they differ on the home mortgage-interest deduction; the House bill would restrict that break to loans of $500,000 or less with regard to new purchases of homes. The Senate legislation would leave the current $1 million cap in place.

They also differ — narrowly — on the tax rates they’d apply to multinational companies’ accumulated offshore earnings. The House bill would tax those profits at 14 percent for earnings held as cash and 7 percent for less-liquid assets. The revised Senate bill contains a lengthy section that has no direct mention of the rates, but a person familiar with the Senate plan said they’d be 14.5 percent for cash and 7.5 percent for less-liquid assets.

Both bills share some key central elements: They would both almost double the standard deduction for individual taxpayers while eliminating personal exemptions. They would both allow companies to fully and immediately deduct the cost of their spending on equipment for five years. But the Senate version would slowly step down the expensing provision after the five-year period — a feature that the House bill doesn’t include.

The House bill would consolidate the current seven individual tax brackets to four, leaving the top tax rate at 39.6 percent. The Senate bill would have seven brackets — with lower rates, and a top rate of 38.5 percent. Studies have shown that many of the tax bill’s benefits would go to the highest earners — and some middle-class taxpayers might actually pay more — a finding that could affect the House-Senate talks.

The Senate bill also includes an addition on private school tax breaks. Vice President Mike Pence was called on to break a 50-50 tie to approve Senator Ted Cruz’s (R-TX) amendment that would give breaks for private K-12 education tuition, including home schooling, via 529 College Savings Plans.

The House bill also did not include a repeal of the penalties used to enforce the Affordable Care Act’s mandate that most Americans have health insurance or language that would open portions of the Arctic National Wildlife Refuge to drilling.

For further information, a power point presentation comparing the House-passed and Senate-passed bills, and current legislation is attached in the weekly newsletter email.

 

House Republican Group Seeks to Rescue Muni Bonds From Tax Bill

Two weeks after the House passed its sweeping tax-cut bill, a small group of Republicans are having second thoughts about how it will roll back the subsidies given to a massive segment of the state and local government bond market.

In a letter released Wednesday, November 29, 21 House members asked Republican leaders to reconsider measures that would pull the tax breaks for bonds issued for some refinancings or projects such as hospitals, toll roads and others run by businesses. That’s threatening to make public works more expensive because investors would demand higher yields on the debt, putting the tax bill at odds with President Trump’s stated goal of pumping more money into America’s infrastructure.

The risk has led to a blitz of planned bond sales by states and cities rushing to borrow before the end of the year. Prices of the securities have slid this month as investors brace for a wave of new tax-exempt debt to hit the market, though if the legislation is enacted sales would be dramatically reduced starting next year.

It’s unclear how successful the group’s push will be, given that it doesn’t include key leaders. And their concerns about the municipal-bond market did not keep most of them from signing off on the bill: Only five members of the group were among the Republicans who voted against the legislation.

 

House Republicans to Push Stopgap Funding Without Democrats

House Republicans can pass a two-week extension of government funding — without Democratic votes — to avoid a shutdown on Friday, December 8 and move the next deadline to the Friday before Christmas, on December 22, giving lawmakers time to finish work on tax legislation, a member of the GOP vote-counting team said.

“They had a very productive discussion in the conference here about what the strategy is,” Representative Richard Hudson (NC-R) said in a brief interview as he was leaving a House GOP meeting Friday, December 1.

He said the leadership team will continue to press rank-and-file members to vote for the funding extension without any extraneous provisions that could cause delays. Representative  Hudson expressed confidence that House Republicans have enough support, even though a handful of conservatives, including Representatives Scott Perry (R-PA) and Jim Jordan (R-OH), said they would not vote for it.

The short-term spending bill, known as a continuing resolution (CR), would still need support from some Democrats in the Senate, where 60 votes will be required to advance the measure and Republicans have only 52 members. But being able to get it through the House by relying just on the Republican majority removes some Democratic leverage to press to include other issues.

Deadline Set

The Friday, December 8 deadline was set in September when President Trump agreed with Democratic leaders to fund the government and suspend the debt limit for just three months. Republicans usually need a bipartisan agreement on stopgap measures, even in the House where they have a solid majority, because many conservatives strongly oppose short-term solutions that leave the military operating under previous funding levels.

Now, however, Republicans are betting that putting all their energy into a legislative win on tax cuts will convince enough of their own members to push the spending negotiation off until Friday, December 22. A conference committee, which could begin meeting as soon as next week, will reconcile the two versions into a final bill that must be passed by both chambers before heading to President Trump for his signature.

