Will Tax Reform Be the Fish That Got Away?

Failing to repeal the tax increases contained in the Affordable Care Act will make it much more difficult for Congress to achieve full-fledged, revenue-neutral tax reform. That was one of the key takeaways that emerged from the 2017 NAPA DC Fly-In Forum, held July 18-19 in Washington, DC.

Fly-In delegates were treated to nearly a full day of speeches and panel discussions featuring members of Congress, Capitol Hill staffers, policy experts and senior ERISA litigation counsel who offered their insight on the prospects for tax reform, the latest developments with the fiduciary rule, and what can be done to minimize the ongoing litigation threats.

As we reported here, Sen. Ben Cardin (D-MD) kicked off the 2017 Fly-In emphasizing that a fundamental point in the forthcoming tax reform debate will be to first “do no harm” with the existing tax incentives for retirement savings.

Tax Reform Must Be Done, But Can It?

Cardin was followed by Rep. Pete Roskam (R-IL), Chairman of the House Ways & Means Subcommittee on Tax Policy, who provided an update on the current tax policy debate. Roskam said he believes the country is at an inflection point, noting that there is a lot of momentum and energy coalescing around updating the tax code.

Explaining that backdrop, Roskam said, “Point #1 is that nobody is defending the status quo of the Internal Revenue Code. Point #2, nobody likes the IRS. And Point #3, so much has changed in the economy since the last time the tax code was updated.” He added that the internet and today’s sharing economy didn’t exist back in 1986, and the current tax code doesn’t reflect this reality.

Roskam explained that the House GOP’s tax reform blueprint from last year is viewed as a starting point, noting that it was built on four key themes: growth, simplicity, dealing with base erosion, and permanence. In particular, Roskam pointed to base erosion as a serious issue that needs addressing, pointing to nearly $3 trillion locked out of the U.S. economy because of the country’s tax laws and the ongoing threat of companies moving their headquarters overseas.

One of the fault-line debates taking place on Capitol Hill is whether to implement permanent tax policy that is paid for versus implementing a temporary tax cut that is not offset. Roskam explained that his GOP colleagues are currently grappling with this and haven’t settled on a final strategy. He further suggested that the outcome of tax reform cannot be an exercise in redistribution and that it must focus on growth.

Like Cardin, Roskam referred to the Hippocratic oath when asked about maintaining retirement tax provisions as part of the ongoing debate, suggesting that he would follow a “do no harm” principle when considering changes to the system. (It’s worth noting that he did not offer as spirited a defense of the current retirement savings tax structure as Cardin did.)

Read our other coverage of this year’s Fly-In here and here.

“There is not an appetite to make it more difficult for people to save,” Roskam stated, adding that, “One message from the retirement community is ‘We have a retirement crisis,’ but the other is ‘Don’t do anything,’ and we have to sort that out.”

As for when Congress may act, Roskam said he is “of the view that we will get tax reform done in 2017, or it will be the fish that got away.”

Tax Reform Doesn’t Get Any Easier

Former congressman Jim McCrery, a senior member of the House Ways & Means Committee during his tenure on Capitol Hill, and David Olander, former tax counsel to the Ways & Means Committee — both now partners with Capitol Counsel — provided an inside look at the prospects for tax reform. They both explained how the failure of Congress to repeal the Affordable Care Act will make it even more difficult for Congress to pass tax reform.

With health care reform on life support and momentum now firmly stalled, McCrery and Olander both believe that Congress will now move to tax reform, but the legislation will probably be focused more on cutting taxes and not on overarching tax reform. McCrery also predicted that the effort will not be revenue-neutral and will likely sunset at the end of the 10-year budget window.

McCrery and Olander also explained how the congressional budget rules will affect the tax reform effort. Both noted that the failure to repeal the ACA tax increases has resulted in a $1 trillion hit to the federal budget baseline, making it hard to craft a revenue-neutral tax reform plan.

“If you’re trying to find a replacement for that revenue, politically speaking it’s not very fun. The exercise [Congress] just went through with Obamacare has not emboldened anyone to step out on a plank to pay for tax reform,” McCrery noted. Added Olander, “The apparent failure of health care [reform] creates a math problem. These two are interrelated.”

Addressing a question about how corporate tax reform fits in to this dynamic, McCrery noted that the phenomenon of corporate inversions has been a driver of tax reform. And while tax reform should be designed to incentivize companies to keep their headquarters in the U.S., it becomes more difficult to do that if the changes sunset after 10 years. Corporate tax directors will be looking for long-term assurances, McCrery added.

Either way, Olander suggested, Congress does not want to go home empty-handed.

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