Six Tax Framework Issued

by Denise A. Bode and Anne C. Canfield

 

This week President Donald Trump and the Republican leadership announced their long-awaited tax reform framework. The release means the beginning of a process that will pit Democrats and some Republicans who disagree on key elements of the framework against the plan’s supporters.

The next step in the process is to see if both chambers can pass a budget resolution. According to Senate leadership staff, the issuance of the Big 6 plan was to provide enough information to facilitate the passage of the House and Senate Budget resolution that will contain Reconciliation instructions.  Reconciliation is the vehicle that will allow the Senate to pass tax reform with a simple majority.   Action on the Senate Budget resolution is expected in the next several weeks.  Importantly, the Senate Budget resolution is expected to make room for a net tax cut in the range of $1.5 trillion over the next ten years, whereas the estimated cost of the Big 6’s tax plan is expected to be around $4.5 trillion.  In order for the “numbers to work,” the tax plan will:

  • have to be scaled back significantly,
  • the revenue estimates rejiggered to be scored more dynamically,
  • the 10-year revenue window extended to 20 or 25 years,
  • revenue offsets will be used, or
  • a combination of all of these options.

While the FY 2018 budget resolution is being brought to the floor, both the House and Senate will be readying their separate schedules for marking up a bill in committee.  House Ways & Means Committee Chairman Brady has long advocated permanent changes to the tax code in order to achieve economic growth, but if the numbers don’t add up to meet the requirements under Reconciliation, some provisions may be permanent, but others might be temporary.

The Big 6 said that their timeline for finishing the bill was still by years-end.  If the process bleeds into 2018, though, they can always make some or all of the provisions retroactive just as President George W. Bush did with the tax cut bill he signed that sent refund checks to millions of taxpayers across the country.

President Trump is keeping his negotiating options open.  Reportedly, he was concerned with several aspects of the plan, including questioning the lowest rate being set at 12% versus 10% and setting the corporate rate at 20% versus the 15% rate he has long advocated.  He also left open the possibility of establishing a fourth, top rate for the wealthy, but letting Congress decide on where the threshold for the rate should be set.  As part of the “Art of the Deal,” the President is presumably signaling that he is willing to roll up his sleeves and start negotiating with any and all parties in order to get a robust tax cut plan enacted.

Coming out in support of the framework and the budget resolution was the important conservative House Freedom Caucus.  They were joined by many others, including The Club for Growth and the U.S. Chamber of Commerce.

MBS has prepared a comparison of various plans that have been considered previously, but not passed.  Those proposals include the work done by the Ways and Means Committee under former Chairman Dave Camp and the House “Better Way” Plan prepared by the Ways and Means Committee under Chairman Brady.  And as a point of personal privilege, included is our previously published MBS “Guestimate,” which came pretty close to the mark.

Corporate Tax Package

 

Current Law

Camp Tax Reform Act of 2014

House Blueprint

Latest Big 6 Framework

MBS Projection

Tax rates

·    35%

·    25%

·    20%

·    20%

·    22%

Pass-through tax rates

·    Taxed at individual owners’ rates

·    Taxed at individual owners’ rates

·    Maximum rate of 25% on domestic manufacturing income

·    25% Business

·    Max of 25% for small businesses

oPartners pay individual rate

·    22% for pass through entities, but not for PSC which will be taxed at individual rate

Capital gains/

Dividend paid deduction

·  0%/15%/20% on capital gains and qualified dividends

·   3.8% net investment income tax for highest earners

·    40% deduction of adjusted net capital gain

·    50% deduction for capital gains, dividends, and interest income

·    Repeal net investment income tax

·    40% deduction of adjusted net capital gain

·    40% dividends paid deduction
Hatch Corporate Integration(Note: As an example, if a corporation had $100 in earnings and paid all of its earnings in dividends to its shareholders, it would then get taxed on $60.  If the corporate tax rate is 22%, the effective rate would then be 13.2 percent.  If it were 25%, it would then be 15% — the corporate tax rate President Trump has advocated.)

