ASA Washington Update
If the saying goes that a “third time’s the charm,” this likely is our third and final installment about taxes and tax reform.
Six months ago, there was little more than skepticism in Washington. The president and a Republican-controlled House and Senate oversaw the absolute collapse of their last, best chance at repealing or substantially changing the Affordable Care Act. What followed was finger pointing and a blame game, unseen in years. Incumbents such as senators Bob Corker (Tennessee) and Jeff Flake (Arizona) announced their retirement, creating an already tense relationship with the White House and making its agenda even more uncertain.
Returning from a hot August recess, both houses began laying significant groundwork to passing tax reform, with a public still remaining skeptical, still scorned from the failure to keep their year’s long campaign promise to reverse what many believe is the torment of the ACA. Having witnessed Republicans essentially cause their own legislative demise, surely they wouldn’t allow it to happen again, twice in one year?
With a far smaller window of opportunity in the Senate, the House passed a robust bill that reduced corporate and individual rates, but hit a stumbling block with respect to business reform, specifically how to address the 30 million filers known as pass-throughs, many of which are small, family-run businesses. In the House approach, they set the top rate at 25%, but made that rate nearly useless as they attempted to install “guardrails” to prevent abuse of the rate. They provided for the reduced rate only on “qualified business income” to ensure salaries and wages continued to be taxed at the individual tax rate.
In the Senate, where any Republican senator could have brought the bill to a grinding halt, Wisconsin Senator Ron Johnson almost did just that, over the issue of pass-through treatment. In the Senate, while 60 votes normally are needed for passage, under special reconciliation rules, the tax bill needed just 51, meaning Republicans could suffer just two defections before the bill would meet the same fate as ACA repeal.
As both houses passed their versions and moved toward a conference committee, a rarity in Washington when dual pieces of legislation requiring compromised ironing out, the light could be seen at the end of the tunnel. Gone was the fear that a few recalcitrant Republicans in the House or independent-minded senators could kill this bill, it actually was on track to be signed into law.
The buzz around Washington was almost eerie. We still expected something to go wrong in the back of our minds, too often it does, but we also came to a realization that this actually was happening. In fact, many were almost prepared to stop the fight in acceptance that anything was better than the status quo.
But while that much is true, and there is much to be pleased about in this bill, there remains much work to be done. To begin, in order to get the bill passed within the rules of the Senate, many of the provisions and rates are set to expire in about 2025 (while the corporate rates were made permanent). A number of deductions also were eliminated or capped from the code, most notably the ability to deduct one’s property taxes being capped at $10,000. Also included in the bill was a repeal of the Affordable Care Act’s individual mandate, along with the opening up for energy exploration in the Arctic National Wildlife Refuge in Alaska, commonly known as ANWR.
To be sure, with the haste this bill was written, most are expecting legislation known as a technical corrections bill will be needed. This will require 60 votes in the Senate, thus help from the Democrats, which they may or may not be willing to provide, and it’ll surely will come with a price.