Moving Through the Process of Federal Tax Reform

by Sarah Helton, Senior Advisor, Michael Best Strategies

Last week, the “Big 6” released a joint statement on tax reform that sought to impress upon the American people notions of unity between the Republican-controlled Congress and the President and confidence that comprehensive tax reform will happen this year. The “Big 6” includes House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch (R-UT), and House Ways and Means Committee Chairman Kevin Brady (R-TX). They state, “Our shared commitment to fixing America’s broken tax code represents a once-in-a-generation opportunity…American families are counting on us to deliver historic tax reform. And we will.” This message of unity and commitment to tax reform comes immediately after Congress’ dismal failure to pass health care reform. The “Big 6” also highlighted the process for tax reform moving forward that is distinct from the process used for health care reform. So aside from the full agenda of legislative deadlines in the fall and the policy and political challenges ahead on tax reform, what can we expect on the process? Leadership in Congress and the administration say regular order and reconciliation by year end.

Regular order is something we did not see with health care reform, but has been the focus of Republican leadership’s talking points for tax reform. In moving tax reform legislation through regular order, the House Ways and Means Committee, made up of 24 Republicans and 16 Democrats, and the Senate Finance Committee, made up of 14 Republicans and 12 Democrats, will continue to have hearings in the fall followed by markups in the committees. The House Ways and Means Committee has already conducted several hearings focusing on tax reform and the impacts on individuals and families, small businesses, the border adjustment tax and the economy. The Senate Finance Committee has had two hearings related to tax reform, one as part of the consideration of the nomination of David Kautter to be Assistant Secretary of the Treasury and the second on prospects and challenges of comprehensive tax reform. Additionally, the Senate Finance Committee has divided its members into industry working groups to help develop legislative proposals.

Regular order would seem to offer an opportunity to legislate and advance tax reform in a bipartisan fashion. Much of industry has encouraged bipartisanship as it provides heightened certainty on permanency of tax reform. While several members of Congress, including Chairman Hatch, are open to the possibility of bipartisan reform and see it as necessary, the House and the Senate leadership’s commentary, committee hearings to date, and plan to use the reconciliation process have demonstrated their intentions right now are to move forward in a partisan way. Additionally, Democrats recently made a conditional offer to work with Republicans on tax reform so long as their prerequisites are addressed. Majority Leader McConnell’s statements this past week more or less leave the Republicans and Democrats pointing fingers at each other. He stated, “We will need to use reconciliation” for taxes in the wake of Democrats’ statement that they are “not interested in addressing” Republican priorities.

While Republicans intend to use regular order through committee hearings and markups, it may stop short of what some would consider regular order on the Senate floor. Republicans continue to talk about using reconciliation as the vehicle for comprehensive tax reform. The reconciliation process is valuable for the Senate to avoid a filibuster, limit debate, and pass legislation with only 51 votes. However, Republicans face some challenges if they plan to use reconciliation to pass tax reform, including the necessity to first pass a FY 2018 budget resolution that includes reconciliation instructions and Republicans can only afford to lose two votes without Democrat support. The collapse of health care reform using the reconciliation process demonstrates the potential difficulties ahead.

As for timing, hold on to your seats, because Republicans have an aggressive time table to advance comprehensive tax reform. This past week, White House Legislative Affairs Director Marc Short stated he expects the House to pass legislation in October and the Senate to do so in November. This timeline is easier said than done considering Congress will need to address the debt ceiling and FY 2018 appropriations before the end of September in addition to the fact that comprehensive tax reform is complicated and difficult. So while the administration and leadership look to finishing tax reform by the end 2017, other policymakers and tax analysts are placing their bets on passage in early 2018.












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                    FROM THE CHART ROOM

                    Maritime Chokepoints Are Critical to Global Energy Security

                    The U.S. Energy Information Administration has released its 2017 World Oil Transit Chokepoints report. Chokepoints are narrow channels along widely used global sea routes for oil transport, with some so narrow that restrictions are placed on the size of the vessel that can navigate through them. The inability of oil tankers to transit a major chokepoint, even temporarily, can lead to substantial supply delays and higher shipping costs, resulting in higher world energy prices. While most chokepoints can be circumvented by using other routes that add significantly to transit time, no practical alternatives are available in some cases. Chokepoints may also expose oil tankers to theft from pirates, terrorist attacks, political unrest, and shipping accidents. By volume of oil transit, the Strait of Hormuz (leading out of the Persian Gulf) and the Strait of Malacca (linking the Indian and Pacific Oceans) are the world’s most important strategic chokepoints. The Cape of Good Hope, near the southern tip of Africa, is a major oil trade route and potential alternate route to certain chokepoints. Ships carrying crude oil and petroleum products transiting certain chokepoints are in some cases limited by size restrictions.


                    The global crude oil and refined product tanker fleet is typically classified using the Average Freight Rate Assessment (AFRA) system that was first established by Royal Dutch Shell many years ago and is now overseen by an independent group of shipping brokers.  The AFRA system classifies tanker vessels according to deadweight tons—a measure of a ship’s capacity to carry cargo. The approximate capacity of a ship in barrels is determined using an estimated 90% of a ship’s deadweight tonnage, which is multiplied by a barrel-per-metric-ton conversion factor specific to each type of petroleum product and crude oil, because liquid fuel densities vary by type and grade.  Long Range (LR) class ships are the most common ships in the global tanker fleet, as they are used to carry both refined petroleum products and crude oil. These ships can access most large ports that ship crude oil and petroleum products. An LR1 tanker can carry between 345,000 barrels and 615,000 barrels of gasoline (14.5–25.8 million gallons) or between 310,000 barrels and 550,000 barrels of light sweet crude oil. An LR2 tankers can carry 600,000 to 900,000 barrels of a petroleum product like gasoline, diesel, or light sweet crude oil.  Additional ship categories, including the Very Large Crude Carrier (VLCC) and the Ultra-Large Crude Carrier (ULCC), were added to the AFRA classification system as larger vessels with better economics for crude oil shipments were deployed to serve expanded global oil trade. VLCCs are responsible for most crude oil shipments around the globe and can carry between 1.9 million and 2.2 million barrels of a West Texas Intermediate-type crude oil.  Some chokepoints, such as the Strait of Hormuz, are sufficiently deep and wide to accommodate all sizes of vessels. However, ships transiting the Panama and Suez canals are subject to depth and width restrictions. Tanker traffic through the Bab el-Mandeb and Turkish straits do not face specific size restrictions, but they must deal with relatively narrow, difficult-to-navigate sea lanes.




                    Michael Best Strategies’ Energy Team

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