Sikich Series on Tax Reform – Tax Reform Update: Special Alert October 26, 2017

Budget Adopted by Congress – Legislative Process for Tax Reform Begins

Following the unveiling of the Tax Reform Framework at the end of September, there are four major legislative hurdles that must be passed for tax reform to be enacted (please click here to view our Tax Reform Framework article). The first step was met today as Congress approved a budget that now leaves Washington in a frenzy over the remaining three steps. The legislative process for tax reform is as follows:

1. Budget

Congress must first adopt a budget. The budget sets the overall amount of tax cuts that tax reform legislation can include, and this budget is needed before the actual tax legislation is drafted and voted on in Congress. The Senate’s budget plan passed by a narrow 51-49 margin last week (10/19/2017), and the House opted to take up the Senate budget. The House voted on the Senate’s budget today (10/26/2017). This passed by a narrow margin of 216-212, and thus the budget has now passed Congress – it does not need to be signed by the President. This means that tax reform has already completed the first step of the legislative process. The actual drafting of tax legislation can now begin in Congress (step 2).

Part of this budget contains “budget reconciliation” instructions which will allow a tax reform bill to pass in the Senate with a simple majority of 50 votes, and not a 60 vote margin. These budget reconciliation rules are very complicated, but the key takeaway is that the same budget must pass both the House and the Senate—this was accomplished today.

2. House

The next step in the process is for the House to hold mark-up hearings to draft the actual tax legislation. Shortly after the House passed the budget today, House Ways and Means Committee Chairman Kevin Brady released his schedule for these tax reform hearings. He will hold mark-up hearings the week of November 6, 2017 to work on the actual tax reform legislation with the entire committee members and vote on the tax bill. Also, Brady announced that on Wednesday, November 1, 2017, he would release a draft of this legislation that the committee will address the following week. The details of the tax bill have not yet been released, but they will be soon. Key committee members and staffers are keeping a tight lid on the bill’s details until they are released to the public on November 1, 2017.

As you may recall, one of the major themes in the Tax Reform Framework was to reduce the corporate tax rates to 20%, and to 25% for certain pass-through entities. These lower tax rates have received much attention, but we will soon learn more about the less-publicized offsets (also referred to as the “pay-fors”) included in tax reform. These pay-fors will encompass a wide range of deductions, credits, and other special tax incentives that will be repealed or curtailed as part of the tax reform process in bringing about lower tax rates. These pay-fors will be unveiled next week when the proposed draft of the entire tax reform legislation is released. The lobbying and public pressure will mount once these specific changes are announced. Assuming the tax reform bill passes out of the Ways and Means Committee, it will move to the full House for a vote (a simple majority is needed for passage).

Projected Timeline and Outlook:

House leaders would like to have the tax reform bill approved in the House in November – prior to the Thanksgiving recess. The prospects for tax reform passing in the House are better than in the Senate, but it will still be a narrow margin.

3. Senate

The third step will be the Senate. Senate Finance Committee Chairman Orrin Hatch and his committee will review the House passed tax reform legislation, but may offer their own version of various provisions that differ from the House plan. As you know from the Affordable Care Act (ACA) repeal bills this year, the Senate has razor thin margins; high stakes political drama on tax reform is likely to play out again in the Senate. The support will likely fall along party lines; there may be some Republicans that oppose the tax reform bill, while some Democratic senators may support it.

Projected Timeline and Outlook:

The Senate Finance Committee may take action before Thanksgiving, but the full Senate will likely not vote on the bill until after Thanksgiving. The Senate’s passage of the budget last week is a good sign for tax reform, but not a guarantee. The final vote on tax reform in the Senate will likely be decided by one or two senators. As with the legislation to repeal the ACA, the Senate will be key in getting any tax reform legislation passed.

4. House-Senate Conference

The House and Senate versions of tax reform will invariably differ. Each of their versions then go to a House-Senate conference where a compromise legislation is needed. The conferees from both the House and Senate address each provision in the bill, distinguish differences, and seek agreement on what they feel will pass in the House and Senate. Once this is done, the same bill (as revised) must pass both the House and the Senate.

Projected Timeline and Outlook:

With the Senate margin down to a few votes, the House-Senate conference would likely be geared toward not losing any Senate votes, which could result in some lost votes in the House (but still enough for passage). Again, it will come down to a numbers game. Alternatively, as with the budget bill, a tax bill that survives the Senate (step 3 above) could go directly back to the House for a vote where it cannot be changed and would face an up or down vote. Look for this final legislative activity in mid-December.

President

Any tax reform bill that survives the above four steps in Congress would go to the President to sign. The president has no ability to change any final legislation. Any input the administration has on various provisions in the tax reform legislation would be communicated at each step of the above process. A signing ceremony on tax reform, assuming each of the above four steps are met, would probably be in mid-to-late December (it could perhaps slip into 2018, but they would like to have it done in 2017).

Please keep in mind, while the pace of tax legislation may seem slow up to this point, it will greatly accelerate now that the budget was finally approved by Congress (step 1 above). Things will become more hectic now. The tax reform bill can change quickly, and it will be hard at times to keep up with what is going on. Chairman Brady will introduce his “mark” (a draft of actual tax reform legislation), and this will contain a significant level of details, after which legislative activity will move quickly. There will be specifics on numerous major tax provisions, various effective dates, perhaps some phase-in of provisions, etc. While these items are not enacted into law, you may want to have some understanding of what is in the tax reform bill and what is not in it, and the various effective dates. We will provide updates as each of the above steps play out for tax reform this year. Please contact your Sikich tax advisor with any questions you have, or if you need any assistance evaluating the prospects of tax reform to you, your family, and your business. Stay tuned . . .