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Senate Holds Hearing on Tax Reform for Businesses

 

Last week, the Senate Finance Committee held a hearing regarding tax reform for businesses. The hearing focused on discussion of the effects of a large, deficit-financed tax cut that some Republicans want to facilitate through reconciliation instructions in the FY 2018 budget resolution. The hearing was held prior to next week’s release of a tax reform outline by the "Big Six" group of Trump Administration and congressional Republican negotiators, which Senate Finance Committee Chairman Orrin Hatch (R-UT) previously said would not determine the Committee's work on tax reform.

In the hearing, Hatch stated that the Committee will consider tax reform through regular order, which applies to the drafting and reporting of any tax reform bills, and that he hopes the process will be bipartisan. There are many areas of business tax reform where thoughts and interests of both Democrats and Republicans overlap, Hatch said, and "there is fertile ground for bipartisan agreement on this." Hatch said the U.S. statutory and effective tax rates are high relative to other nations, stating that "according to a recent analysis by Ernst and Young, when you integrate corporate-level taxes and investor-level taxes such as those on dividends and capital gains, U.S. tax rates are the second highest among developed countries," he said. "That last one is important, given that the United States taxes most corporate earnings that are distributed to shareholders twice — both at the corporate and shareholder levels."

Witnesses at the hearing included Scott A. Hodge (President, Tax Foundation), Donald B. Marron (Institute Fellow, Urban Institute & Urban-Brookings Tax Policy Center), Troy K. Lewis (American Institute of CPAs) and Jeffrey D. DeBoer (President and Chief Executive Officer, The Real Estate Roundtable). Hodge listed four priorities for business tax reform: full expensing; a competitive corporate tax rate such as 20 percent; moving to a territorial system; and making all such changes permanent. Marron said because "the boost to near-term growth may be modest," dynamic scoring by the Joint Committee on Taxation will "play only a small role in paying for tax reform." Lewis recommended codifying traditional definitions of "reasonable compensation" to address the distinction between profits of the business and compensation of owner-operators under a lower pass-through rate. Lastly, DeBoer said the deductibility of business interest should not be repealed or limited, and that expensing should not apply to buildings.

It remains to be seen if, and when, a tax reform package will come to the floors of the House and Senate for votes. In order to proceed to tax reform, Congress must first pass a budget. As House and Senate Republicans continue to discuss tax reform, disagreements continue within the party as to whether the House and Senate budget resolutions demand the reforms to be deficit neutral or allow for revenue losses.

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