Tax Cuts and Jobs Act

After much secrecy and delays, House Republicans unveiled last week the Tax Cuts and Jobs Act. The House opted for a more traditional legislative title for the bill instead of calling it the Cut, Cut, Cut Act as President Trump had proposed. This is smart as most of the proposed cuts are directed at corporations. House Ways and Means Chairman Kevin Brady (R-TX) and Speaker Paul Ryan (R-WI) aim to fast track and send the bill to the Senate by Thanksgiving. With the passage of the recent budget bill, the Tax Cuts and Jobs Act will only require a majority vote in the Senate to pass and Leader Mitch McConnell (R-KY) has said previously that he wants to pass a tax overhaul by year’s end. With a 52-seat majority Republicans can only afford to lose two GOP senators. Like the failed attempt to repeal the Affordable Care Act, this will be difficult.

Major elements of the bill for businesses include:

  • Lowers the corporate tax rate to a flat 20%
  • Reduces tax on pass-through income to 25% for certain small businesses
  • Allows full (100%) depreciation of capital expenditures in Year One
  • Imposes a 1.4 percent excise tax on college endowments at 200 private universities
  • Maintains the Low-Income Housing Tax Credit but eliminates tax-exempt private-activity bonds used to help fund airports, affordable housing developments and hospitals

For individuals the bill would:

  • Reduce the number of income tax brackets to four
  • Make no changes to 401k programs
  • Cap the mortgage interest deduction at $500,000 (down from $1.1 million)
  • Doubles the standard individual tax deduction
  • Eliminate the state and local tax deduction as well as deductions educators use to buy school supplies
  • Repeals the Alternative Minimum Tax
  • Phases out the estate tax which currently affects estates of $5.5 million or more
  • Eliminates deductions for medical expenses and student loan interest and the adoption tax credit

The last major tax reform took place in 1986 under President Reagan and had bipartisan support. Reagan initially called for tax reform to pass in time for the 1984 elections. That timeline wasn’t even close to being realistic. After Reagan won 49 states that fall, he had more political capital to leverage. Despite that, House and Senate leaders adhered to regular order knowing that real reform is only possible when there’s true bipartisan support. Fast forward to today and Rep. Richard Neal (D-MA), the Ranking Member on the House Committee on Ways and Means and the Dean of the Massachusetts Delegation, is urging Republicans not to rush legislation with such wide-ranging economic impacts. In a letter Rep. Neal sent last week to Chairman Brady, he noted that during the 1986 tax reform debate, Ways and Means held 30 hearings. Subcommittees held 12 hearings. More than 450 witnesses testified. The Committee took 26 days to mark up the bill. The Senate Finance Committee took a similarly thorough approach.

Now that stakeholders have had a chance to review the bill, many are concerned, especially those in Blue states. The tax on college endowments, for example, disproportionately targets large private universities in the Northeast. The same states also have costly housing markets and homeowners will take a hit with cuts to their mortgage interest deductions as well by the elimination of state and local tax deductions. It also appears that deficit hawks are looking away as the bill could add $1.5 trillion in debt over a decade unless unrealistic assumptions on economic growth come to fruition.

The Tax Cuts and Jobs Act will dominate all Congressional activity for the near future. It’s critical to quickly engage with lawmakers to make sure they realize this bill’s effects on your personal or corporate wallet. Not to get lost in the tax debate is the Dec. 8 deadline for Congress to pass legislation funding the government.

The Path to Tax Reform Will Go Through Massachusetts

By: Anthony DeMaio

Washington is working overtime this week to characterize the president’s first 100 days following the April 29th milestone. With the spotlight on the White House, it is easy to ignore Capitol Hill. As the 115th Congress reconvenes after a two-week recess, many Members will be smarting from tough town halls and other public appearances back in their districts. Pressure on Speaker Paul Ryan and Majority Leader Mitch McConnell to pass legislation is mounting. With the president having outlined his vision for tax reform, it looks like a much-anticipated tax bill will be the next policy item on Congress’ agenda.

If the goal of re-writing the federal tax code seems ambitious, it’s because it is. The last time a tax reform bill was enacted was 1986 – three days before the ball rolled through Buckner’s legs – a lifetime ago (in both politics and sport). Despite a divided government then, Washington was less polarized. Democrats in the House including Speaker Tip O’Neill and Ways and Means Chairman Dan Rostenkowski worked with Republicans like Senate Majority Leader Bob Dole, Finance Chairman Bob Packwood, and President Ronald Reagan to pass the first comprehensive changes to the tax bill code in 32 years.

