House GOP leaders moving full steam ahead on Tax Cuts 2.0 as new details emerge

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1 Tax News & Views Capitol Hill briefing. In this issue: House GOP leaders moving full steam ahead on Tax Cuts 2.0 as new details emerge... 1 McConnell tees up vote on Rettig s nomination for IRS commissioner... 4 Executive order calls for regulatory action to boost retirement savings... 5 House GOP leaders moving full steam ahead on Tax Cuts 2.0 as new details emerge Despite rumors that the effort was running aground due to Senate indifference and concerns raised by some blue state Republicans about drawing more attention to the limitation on the deductibility of state and local taxes (SALT), House GOP leaders insisted this week that their Tax Cuts 2.0 effort to extend lapsing provisions in the major tax cut legislation enacted last year and provide new incentives to promote retirement and family savings and encourage the formation of start-up businesses will proceed as planned during September, with Ways and Means Committee action expected the week of September 10. Meanwhile, Ways and Means Committee Republicans on September 6 unveiled an updated outline of the Tax Cuts 2.0 package that adds a few shreds of meat to the bare-bones description they released in late July. (For prior coverage, see Tax News & Views, Vol. 19, No. 24, July 27, 2018.) URL: URL: Tax News & Views Page 1 of 5 Copyright 2018 Deloitte Development LLC

2 Extending 2017 provisions for individuals, estates, passthroughs Like the earlier release, the September 6 outline states in general terms that the Tax Cuts 2.0 package will include provisions to permanently extend tax incentives from the 2017 legislation (P.L ) that benefit individuals, estates, and passthrough entities most notably, the lower income tax rates, the increased child tax credit, a higher standard deduction, increased exemptions for the alternative minimum tax and the estate tax, and the 20 percent deduction for certain passthrough income. As enacted, nearly all of the 2017 tax law changes (both revenue-losing and revenue-raising) on the individual side of the code are set to expire after 2025 due to the Senate s arcane rules governing the budget reconciliation process the fast-track procedure by which Republicans circumvented a certain Democratic filibuster in particular, a rule stating that reconciliation legislation cannot increase the deficit in the years beyond the budget window. Permanent SALT deduction cap included, Brady says: Although the new outline touts the prospect of making last year s tax incentives permanent, it is silent on whether the Tax Cuts 2.0 package will permanently extend the expiring revenue raisers enacted in last year s tax law, including the new $10,000 annual limitation on the itemized deduction for state and local income and property taxes. That provision generally has been unpopular among Republicans representing districts in high-tax blue states such as New York, New Jersey, and California, and prompted several blue state GOP lawmakers to vote against the legislation when it reached the House floor last December. But Ways and Means Committee Chairman Kevin Brady, R-Texas, insisted to reporters September 4 that the cap on SALT deductibility would be extended beyond 2025 in the forthcoming plan likely signaling that GOP leaders do not want to be seen as backing away from the policy so soon after its enactment and as Treasury and the IRS are promulgating regulations to implement it. URL: Cost considerations also may have been a part of the GOP leadership s calculus. According to a very preliminary estimate from the nonpartisan Joint Committee on Taxation (JCT) that was provided to Democratic staff on the Senate Budget Committee September 4, permanently extending the temporary tax provisions affecting individuals, estates, and passthrough entities in the 2017 legislation would reduce federal receipts by a net $626.7 billion between 2019 and But it s worth noting that this amount reflects the net effects of those policies when partially offset by a combined $318 billion in revenue that would be generated by permanently extending the SALT deduction cap and the new limits on the mortgage interest deduction. (The JCT did not provide separate estimates for the two items.) Removing that revenue from the equation by allowing those provisions to expire as scheduled after 2025 would significantly boost the net cost of a second round of tax cuts and could make the prospect of voting for the legislation harder to swallow for GOP fiscal hawks. URL: Other 2017 revenue raisers could be in the mix: Given Brady s comments about the SALT cap, it follows that the mortgage interest deduction limitation and other temporary revenue raisers in the 2017 legislation such as repealed deductions for personal exemptions and moving expenses, and the new limit on deductions for excess business losses also will be extended beyond 2025 in the forthcoming plan. Retirement and family savings provisions The document that Ways and Means Republicans released in July offered no real specifics on the retirement savings incentives that would be included in an eventual Tax Cuts 2.0 package. The new outline begins to fill in those blanks, noting without elaboration that the legislation would encourage small businesses to offer retirement plans to their employees by: Allowing unrelated small businesses to combine forces to sponsor so-called multiple employer plans (MEPs); Giving employers more time to put new retirement plans in place ; and Simplifying the employer plan participation rules. Specific incentives for retirement plan participants include eliminating mandatory payouts for small retirement plans, allowing individuals to continue making retirement plan contributions after they reach age 70-1/2; and allowing military reservists to maximize their retirement contributions. Tax News & Views Page 2 of 5 Copyright 2018 Deloitte Development LLC

