Despite White House Turmoil, No One Pressing Pause On Tax Reform

Noting that the degree of overhaul depends on compromise between Republicans and Moderates on budgetary reconciliation instructions, Height Securities analyst Peter Cohn waged 85-percent odds that Congress will pass a major tax bill before 2018 midterm elections.

The continued meetings of and between Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn; an in-the-works Senate bill emphasizing cost recovery and expensing; and Thursday’s House Ways and Means Committee hearing on tax reform all indicate continued investment in the process.

“Amid all of the noise and distractions emanating from the Oval Office, no one on Capitol Hill is hitting the pause button on tax reform, and we believe it is premature to argue a Constitutional crisis will kill tax reform until 2019,” Cohn wrote in a Wednesday note.

Roadblocks In The House

However, there are still unsettled conditions challenging the thesis, including those surrounding the House Republicans’ destination-based cash flow tax, which Height said is likely to be altogether omitted. The provision encompasses the border adjustment tax, a repeal of net interest deductibility and first-year expensing.

The House Ways and Means Committee will hold a hearing on the concept May 23 in order to work a compromise with the White House and Senate, but the measure is already facing pushback.

Haste In The Senate

In the meantime, the Senate is expected to release tax reform plans incrementally ahead of the House’s full proposal, including measures addressing territorial tax regimes, repatriation and anti-base erosion.

On Wednesday, the body was to receive draft legislation by Republican Sen. John Thune of the Finance Committee proposing a permanent 50-percent bonus depreciation, the status of which would otherwise begin scheduled decline at the end of the year. The bill also suggests quadrupling equipment expenses under Section 179.

General Ambivalence

But all proposals are hindered by uncertainties.

Thune’s proposal, for example, hinges on the concept of revenue-neutral tax reform, which is similarly contingent upon term definition. For some, neutrality accommodates tax increases, while others approach it through targeted spending cuts and the application of a “current policy” rather than “standard law” baseline.

“The use of ‘current policy’ baseline would be to first assume that tax ‘extenders’ that lapsed at the end of 2016 as well as yet-to-expire temporary provisions are made permanent,” Cohn wrote. “Then lawmakers would use the revenue dividend to cut rates further or avoid the need for additional offsets.”

The difference between baselines, then, is likely the difference between passing or rejecting Thune’s permanent 50-percent bonus depreciation, which would cost an estimated $247 billion under the current law baseline but virtually nothing under the current policy baseline.

Height expects the House and Senate Budget Committees to apply a policy baseline for the 2018 budget and relevant instructions for tax reform.

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