The strategy for the funding measure grew in part from the complicated coalition that Republican leaders have to build for their tax overhaul.

Tax Negotiations

As part of the negotiation to convince moderate GOP Senators like Senator Susan Collins (R-ME) to support the tax bill, Majority Leader Mitch McConnell (R-KY) promised that a bipartisan proposal to stabilize health-insurance markets would be attached to must-pass legislation — like a spending bill to avoid a government shutdown — before the end of the year. Senator Collins made the demand because the Senate tax bill would end the Affordable Care Act mandate that individuals have health coverage, which is forecast to make insurance premiums rise.

The leading bipartisan health proposal, from Senators Lamar Alexander (R-TN) and Patty Murray (D-WA), is unpopular in the House, and Speaker Paul Ryan (R-WI) said as recently as last month that he does not support it. Attaching the bipartisan health-care bill to a stopgap spending bill would risk enraging conservatives right as a conference committee is working on the final version of the tax legislation.

By creating another government shutdown deadline on Friday, December 22, Senate leadership can still try to fulfill its promises to moderates by attaching the Lamar-Alexander legislation to a must-pass bill before the end of the year — and hope by then the tax overhaul is already on the president’s desk.

Immigration Measure

Another lingering contentious issue is the legal status of young immigrants brought to the U.S. illegally as children. There is support in both parties for legal protection that would allow so-called Dreamers to remain in the country under certain conditions. President Trump earlier this year ended the Obama-era program known as Deferred Action for Childhood Arrivals (DACA) and gave Congress until March to come up with a fix.

Democrats — and some Republicans, including Senator Jeff Flake (R-AZ) and Representative Carlos Curbelo (R-FL)– are demanding a solution before the end of the year.

Representative Curbelo said he would vote for a short-term spending bill that lasts until Friday, December 22, but “I would not support funding the government beyond Dec. 31 unless we have a solution for DACA,” he said.

Top-Line Budget Unresolved

Also, appropriators probably will not have time to finish their package of actual spending bills before Friday, December 22, because Republican and Democratic leaders still have not agreed on top-line spending levels.

Under the law, the defense spending cap is to drop from $551 billion in 2017 to $549 billion in 2018 while non-defense spending is to drop from $518 billion to $516 billion. Some Republicans want a large boost to the defense cap and Democrats have demanded an equal size increase to non-defense spending in return. Even once caps are agreed upon, hundreds of line items and policy provisions in the final spending bill need to be hammered out.

That means the legislation to avert a government shutdown on Friday, December 22 will probably have to be another stopgap measure until at least sometime in January. Representative Andy Biggs (R-AZ) stated House leaders recognized that possibility in their Friday, December 1 morning meeting.

Congress will not have to decide this month how to raise or suspend the federal debt limit, which was a part of the September deal, because the Treasury can use so-called extraordinary measures to avoid defaulting on its debt obligations. These steps, such as suspending some government investments, could push that deadline back until sometime in late March or early April 2018, according to a report issued this week by the Congressional Budget Office.

Still, even with remarkable Republican unity on the tax overhaul buying some goodwill on the Friday, December 8 deadline, there are GOP House members who resent being forced to perform the most basic function of Congress — funding the government — in short term crisis-avoidance bills.

Representative Jordan, who was one of the founders of the conservative House Freedom Caucus, said he would vote against a two-week measure to avoid a government shutdown, and he’ll consult the other members of his group to check on their support.

Representative Perry, who is also a member of the Freedom Caucus, said he has a “whole host of concerns” about the strategy to fund the government for just two weeks and plans to vote against it. He said such short-term solutions, often presented at the last moment, are bad for the military and give Democrats more ways to make policy demands.

 

Infrastructure, Florida Citrus Help Sought in Disaster Package

Congress may use the next disaster aid package to provide funds to upgrade Puerto Rico’s infrastructure so that future hurricanes do not cause as much damage as Irma and Maria did this summer, according to a House appropriator.

Representative Ken Calvert (R-CA), chairman of the House Appropriations Interior-Environment Subcommittee, said his top priority for the next disaster-relief package is improving infrastructure, such as the transportation network and electric grid, where it previously was dangerously weak.

The Trump Administration’s $44 billion request for emergency funds called on Congress to create a waiver for Puerto Rico to Stafford Act requirements that buildings and infrastructure can only be fixed to their previous level of quality. Lawmakers should follow through on that request, Calvert said.