3 (In a related development, President Trump this week took steps to expand retirement savings incentives through administrative means. See separate coverage in this issue for details.) The new outline also reiterates assertions in the July release that the upcoming legislation will include family savings incentives such as tax-preferred Universal Savings Accounts, an expansion of section 529 education accounts, and provisions allowing penalty-free withdrawals from a retirement account to cover expenses associated with the birth or adoption of a new child. Business innovation provisions The July outline noted that the Tax Cuts 2.0 package would encourage the formation of new businesses but offered no real specifics on what this might entail. The September 6 outline reveals that the legislation will include proposals to: Allow new businesses to write off a greater share of their initial start-up costs and Allow start-ups to bring in new investors without triggering limits on their access to tax benefits like the research and experimentation credit for activities conducted in their early years. The outline does not provide additional details on these proposals, however. Brady: Expect legislative language week of September 10 Ways and Means Committee Chairman Brady told reporters September 4 that he would release legislative text of the 2.0 plan early in the week of September 10 with the goal of advancing the bill through committee by week s end. House GOP leaders directed us from the get-go to be ready to move this in September. It s full steam ahead, Brady said. Brady and House Majority Whip Steve Scalise, R-La., briefed the House Republican conference on the effort September 6. House vote in September, but Senate prospects still murky For their part, House Speaker Paul Ryan, R-Wis., and Majority Leader Kevin McCarthy, R-Calif., noted September 5 that they intend to bring the Tax Cuts 2.0 plan to the House floor for a vote this month. Assuming the Ways and Means Committee successfully reports the plan the week of September 10, Ryan and McCarthy s comments imply a floor vote could occur during the week of September 24. (The House is currently scheduled to be out of session during the week of September 17.) Importantly, the signals of confidence from Chairman Brady and House GOP leaders this week do not change the reality that, even if the lower chamber can clear the forthcoming 2.0 plan, its prospects remain dubious in the Senate, where 60 votes (and thus the acquiescence of at least nine Democrats) would be required to overcome procedural hurdles and secure its passage. In fact, some Republicans are wary of even allowing a Senate vote to occur, lest it provide a handful of Democrats running for re-election this year in states that President Trump carried in 2016 an opportunity to bolster their taxcutting credentials by voting yes on the plan while knowing it does not have the requisite support to pass. Nonetheless, some have theorized that the new components of the Tax Cuts 2.0 effort that is, those related to retirement savings and business innovation could potentially be in play, along with other tax items such as tax extenders and some technical corrections to the 2017 tax bill, during the post-election lame duck session of Congress. Alex Brosseau and Michael DeHoff Tax News & Views Page 3 of 5 Copyright 2018 Deloitte Development LLC