Cost recovery of capital investments

·  Depreciation deductions over time

·    Extends cost recovery periods

·    maximum $250k on expensing of business property

reduced as total investment exceeds $800k

·    100% expensing

·    5 year allowance for 100% expensing

·    Not just physical capital expensing, also human capital expensing

·    Business equipment and property: up to $2M

·    Make ‘bonus’ depreciation: permanent at 50% (possibly 70% expensing)

·    Reduce farm machinery depreciation to 5yrs

Based off of the INVEST Act of 2017 (S. 1144) sponsored by Senator John Thune (R-SD)

Interest expense

·  Deductible

·    Limits interest deduction of US corporate shareholder of a CFC that is part of the same worldwide affiliated group

·    Eliminate the deduction for net interest expense

·    Limit the deduction for net interest expense

·    Options

o Limited to a percentage (maybe 66%) of an entity’s interest expense

o Limited to a percentage (maybe 33%) of entity’s EBIDTA

Deductions and credits

·  Numerous deductions and credits

·    Eliminate most deductions and credits

·    Eliminates AMT

·    Permanent R&D incentive

·    Make alternative simplified R&D credit permanent

·    Eliminate all except R&D credit

·    AMT repealed

·    Section 199 repealed

·    R&D tax credit retained

·    AMT repealed

·    Streamlined R&D tax credit

·    Numerous deductions and credits will be repealed or phased-out.  Those include:

o  Section 199 repealed

o  Current deductions for oil and gas and renewables will be equalized. Changes will be phased-in as industries are transitioned to a level playing field

NOLs

·    NOLs carried back 2 years and forward 20 years

·    NOLs limited to 90% of taxable income; repeals special carryback rules

·    NOLs carried forward indefinitely with interest factor

oLimited to 90% of net taxable amount

·    No NOL carrybacks

·    NOLs limited to 90% of taxable income

·    Repeal of special carryback rule

International operations

·    Tax worldwide profits (tax deferred on active foreign earnings until repatriated to US)

·    95% exemption for dividends from 10% subsidiaries

·    Tax only US sales, services, and intangibles (based on destination)

·    100% exemptions for dividends

·    Switch to a territorial system

o 100% exemption for dividends from ‘foreign subsidiaries (in which the US parent owns at least a 10% stake)’

·    Switch to a territorial system

o  10% minimum tax on global income

(Note: If the budget window is moved from 10 years to 25 years, the 10% global minimum tax might be eliminated.)

Imports/

exports

·   Included in corporate tax base if company is subject to US tax

·    Border adjustments

o  Imports are taxed

o  Exports are exempt

·    No border adjustment tax

·    No border adjustment tax

Deemed repatriation

·    No current provision (voluntary holiday in 2004)

·   Mandatory tax on previously untaxed foreign earnings

o  8.75% cash

o  3.5% other assets

·   Less proportional foreign tax credit

o  Payable over 8 years

·   Mandatory tax on previously untaxed foreign earnings

o  8.75% cash

·   3.5% other assets

o  Payable over 8 years

·    Two-tier system

oNo rates specified

·    Mandatory tax on previously untaxed foreign earnings

o  8.75% or 10% cash

o  3.5% other assets

·    Less proportional foreign tax credit

o  Payable over 8 years

Individual Tax Package

 

Current Law

Camp Tax Reform Act of 2014

House Blueprint

Latest Big 6 Framework

MBS Projection

Rates

·    7 brackets

·    39.6% top rate

·    35%

·    25%

·    10%

·   33%

·   25%

·   12%

·    Top rate: up to Congress to decide whether there would be a higher tax bracket for top income individuals

