WASHINGTON, DC—Despite some doubts to the contrary, Washington DC is getting set to tackle tax reform and US President Donald Trump plans to herald these efforts this week by campaigning for the plan in the state of Missouri, according to a tweet by the president.
I will also be going to a wonderful state, Missouri, that I won by a lot in '16. Dem C.M. is opposed to big tax cuts. Republican will win S!
— Donald J. Trump (@realDonaldTrump) August 27, 2017
The Little We Know
While little details have been revealed about the plan, Chief Economic Advisor Gary Cohn told the Financial Times last week that it will protect personal, charitable, mortgage and retirement savings deductions. He also said that the White House would like it to include a one-time corporate tax repatriation on overseas profits and to move to a territorial system. Other than that, Cohn told the Financial Times, the Trump Administration does not have “fixed or detailed plan for tax reform” and expects that the relevant congressional committees will finalize the legislation.
Another clue about what might be included in comprehensive tax reform came at the end of July when White House officials and congressional leaders released a joint statement outlining a set of principles for reform. Meaningfully, the statement dropped the House proposal for border adjustment taxation — a proposal that had the retail industry in a state of high alert. The statement also called for “unprecedented capital expensing.”
…The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas. And we are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the US tax base. While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform.
A Change of Heart About Carried Interest?
Another clue about what the plan might include came from US Treasury Secretary Steven Mnuchin last week when he said that President Donald Trump may keep the carried interest tax break for firms that create jobs. It would eliminate it, though, for hedge fund managers. “What we are focused on is there are many other types of funds that do create jobs and we want to make sure we don't discourage investment,” he said at an event.
While this doesn't exactly spell out commercial real estate, it certainly sounds like CRE could be included in that particular category. But before the industry takes too much heart from that one comment it should remember that Congress will be making some hard decisions about reform as well.
The Senate will be using reconciliation to pass tax reform and while that does mean it won't need 60 votes to pass, it also means that any tax cuts will have to be offset with new revenue if the cuts are to be permanent and not just a ten year initiative. Carried interest will be a tempting source; one stat by the Tax Foundation shows that taxing it as ordinary income could raise $15 billion over ten years.
A Busy Schedule For Congress
But before tax reform can be addressed Congress has a “to do” list that must be tackled if the government is to continue running and the debt ceiling is to be raised.
Congress is returning on Sept. 5 from its August recess.
By Sept 29 the nation's debt limit must be raised to avoid default, according to Mnuchin.
By Sept. 30 it needs to pass a stopgap measure to keep the government open. Another option, which many feel is likely to happen, is that Congress could simply pass a continuing resolution to keep the government open at its current funding levels. At any rate, something needs to be done.
Politics will complicate both measures. Mnuchin has urged Congress to pass a “clean bill” for the debt ceiling, meaning there are no conditions attached. However some Congresspeople on the right are expected to request conditions attached to spending especially as the two measures are so close. Democrats will be needed to pass both measures and it is certain that they will attach their own conditions as well. Whether they will prove palatable to the president remains to be seen; however it should be noted he recently threatened to shut down the government if funding for the Wall between Mexico and the US were not included in the spending bill.
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