There is no doubt that politics is more partisan today than during the Reagan-O’Neill era. And with Republicans in control of Congress and the White House, one would expect the Democrats’ role to be insignificant. But as we learned during the recent attempt to repeal and replace the Affordable Care Act, House Republicans are deeply divided. So if congressional leadership is serious about passing a tax bill, they will need rank and file Democrats to support it, especially Congressman Richard Neal of Massachusetts.

Mr. Neal has served on the House Ways and Means Committee, which has jurisdiction over the tax code, for over 20 years. He is now the top or Ranking Democrat on the panel. It will be up to Mr. Neal and Chairman Kevin Brady (R-Texas) to hash out the details of a viable tax bill.

Among President Trump’s campaign promises and early proposals was a border adjustment tax, or BAT, which would impose a steep tax on goods coming into the United States from abroad. In theory, the BAT would encourage corporate investment at home and create jobs in the manufacturing sector. But as the president found out, tax proposals often make strange bedfellows and while the BAT has some bipartisan support, it also has bipartisan opposition. It appears that the vocal opposition from key Republican senators prompted Trump to shelve the BAT proposal. As other suggestions are considered and tweaked, Mr. Neal will be responsible for determining their viability within his caucus.

In recent history, the medical device tax has been the key tax issue for Massachusetts, thanks to the booming medtech industry. But with a comprehensive bill up for consideration, and a critical seat at the table, Massachusetts interests will play a more central role. Changes to the corporate tax rate will not only affect the 13 Fortune 500 companies based in Massachusetts, but the thousands of small businesses and startups in bio, tech, and other sectors. Consolidating tax brackets and changing eligible deductions should get the attention of the state’s growing millionaire class and the thriving middle class alike. And if Congress is serious about paying for lower taxes by creating savings in the healthcare system, Massachusetts’ research facilities and its dominant healthcare sector will need to sit up and take notice.

While not the low-hanging legislative fruit that would count as an easy win, tax reform is certainly high on Speaker Ryan’s agenda. As the focus turns to legislative action, and the Speaker seeks a win after an early failure on healthcare, we expect to see a tax bill move. There is a narrow political path for the legislation to tread, and it goes right though the Commonwealth.

CEO’s Corner: February/March 2017

220px-Thomas_P_O'Neill_IIICampaigning is different than governing. President Trump recently unveiled his budget blueprint and in doing so formally, he made clear his policy plans for our country. At the state and municipal level, the proposed budget doesn’t bring good news. If adopted, the budget would dramatically impact the ability of America’s urban mayors to continue to operate healthy, thriving communities. This was the message I delivered in an op-ed that ran in CommonWealth Magazine last week.

At the intersection of policy and budget are real people – yet his proposal fails to make that connection. This long tally of crucial cuts will affect cities from Portland, Oregon to Portland, Maine. The reductions don’t just weaken or eliminate essential federal programs intended to help disadvantaged families, but they strike at the very core of America’s cities – the places that drive so much of our current innovation and economic development – and their ability to function and thrive. After all, the private sector cannot prosper when basic public services such as transportation become severely hobbled.

From a $6 billion cut to Housing and Urban Development that will devastate affordable housing, development and public parks, to the elimination of Amtrak subsidies, to a massive $16.2 billion cut to public transportation – taken together it is a recipe for stopping cities in their tracks, stymying growth and development and throwing a wrench into the engine that makes our country run – our great urban centers. Take one example: a $2.3 billion cut to matching federal funds for new or expanded public transportation projects that are co-funded by cities. More than 40 cites, from Albany to Tempe, will lose new subway systems, tramways, light rail and assorted other carbon-cutting, people-moving job creators.

Some of the cuts directly impact households. A cutback of more than $4 billion will decimate Health and Human Services programs, including Home Energy Assistance. So, what is the plan when the elderly and poor in Chicago and Boston and Seattle cannot afford to heat their homes next winter? Section 8 landlords will lose tenants, urban hospitals will lose grant dollars, urban colleges will see huge cuts, and public housing will suffer catastrophic drops in funds for everything from vouchers to maintenance and construction money. The list goes on.