“My primary concern is that as we rebuild these areas, for instance these government facilities, that we do enhancements,” Calvert said in an interview following his subcommittee’s disaster aid oversight hearing.

Some lawmakers have complained that the Trump Administration’s $44 billion request was too low, though Representative Calvert predicted during the hearing that Congress will pass further supplemental appropriations packages.

The Florida delegation plans to oppose another disaster supplemental package unless it includes relief money for the state’s agriculture industry hurt by Hurricane Irma. “It is our duty to advocate for those who have been devastated by Hurricane Irma and citrus greening,” said Representative Dennis Ross (R-FL), who in a statement said the state’s delegation had met this morning to discuss concerns about the aid..

Lawmakers also are discussing whether to follow through with the Trump Administration’s request to include measures cutting billions in spending in the next disaster-relief measure in order to offset the cost. Representative Tom Graves (R-GA), chairman of the House Appropriations Financial Services Subcommittee, has said he supports including offsets.

Homeland Security Subcommittee Chairman Representative John Carter (R-TX) said Friday, December 1 the request to offset the disaster funding is unrealistic, particularly as lawmakers scramble to fund the government past the Friday, December 8 deadline.

“I understand the request but where are we going to get the money?” Representative Carter said. “And we’re right in the middle of trying to fund the government. This is the real world. This is an emergency.”

 

In the Administration

Tax Overhaul Trumps Infrastructure Bonds: White House Official

The White House would sign off on a tax overhaul even if it means gutting private activity bonds, a key tool for financing the administration’s $1 trillion infrastructure plan, White House official DJ Gribbin announced Thursday, November 30.

Private activity bonds (PABs) offer tax-exempt interest for projects such as airports, highways, and waterway facilities. The tax-exempt interest option makes borrowing less costly for state and local governments and airport authorities, among other qualifying entities.

The House tax bill (H.R. 1) would eliminate exemptions for PABs, while the Senate bill would retain them.

“The administration wants a tax reform bill and it’s highly unlikely—highly unlikely—that we would allow private activity bonds to influence our decision on whether we get tax reform or not,” Gribbin, the special assistant to the president for infrastructure policy, said.

Gribbin said he is hopeful that tax legislation emerges from conference with PABs, so they can be coupled with Transportation Infrastructure Finance and Innovation Act (TIFIA) and Water Infrastructure Finance and Innovation Act (WIFIA) loans to pay for infrastructure.

“Hopefully, conference comes back and Congress sends to the president something that allows private activity bonds for infrastructure, but that’s probably not a hill we are going to die on,” Gribbin said.

How to Pay?

The Trump Administration’s fiscal year 2018 budget proposal called for $200 billion in direct federal spending on infrastructure to leverage $800 billion in state, local, and private investment.

The White House called for the cap on PABs to be lifted in the same budget document that set forth its early thinking on the $1 trillion infrastructure plan. The Department of Transportation has a $15 billion cap on the tax-exempt bonds it is allowed to issue on behalf of private entities.

Gribbin told the conference he was confident the Trump Administration could identify infrastructure funds in the next budget. “We found $200 billion in our last budget, highly probable we will find in the next one,” he said.

“We do run into a scoring challenge if Congress is not happy with the cuts we are proposing and will need to find ways to offset,” he said with regard to paying for infrastructure.

But he added: “I think that at the end of the day we’re not going to have problems finding opportunities to pay for infrastructure.”

The House decision on PABs was less of a philosophical issue with those bonds than a necessary pay-for, according to Sean O’Neill, senior director of congressional relations for the Associated General Contractors of America. “It would be our hope that … their tax-exempt status remains,” O’Neill stated.

 

White House Is Said to Weigh Replacing Tillerson With CIA Chief

The White House is discussing whether to replace Secretary of State Rex Tillerson with CIA Director Mike Pompeo, two White House officials stated.

The timing of the shakeup for President Trump’s national security team is unclear. The President has told advisers that Secretary Tillerson might be out of his job before the end of the year, a third person familiar with the matter said.

President Trump and Secretary Tillerson, the former chief executive officer of Exxon Mobil Corp., have repeatedly clashed. Late on Wednesday, November 29, Secretary Tillerson canceled plans to speak on Thursday at a World AIDS Day event and sent a deputy instead.

 

Treasury, IRS Gearing Up for Guidance Challenges After Tax Reform

The Treasury Department is making plans to develop a raft of guidance that will be needed in response to the tax system overhaul now rushing through Congress, a department official said Thursday, November 30.

The House passed its version of tax reform bill (H.R. 1) on Thursday, November 16; the Senate leaders passed their bill (S. 1) on Saturday, December 2.

