Tax News & Views Capitol Hill briefing. In this issue: House GOP budget writers OK blueprint calling for Tax Cuts 2.0, reconciliation spending cuts... 1 Tax Alert: In Wayfair decision, Supreme Court overrules physical presence sales, use tax nexus standard... 4 Senate taxwriters schedule Rettig s confirmation hearing; appropriators approve IRS budget bump... 4 Ways and Means bills address IRS rehires, tax-exempt status of mutual ditch and irrigation companies... 6 House GOP budget writers OK blueprint calling for Tax Cuts 2.0, reconciliation spending cuts House Budget Committee Republicans marked the six-month anniversary of the passage of the 2017 tax cut legislation (P.L. 115-97) by approving a budget resolution for fiscal year 2019 that calls for a permanent extension of the temporary tax relief provisions enacted in the new law, while separately setting up a fast-track budget reconciliation process designed to move major spending cuts. But even if the measure eventually passes on the House floor, there are no indications that it will advance in the Senate. House GOP budget plan The budget blueprint for upcoming fiscal year 2019, which begins October 1, cleared the House Budget Committee on June 21 by a vote of 21-13. It purports to reduce the federal deficit by $8.1 trillion by 2027 and bring the national balance sheet into surplus beginning in 2028 through a combination of cuts in mandatory spending, regulatory reforms, and increased economic growth. Tax News & Views Page 1 of 6 Copyright 2018 Deloitte Development LLC
Tax cut reserve fund: The blueprint provides for a reserve fund for extending the pro-growth tax policies that were enacted last year, which presumably would mean permanent extensions of a number of tax relief provisions for individuals in last year s tax bill such as income tax rate reductions, a higher alternative minimum tax exemption, and an increased estate and gift tax exemption which are currently set to expire after 2025, and possibly certain business breaks such as 100 percent bonus depreciation that are scheduled to expire or phase out in later years. House Ways and Means Committee Chairman Kevin Brady, R-Texas, and other House Republican leaders, have promised to unveil such a bill informally known as Tax Cuts 2.0 before the chamber adjourns for the August recess and bring it to the floor for a vote before the November midterm elections. As a practical matter, a reserve fund which allows the chairman of the Budget Committee to adjust certain levels in the budget, subsequent to its adoption, to protect a particular policy from parliamentary challenges is a mere a messaging tool, particularly in the current context. Importantly, reserve funds are not an avenue by which lawmakers can bypass a filibuster in the Senate. A separate reserve fund would be established for legislation to repeal and replace the Patient Protection and Affordable Care Act of 2010. Reconciliation spending reductions: The plan also includes reconciliation instructions that would require 11 House committees to report legislation by September 14 of this year that would reduce the deficit by a total of at least $302 billion over the 10-year budget window. Of that amount, the Ways and Means Committee is specifically charged with producing a bill that would achieve at least $150 billion in deficit reduction. Provided strict parliamentary and procedural rules are met, legislation moved under budget reconciliation can pass both chambers with a simple majority vote a potentially powerful tool for Republicans who control 51 seats in the Senate, where 60 votes (a three-fifths majority) are normally required to advance legislation under regular order. (The reconciliation instructions in the fiscal year 2018 budget agreement that the House and Senate reached last fall enabled GOP leaders to move last year s tax cut legislation through the House and Senate on the strength of Republican votes alone.) The blueprint leaves it to each committee to authorize cuts from the spending programs in its jurisdiction. In the case of the Ways and Means Committee, that conceivably could mean reductions in programs such as Medicare, Temporary Assistance for Needy Families, Supplemental Security Income, and Unemployment Insurance. In theory, the Ways and Means Committee could also move extensions of expiring tax cuts pursuant to the reconciliation instruction, as such instructions cannot be prescriptive as to policy. Importantly, however, the net effect of all such policies would still have to meet the committee s $150 billion deficit reduction target. Any tax-cutting effort under reconciliation would also have to contend with the Senate s Byrd Rule, which generally seeks to prevent the fast-tracking of policies that would increase the deficit