Federal budget impacts will be locally significant and very real. However, submitting a budget is much easier than persuading Congress to pass it. States, municipalities and individuals must carefully scrutinize the president’s proposal and make their voices heard in Congress – just as they did in the failed attempt to “repeal and replace” the Affordable Care Act. The time to engage Congress is now.

 

March Madness: American Health Care Act

“I’m just a bill, sitting here on Capitol Hill..” 

Schoolhouse rock Bill

The American Health Care Act of 2017 was pulled before a probable defeat on the floor of the House of Representatives today. Here’s a recap of its journey.

After months of anticipation and secrecy, the American Health Care Act of 2017 plan was released by House Republicans on March 6th consisting of two bills. One bill was introduced into the House Energy and Commerce Committee and the other to the House Ways and Means Committee.  The bills passed both committees the next day on a party-line vote and without a Congressional Budget Report (CBO) cost analysis.  It wasn’t until March 13th that the CBO released its budget estimates. The CBO report is often used as a tool for debate prior to any votes. On March 16th the bill passed the House Budget Committee with a vote of 19-17.  It’s important to note that three Republicans on that committee joined the Democrats in opposition.  The bill, HR 1628, then went to the House Rules Committee which sets the terms for the final debate when the bill comes to the House floor for a vote.  The committee approved a provision that allows for the “same-day” rule (or often referred to as martial law), essentially allowing the bill to be voted on the same day even as it is still having changes made to it before being voted out of committee.

In contrast to the fast movement of the American Health Care Act, the Affordable Care Act during the Obama Administration underwent months of negotiations, markup, and debate before its final passage.   It was introduced by Speaker Pelosi in July of 2009 and passed in the House November 2009 and was ultimately not signed into law by then President Obama until March 23, 2010.

Here’s a visual recap of its journey:

AHCA HR 1628.png

Reconciliation: the Capitol Hill buzzword that might just yield legislation

By: AmyClaire Brusch

There is a lot of discussion in Washington and in the news about “reconciliation.” The process is being touted as the Republicans’ key to passing all sorts of legislation including measures to repeal and replace the Affordable Care Act. So what is reconciliation? How does it work? Can Republicans use reconciliation to make good on the many promises that were made during this long campaign?

President Trump, along with members of the new Congress, campaigned on a platform that called for large policy changes. Some of these changes will be difficult to achieve through the normal legislative process. Getting something like tax reform or the repeal and replacement of the Affordable Care Act would be nearly impossible under regular order. Legislating is a complex art and, when traditional methods stall, Congress looks deeply into its rulebook. In this case, the Republican majority will likely turn to the budget reconciliation process (“reconciliation,” for short) to advance top agenda items in 2017.

The budget reconciliation process was first used in the 1980s as a means of enacting spending, tax, and entitlement reform measures that the then-Senate minority would have filibustered. Under Senate rules, it only takes one Senator to hold up a piece of legislation with a filibuster (think: Ted Cruz reading Green Eggs and Ham). The only way to place a time limit on debate is with a supermajority (three-fifths of the Senate). Today, the Republicans control the Senate but only narrowly. At 52 seats, they are nowhere near the 60 needed to break a filibuster. However, some bills, namely budget resolutions, are filibuster-exempt. Since budget resolutions are protected from the Senate filibuster, so, too are budget reconciliation resolutions.

Okay, but what’s a reconciliation resolution?

At its heart, a budget reconciliation bill “reconciles” some aspect of spending, revenue, or the national debt. Because it is a budget resolution, reconciliation has no force of law but outlines what changes authorizing committees should make to the issue at hand in order to meet that year’s budget targets. Those committees then have to pass legislation detailing those changes. Finally, since that legislation is under the directive of reconciliation, it is not subject to typical House and Senate rules. As a result, it is very difficult for the minority party to hold it up with procedural moves.

So are the Republicans going to run roughshod through this Congress?

The short answer is: No. There are checks on the reconciliation process. It does not give the majority party free reign. First, the very nature of reconciling the budget offers limited possibilities to do so. There are three applications eligible for budget reconciliation – spending, revenue, and debt limit – but each of those applications can only be used once per budget. Once Congress has taken each of those three bites at the apple, it cannot continue to “reconcile” the budget. That is one reason the process is usually saved for big items. Second, the president can always veto a reconciliation bill, as President Clinton did with the tax relief act in 1999. Given that congressional Republicans are not necessarily in line with President Trump, they will need to be careful with what reconciliation bills they send to his desk. Finally, the Senate’s “Byrd rule” prevents the majority from throwing everything but the kitchen sink into reconciliation bills. The rule stipulates that the items within the bill must actually reconcile some part of outlays or revenues and be within the jurisdiction of the authorizing committee receiving the reconciliation instructions.