·    35%

·    25%

·    12%

·   Top rate: applied to very high income individuals

·   28%

·   25%

·   15%

Standard Deduction

·   Individuals: $6,300

·    Joint Filers: $12,600

·    Individuals: $11,000

·    Joint Filers: $22,000

·   Individuals: 12,000

·   Joint Filers: $24,000

·    Individual: $12,000

·    Joint Filers: $24,000

·   Individuals: $6,300 – $12,600

·   Joint Filers: $12,600 – $25,200

Credits and Deductions

·    SALT deductions are an itemized deduction for taxes paid

·    $1,000 per child tax credit

·    Deduct up to $1M in mortgage principal

·    SALT deductions eliminated

·    Child tax credit increased

·    Repealed most itemized deductions

·    Eliminated the mortgage interest deduction

·    Modify EITC

·   Eliminate SALT deductions

·   Create consolidated $1,500 credit for child tax credit

·   Retain mortgage interest principal

·   Eliminated most itemized deductions

·    Eliminate SALT deductions

·    Raise ‘significantly’ the child tax credit

·    Retain mortgage interest principal

·    Eliminated most itemized deductions

·    Low-income housing credits retained

·   Child tax credit increased

·   EITC retained

·   Mortgage interest deduction cap reduced to $500k

oDeduction for foreign-owned properties repealed

·   Charitable contribution deduction retained

·   SALT deduction repealed

Alternative Minimum Tax (AMT)

·   Separate tax calculations on some returns

·    Repealed

·   Repealed

·    Repealed

·   Repealed

Capital Gains and Dividend Income

·  0%/15%/20% on capital gains and qualified dividends

·   3.8% net investment income tax for highest earners

·    40% deduction of adjusted net capital gain

·    50% deduction for capital gains, dividends, and interest income

·    Repeal net investment income tax

·   20% rate

Estate and Gift Tax

·    Applies to $5.49M single or $10.98M couple

·    Repealed

·   Repealed

·    Repealed

·   Retained, but the current $5.49M exemption will be increased and/or the rate reduced


 

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                  FROM THE CHART ROOM

                  National Oil and Gas Gateway Stood Up At the Energy Information Administration (EIA)

                  national-oil-and-gas-gateway

                  The National Oil and Gas Gateway is the first publicly available website with oil and natural gas well-level data from multiple states. The website was created as a collaborative initiative among the EIA; the Groundwater Protection Council (GWPC) and its member states; and the U.S. Department of Energy’s Office of Oil and Natural Gas, part of the Office of Fossil Energy.

                  Well-level data in the Gateway are updated monthly by the participating states. Ten oil- and natural gas-producing states are currently submitting monthly data to the Gateway: Alabama, Arkansas, Colorado, Kentucky, Mississippi, Nebraska, New York, Oklahoma, Utah, and West Virginia.

                  Participation in the Gateway is open to all oil- and natural gas-producing states, and the GWPC has worked with most of those states to develop the Risk Based Data Management System (RBDMS), a shared data management system developed with the support of the U.S. Department of Energy’s Office of Oil and Natural Gas.  Users of the Gateway may view, analyze, and export data for oil and natural gas wells, including:

                  • Well location
                  • Well name, unique well API number, and operator
                  • Current well status and well type
                  • Well production, injection, disposition, and completion data
                  • Hydraulic fracturing chemical disclosure reports from FracFocus
                  • Well depth and drilling orientation—such as directional, horizontal, or vertical

                  Gateway data are available in map, datasheet, or dashboard forms. The map view displays the geographic location of wells and allows users to apply filters by drawing areas directly on the map. The datasheet displays well data in a spreadsheet format that lets users aggregate, sort, and compare wells, and the dashboard provides charts that can be customized and downloaded.

                  The Gateway combines participating states’ publicly available oil and natural gas data into a common framework with consistent definitions. Before the Gateway, these states’ well-level data were only available on individual state websites or in aggregate in commercial databases. Data in the Gateway can be modified only by the respective states. State agency websites should be considered the definitive source for all data in the Gateway.

                  Read more here


                   

                   

                  Michael Best Strategies’ Energy Team

                  About Michael Best Strategies

                  Michael Best Strategies focuses on achieving clients’ objectives through unparalleled strategy development and deployment for implementation, pragmatic guidance on public policy development, and government relations. The Strategies team specializes in a full range of services, including government relations, public policy consulting, grassroots advocacy, public affairs, conference planning, and strategic political relationships. For more information, visit michaelbeststrategies.com.