over the long run. Senate action appears unlikely The measure may come to the House floor for a vote by the full chamber the week of June 25. But even it if clears the House, there is currently no sign that action on a similar measure is likely on the other side of the Capitol. Senate Budget Committee Chairman Mike Enzi, R-Wyo., and Senate GOP leaders have not indicated that a budget resolution is on their legislative agenda. Moreover, Senate Republican leaders have so far shown no appetite for moving a second round of tax cuts in 2018. More debate over Tax Cuts 1.0 Even as the House budget writers attempted to lay out a path for a second tax bill, comments by Republican and Democratic congressional leaders at dueling press conferences on June 20 and debate during two House committee hearings (also on June 20) on the economic impact of the 2017 tax cuts confirmed that the partisan divide over last year s legislation remains as wide as ever. Leadership press conferences: House Ways and Means Committee Chairman Kevin Brady told reporters at the GOP press briefing that because of the new law [t]he economy s transformed and [is] exceeding all expectations. I think it s difficult to find any measurement that isn t better now than before. Tax News & Views Page 2 of 6 Copyright 2018 Deloitte Development LLC
House Speaker Paul Ryan, R-Wis., was similarly upbeat, telling reporters America had the worst tax code in the industrial world. Now things are getting so much better. Democrats, on the other hand, cast the new law as a deficit buster that does little to benefits middle-class taxpayers. House Minority Leader Nancy Pelosi, D-Calif., told reporters that 86 million American families, middle-income families, will be paying more in taxes under this, in the life of this bill. And House taxwriter Brian Higgins, D-N.Y., said the new law would result in largest accumulation of debt in the shortest period of time in American history. Energy and Commerce: During a hearing on the benefits of tax reform on the energy sector and consumers held by the House Energy and Commerce Committee s Energy Subcommittee, Chairman Fred Upton, R-Mich., declared that the 2017 law seems like it s working, while ranking Democrat Rep. Bobby Rush of Illinois and his members denounced the legislation as helping primarily the wealthiest Americans and not providing benefits for middle-class families. Several of the Democrats noted that the Energy and Commerce Committee has no jurisdiction over taxes and said the members time would be better spent focusing on pressing issues of relevance to their authority. This is clearly a political hearing, said Rep. Jerry McNerney, D-Calif., adding that with consumer energy prices generally rising, the hearing seemed misplaced. Republicans pointed to the many public utilities that have announced lower rates for customers as a direct result of the tax bill, but Democrats and Seth Hanlon of the left-leaning think tank Center for American Progress countered that many states require utilities to pass any tax savings along to the consumer and that other types of energy companies have no such mandate. The panel also heard from witnesses from two small energy companies and the National Federation of Independent Businesses. Financial Services: The tone was much the same at a House Financial Services Committee hearing addressing the impact of last year s legislation on economic growth. Chairman Jeb Hensarling, R-Texas, and other Republicans on the panel cited statistics suggesting that the new law has led to an increase in the rate of economic growth, job creation, and personal income, and they offered anecdotal evidence of a growing sense of economic optimism among consumers and small-business owners. For their part, ranking member Maxine Waters of California and her Democratic colleagues contended among other things that increases in economic growth are simply building on the economic recovery that began during the Obama administration, that large corporations are using their tax savings primarily for stock buybacks rather than capital investment, and that the tax benefits for business owners have not translated into higher wages for workers. They also argued that the tax cuts, which were not offset, will lead to unsustainable increases in the deficit. The Financial Services Committee, like the Energy and Commerce Committee, does not have jurisdiction over tax issues. Coming soon: 1040 postcard In other developments, Treasury Secretary Steven Mnuchin told reporters June 20 that the IRS will soon unveil what has been touted to be a smaller, simpler version of the Form 1040. The redesigned form, which Mnuchin said will be released sometime during the week of June 25, is expected to reflect the simplifications to the tax code enacted in last year s tax legislation. Hardworking taxpayers won t have to spend nearly as much time filing out their taxes, Mnuchin said. Mnuchin offered no details about the revised form other than to say it will be a postcard as we promised. (A frequent talking point of congressional Republican leaders and President Trump last fall was that passage of their proposed tax cuts would allow many individual taxpayers to file their returns on a form the size of a postcard.) Tax News & Views Page 3 of 6 Copyright 2018 Deloitte Development LLC