4 McConnell tees up vote on Rettig s nomination for IRS commissioner Senate Majority Leader Mitch McConnell, R-Ky., on September 6 filed cloture on the long-stalled nomination of Charles Rettig to be IRS commissioner, setting up a potential confirmation vote as early as the week of September 10. Filing cloture McConnell s act of filing cloture means that the Senate is now poised to hold a vote on the motion to proceed to the Rettig nomination on Wednesday, September 12. (Congress is not scheduled to be in session September 10-11). Importantly, because of changes to the chamber s rules pushed by former Senate Majority Leader Harry Reid, D-Nev., in 2013 and expanded upon by McConnell last year, at this point all presidential nominations (including Supreme Court nominees) can clear the Senate with a simple majority vote (i.e., 51 votes), rather than the usual three-fifths majority typically needed to overcome procedural hurdles in the chamber. Because they control 51 Senate seats and can rely on Vice President Mike Pence to cast a tie-breaking vote in their favor if necessary, Republicans appear very likely to achieve cloture on Rettig s nomination, which would then set in motion up to 30 hours of post-cloture debate followed by another simple majority vote to confirm the nomination. Depending on the Senate s time in session, the number of other items on the schedule, and the level his opponents desire to use up the 30 hours of debate time allotted to them, Rettig could be confirmed by the end of next week. Caught in the crossfire Rettig, who was nominated to the top spot at the IRS by President Trump in February of this year, cleared the Senate Finance Committee July 19 on a straight party-line vote that likely would have been at least somewhat bipartisan if not for Democratic consternation over IRS guidance (Rev. Proc ) issued days earlier that relaxed donor disclosure requirements for nonprofit organizations other than section 501(c)(3) entities that may be involved in political activities. (For prior coverage, see Tax News & Views, Vol. 19, No. 23, July 20, 2018.) URL: Last month, Senate Finance Committee member Bob Menendez, D-N.J., announced he would place a hold on Rettig s nomination if he was dissatisfied with then-forthcoming regulations addressing efforts by certain states, including New Jersey, to construe state and local tax payments as charitable contributions in order to circumvent the 2017 tax cut law s $10,000 annual cap on deductibility of state and local income and property taxes. (For prior coverage, see Tax News & Views, Vol. 19, No. 27, Aug. 17, 2018, and Tax News & Views, Vol. 19, No. 28, Aug. 31, 2018.) URL: URL: Menendez s threat of a hold was always more rhetorical in nature, however, given McConnell s ability to file cloture on the nomination at any time with requisite Republican support and the GOP s ability, under the rule changes already noted, to clear the nomination with a simple majority vote. Nonetheless, Menendez, or any other Democratic senator for that matter, could ensure that the Senate expends the full 30 hours of post-cloture debate on Rettig s nomination, thus occupying floor time that would otherwise be spent on other nominees or, in the current instance, appropriations legislation that must be enacted prior to the beginning of the federal government s fiscal year 2019 on October 1. If confirmed, Rettig would replace acting IRS commissioner David Kautter, who took over for former Commissioner John Koskinen when his term expired during November Kautter also serves as assistant Treasury secretary for tax policy. Alex Brosseau Tax News & Views Page 4 of 5 Copyright 2018 Deloitte Development LLC

5 Executive order calls for regulatory action to boost retirement savings President Trump signed an executive order on August 31 directing the Departments of Labor and Treasury to consider regulatory actions aimed at increasing access to employer-sponsored retirement plans, particularly for employees of small businesses. URL: The order calls on the agencies to consider policies that would: Clarify and expand the rules allowing unrelated employers to reduce administrative burdens and maintenance costs by banding together to sponsor a multiple employer plan (MEP) for their employees. The order also asks Labor to consider revising the definition of employer under the Employee Retirement Income Security Act of 1974 (ERISA) to allow more nontraditional workers, such as sole proprietors and part-time workers, to participate in retirement savings plans. Modify the plan qualification requirements for MEPs to alleviate the so-called one bad apple rule, under which a MEP risks losing its tax-qualified status if one of the participating employers runs afoul of those requirements. Increase the effectiveness of plan notices and disclosures required under ERISA by making them more understandable and reduce the cost to employers of providing these notices and disclosures by expanding options for delivering them electronically. The order directs the Treasury Department to evaluate current life expectancy and minimum distribution tables and see if they need to be revised based on updated mortality information. The order also asks Treasury to decide if these tables ought to be updated annually or on some other periodic basis. Guidance on MEPs and an evaluation of the life expectancy and minimum distribution rules are requested within 180 days of the date the order was issued, which would make the deadline late February An evaluation of the disclosure rules is requested within one year from the order s issue date. The executive order comes as lawmakers on both sides of the Capitol are examining ways to increase participation in and access to retirement savings plans. The Tax Cuts 2.0 package that House Ways and Means Committee Republicans plan to release and mark up the week of September 10 is expected to include provisions aimed at boosting retirement savings. (See separate coverage in this issue.) In the Senate, Finance Committee Chairman Orrin Hatch, R-Utah, and ranking member Ron Wyden, D-Ore., introduced bipartisan retirement reform legislation earlier this year. (For prior coverage, see Tax News & Views, Vol. 19, No. 9, Mar. 9, 2018.) Hatch and Wyden have not indicated when that package will be taken up in the Finance Committee. URL: Jacob Puhl About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the Deloitte name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see to learn more about our global network of member firms. Copyright 2018 Deloitte Development LLC. 36 USC Tax News & Views Page 5 of 5 Copyright 2018 Deloitte Development LLC