Why doesn’t this process come up more often?

The budget reconciliation process is not often used. That’s partly because, in order to ensure its success, the House, Senate, and presidency really need to be occupied by the same party. Otherwise, one chamber could simply ignore the legislation or the president could veto it. The aforementioned restrictions also make the process challenging to wield. Reconciliation is, by its very nature, not easy. Though a congressional staffer for over a decade, I only saw the reconciliation process used successfully a few times (including the 2001 and 2003 tax cuts and Affordable Care Act).

Part two of this post will focus on reconciliation and specific legislation.

To learn more about our federal relations services visit our website www.oneillandassoc.com or call us at 617-646-1000.

Federal Look Ahead

By John Cahill

webres_120403_oneill_johncahill-0108With the Republican Party holding the presidency and both houses of Congress for the first time since 2006, many believe government will be in a post-gridlock frame of mind. There will surely be quick movement on some major initiatives. However, the Congressional majorities are slim and many bills will require Democratic votes.

It’s virtually certain that the first order of business in Congress will be to repeal and replace the Affordable Care Act (ACA). This was a central campaign theme for Republican candidates in 2016 and every year since the ACA was enacted. However, the ACA is enormously complex and it’s naïve to think that a single vote to repeal will return the health care system to a pre-ACA condition. Even within the majority, there are deep divisions on what the repeal vote will actually repeal. There’s similar disunity within industry. Some predict a repeal with delayed implementation, but that unreasonably assumes that the health care system will stay the course instead of shifting for the post-ACA world.

The entire health care sector has essentially reshaped its business model to account for ACA. The law expanded Medicaid and established individual mandates. Today more than 23 million Americans are insured because of the law, according to the Congressional Budget Office. There are now safeguards preventing insurance companies from denying people coverage over pre-existing conditions and young adults can continue to be insured on their parents’ plans until age 26. While the details of a repeal remain to be seen, the vote will set in motion a lengthy process to not eliminate, but replace the law’s most popular provisions. Replacing with even a scaled back version will still require difficult policy trade-offs and, most importantly, revenue – taxes that may no longer be in place after a repeal.

Tax reform is also likely to advance in the next Congress. Similar to the ACA repeal, details are unclear. One thing is certain and that is that tax reform will be a top agenda item for every member of the House Ways and Means Committee. Individual and corporate rates are likely to fall affecting every household and business as a result. Every step of the way, there will need to be concessions. The President-elect campaigned on a 15 percent corporate rate. Speaker Paul Ryan’s plan calls for a 20 percent rate. Both want to repatriate the $2.5 billion that corporations hold abroad. Historically, moves to lower rates require elimination of deductions. It’s also difficult to envision how such major cuts could be seen as revenue neutral to deficit hawks in both parties.

While the winter and spring will be dominated by a repeal of ACA and the beginnings of tax reform, shortly thereafter we expect Congress to focus on infrastructure. There is broad consensus that infrastructure improvements are vastly needed. However, with massive tax cuts proposed, finding new funding will be tricky. Surely there will be public-private partnerships, but it’s also possible that tax revenues gained through the repatriation of oversees money may be a source of revenue. There are also opportunities such as hypothetical “rebuild America” bonds, although investors need a decent return to make this asset attractive. For projects like airports, it’s conceivable that the new Congress could allow for more local latitude on funding sources like the Passenger Facility Charge (PFC) by letting individual airports to raise the current cap on PFCs, thereby permitting new airport bonds to be issued with proceeds going to improvements. What is straightforward is that the list of projects is long and investing in our infrastructure would have major economic impact on our country.

Gridlock will no longer be the norm, but everything will require compromise beginning with the White House and Congressional Republicans. Both parties in Congress will look for common ground. Republicans will have a two-vote margin in the Senate – and a smaller margin on key committees – and Speaker Paul Ryan still must contend with a very active and conservative party base. Several in both parties have a reputation for deal making and that’s one certainty we have as the 2018 midterms approach.