Alex Brosseau, Michael DeHoff, and Storme Sixeas Tax Alert: In Wayfair decision, Supreme Court overrules physical presence sales, use tax nexus standard The US Supreme Court on June 21 held by a 5-4 margin in South Dakota v. Wayfair, Inc., et. al. that the physical presence rule established in its previous decisions in Quill (1992) and National Bellas Hess (1967) for purposes of sales and use tax nexus is unsound and incorrect. As a result, the Court reversed the lower court decisions and upheld the constitutionality of a 2016 South Dakota law establishing a sales/use tax nexus standard based on the existence annually of more than $100,000 of in-state sales or 200 or more transactions involving in-state deliveries of goods or services. Find out more A tax alert from s Multistate Tax Group includes links to the decision itself as well as resources that address the underlying South Dakota law and the technical and logistical implications for remote sellers. It also includes a registration link for a special edition Dbriefs webcast on the decision scheduled for June 29. URL: http://newsletters.usdbriefs.com/2018/tax/tnv/180622_2_suppa.pdf Michael DeHoff Senate taxwriters schedule Rettig s confirmation hearing; appropriators approve IRS budget bump The Senate Finance Committee this week scheduled a hearing to consider Charles Rettig s nomination to serve as the next commissioner of the Internal Revenue Service. Meanwhile, the Senate Appropriations Committee approved a fiscal year 2019 budget for the IRS that would give the agency a slight increase over its current-year funding levels. Rettig hearing Finance Committee Chairman Orrin Hatch, R-Utah, announced in a June 22 news release that the panel will hold a confirmation hearing for Charles Rettig President Trump s nominee to lead the IRS on June 28 at 10:00 a.m. Rettig is a California-based tax lawyer with Hochman, Salkin, Rettig, Toscher & Perez. President Trump nominated him to become IRS commissioner on February 13, but Finance Committee action was delayed because the panel did not receive Rettig s official paperwork until late April. In recent weeks Rettig has been meeting individually with members of the Finance panel and has received generally positive reviews. Treasury Assistant Secretary for Tax Policy David Kautter has been serving as IRS acting commissioner since former Commissioner Robert Koskinen s term expired last November. IRS budget details Also this week, the Senate Appropriations Committee voted 31-0 on June 21 to approve a $23.7 billion financial services and general government spending package for fiscal year 2019 that would allocate some $11.26 billion to the Internal Revenue Service, including funds to implement the massive tax cut legislation (P.L. 115-97) enacted late last year. Program allocations: Across the Service s four program areas taxpayer services, enforcement, operations support, and business systems modernization the Senate Appropriations package represents an increase of $75 million over Tax News & Views Page 4 of 6 Copyright 2018 Deloitte Development LLC
the agency s fiscal 2018 budget that was enacted in the Consolidated Appropriations Act, 2018 (P.L. 115-141) in March. But the program allocation falls $354 million short of the amount included in the IRS spending package for fiscal 2019 that cleared the House Appropriations Committee on June 13. (For details on the House Appropriations measure, see Tax News & Views, Vol. 19, No. 19, June 15, 2018.) URL: http://newsletters.usdbriefs.com/2018/tax/tnv/180615_1.html As approved, the Senate Appropriations bill would allot the IRS just over $2.5 billion for taxpayer services (roughly $15 million more than the House Appropriations package), $4.86 billion for enforcement (no change from the House package), $3.71 billion for operations support ($279 million less than the House package), and $110 million for systems modernization ($90 million less than the House package. Implementing 2017 tax cuts: On top of the program allocations, the Senate Appropriations package like the House package also would provide $77 million for the Service to use in its efforts to implement last year s tax cuts. Lawmakers gave the agency $320 million for tax cut implementation