“We will be in full gear and we’ll have to look at the form of guidance we put out in the way that we can get it out most quickly,” Brian Jenn, a department attorney-adviser, said at the international tax conference sponsored by the George Washington University Law School, Treasury, and the IRS.

Jenn said the government plans to focus its efforts on the highest priorities and has been engaged with stakeholders throughout the tax reform process to shape those efforts. He said the door is still open and encouraged input on needed guidance.

Producing guidance to implement tax reform will pose enormous challenges, Jenn said.

Kirsten Wielobob, Internal Revenue Service deputy commissioner for services and enforcement, who also spoke at the conference. agreed.

Wielobob said her agency will confront dozens of hurdles and the need for “risk mitigation” if tax reform gets enacted in its current form. Although the IRS does not yet have final language, even with tweaks, “it’s going to be a heavy lift,” she said. “Tax reform for us is going to be really challenging.”

Wielobob said the toughest things about the overhaul for the IRS are its complexity and its jet-propelled timing. “We don’t have a long runway,” she said. And the magnitude of the changes the agency is facing is huge. An IRS with shrinking resources and staff will have to implement many of those changes, such as new employer withholding tables, by Monday, January 1, 2018, Wielobob said.

Big Changes to Form 1040

The agency will have to revise about 800 forms and publications, and make “substantial programming changes” to Form 1040, U.S. Individual Tax Return, the linchpin of the filing season, she said.

The IRS likely will have to mitigate risk by releasing forms and making other changes in staggered order, Wielobob said. Even then, while the office that handles forms and publications is “fantastic,” its staff is not at full capacity and the challenges could be overwhelming, she said.

The IRS official said another area where the agency is currently “decimated” and likely to be hard-hit by tax reform is information technology. Programming systems for a filing season can take 14 to 16 months, she said. The changes also could hurt the software industry that works closely with the IRS in developing those systems, Wielobob said.

‘Two Hats’

Apart from the challenges of implanting tax reform, Wielobob discussed the dual roles of David Kautter, now both IRS acting commissioner and Treasury acting assistant secretary for tax policy.

“Tax administration and tax policy are two very different parts of the tax ecosystem,” the deputy commissioner said.

Tax policy is “really ensuring that the administration’s goals are reflected in the tax law” through tax reform and tax regulations, Wielobob said. The commissioner’s job is “apolitical” and serves to manage all other facets of tax, such as processing returns, issuing refunds, information technology, and the like.

As acting commissioner, Kautter will make the decision about when the filing season starts and will be the agency’s “face” on cybersecurity incidents as they come up. At the same time, he may be faced with testifying in Congress on tax laws, she said. “He’s going to have to wear two hats. We don’t have a dog in that hunt. It’s going to be challenging,” she said.

 

Trump Administration WOTUS Ruling Supported in GOP Spending Bills

Earlier this year, the Trump Administration moved to repel the 2015 Waters of the United States (WOTUS) rule. Now, the House and Senate Republicans have included language into their appropriation bills to limit the legal challenges to the Trump Administration’s ruling. Under WOTUS, created by the Obama Administration, the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers have broad authorization to regulate streams, tributaries, and other navigable rivers and waterways that approximately cover 60 percent of the Unites States’ inland water.

While WOTUS supporters believe the ruling environmentally and fiscally benefits the American public in the long term through conservation efforts, WOTUS is far from universally popular. Increased regulations under WOTUS have faced strong criticisms and challenges from agricultural, real estate, and other industry groups for unnecessarily and expensively limiting their procedures and operations.

A main advocate for WOTUS’ repeal is the current Administrator of the EPA, Scott Pruitt, who fought against WOTUS as then attorney general of Oklahoma. Now with Trump Administration and Republican congressional support, Pruitt continues repel efforts by meeting with state officials and groups to discuss how to rewrite the bill.

The legislative language Republican appropriators in the House and Senate have now included may help Pruitt’s negotiations. Such language enables the EPA and U.S. Army Corps of Engineers to end the rule “without regard to any provision of statute or regulation that establishes a requirement for such withdrawal.”

This new legislative language is now facing broader challenges than those directed at WOTUS alone. Opponents argue that it not only blocks challenges to rulings but does not force agencies to provide commentary on reasonings for their regulations, potentially limiting government transparency.

In comment to criticism, the Senate Appropriations Committee spokesman, Stephen Worley stated that, “this provision would allow for the administration to rewrite this flawed rule without unnecessary delay.”