efforts in FY 2018. (The Trump administration asked Congress earlier this year to give the IRS a total of $397 million to implement the new law.) Treasury regulatory review: The Senate Appropriations measure also would authorize funds for the Treasury Department to hire additional personnel to conduct cost-benefit analyses of tax regulations that are deemed economically significant. This extra layer of review is required under a recent deal between Treasury and the Office of Management and Budget (OMB) that grants OMB broader authority in reviewing tax regulations. (For prior coverage, see Tax News & Views, Vol. 19, No. 12, Apr. 13, 2018.) The OMB likewise would receive a budget increase to hire additional staff to handle its own expanded reviewing responsibilities under the joint agreement. URL: http://newsletters.usdbriefs.com/2018/tax/tnv/180413_4.html The House Appropriations bill does not include a similar provision. Next steps: Senate leaders have not yet indicated when they plan to bring the measure to the floor for a vote by the full chamber. Once it clears the Senate, it will need to be reconciled with the competing House version of the legislation. (A floor vote on the House Appropriations measure has not yet been scheduled.) Hearing addresses civil asset forfeitures Also this week, the Ways and Means Oversight Subcommittee held a hearing to examine the procedures in place at both the IRS and the Department of Justice to return assets seized from taxpayers who inadvertently engaged in socalled structuring transactions in violation of the Bank Secrecy Act, which requires cash transactions of amounts greater than $10,000 to be reported to the federal government to target cash-based criminal activity. (Ways and Means Committee members have in the past expressed concern that individuals and small businesses may unwittingly engage in a structuring transaction and be subject to asset forfeiture without ever committing a crime. For prior coverage, see Tax News & Views, Vol. 17, No. 25, July 8, 2016.) URL: http://newsletters.usdbriefs.com/2016/tax/tnv/160708_3.html Don Fort of the IRS and John P. Cronan of the Justice Department answered questions posed by the handful of members present about how their respective agencies have adapted their policies to address inadvertent offenders. Fort told the panel that the Service changed its policy to give more weight to whether a transaction appeared to be a minimal violation or part of a larger criminal scheme and noted that the change was put in place retroactively. Cronan indicated that the Justice Department was instituting its policy changes prospectively something that subcommittee member Peter Roskam, R-Ill., found indefensible. IRS reform legislation (H.R. 5444) that cleared the House in April would limit the IRS s civil asset seizure authority by requiring the Service to show probable cause that the funds in a suspected structuring transaction are derived from an illegal source or connected with other criminal activity. If a court determines that the government should return funds and interest to an individual whose funds were seized based on a structuring allegation, the interest payment would be exempt from tax. Tax News & Views Page 5 of 6 Copyright 2018 Deloitte Development LLC
Michael DeHoff and Jacob Puhl Ways and Means bills address IRS rehires, tax-exempt status of mutual ditch and irrigation companies The House Ways and Means Committee approved legislation June 21 that would prevent the Internal Revenue Service from rehiring any former employee who was terminated for misconduct. Ways and Means Committee member Kristi Noem, R-S.D., who sponsored the IRS Integrity Act (H.R. 3500), said the bill is meant to ensure that the Service rehires only trustworthy individuals given that IRS employees work with some of Americans most sensitive information. According to the Joint Committee on Taxation (JCT) staff, the proposal would have a negligible effect on federal receipts. The panel also approved legislation (H.R. 519) sponsored by Rep. Ken Buck, R-Colo., that would permit mutual water and storage delivery companies to retain their nonprofit status even if they receive more than 15 percent of their revenue from nonmember sources. (Additional nonmember revenue raised would have to be used for maintenance, operations, and infrastructure improvements.) The JCT staff estimates the legislation would reduce federal receipts by $39 million over 10 years. Both measures were approved by voice vote. Michael DeHoff and 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 www.deloitte.com/about to learn more about our global network of member firms. Copyright 2018 Deloitte Development LLC. 36 USC 220506 Tax News & Views Page 6 of 6 Copyright 2018 Deloitte Development LLC