INSIGHT: TTC/EY Tax Policy Business Barometer: Views on Federal Tax Policy—September 2018

The Tax Council (TTC)/Ernst & Young LLP introduced the Tax Reform Business Barometer in 2013 to measure the business community’s perceptions on the prospects for federal business tax reform and other key tax policy issues. With the enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017, TTC and EY developed the Tax Policy Business Barometer (Barometer) to measure the perceptions of the business community on the implementation of the TCJA and a broad set of other policy issues.

In addition to questions on the TCJA, the August 2018 Barometer also included questions on international tax reform, possible tax reform 2.0, trade policy, infrastructure, and the federal government’s long-term fiscal imbalance. The August 2018 Tax Policy Business Barometer tracked the views reported from July 31 through Aug. 14, 2018. Ninety-one leading U.S. tax executives and practitioners completed the August Barometer. Results are based on an online survey conducted by EY’s Quantitative Economics and Statistics (QUEST) practice.

Key Results

Tax Cuts and Jobs Act: Looking forward

• Little likelihood of technical corrections: On average, respondents think there is only a 31 percent likelihood of a TCJA technical corrections bill being enacted before the end of this year.
• Strong likelihood that TCJA’s sunsetting provisions will expire: In addition, respondents on average believe there is a 27 percent likelihood that major TCJA temporary provisions won’t be extended before their scheduled sunset.
• Individual tax provisions are the most likely to be extended: Of those who believe major TCJA provisions will be extended, a large majority (82 percent) are confident that individual tax rates will be extended.
• Corporate tax savings are most likely to fund dividends and share repurchases: 89 percent of respondents believe corporate tax savings from the TCJA will be distributed to shareholders through stock repurchases or dividends, while only 16 percent believe savings will be passed on to consumers through lower prices on products and services. 40 percent believe that companies will increase workers’ wages or other compensation.

Impact of international tax changes

• Many expect the TCJA to lower taxes on foreign-source income: A plurality of respondents expect to pay lower taxes on foreign-source income under the TCJA. (“Estimated Budget Effects of the Conference Agreement for H.R.1, The ‘Tax Cuts And Jobs Act’,” The Joint Committee On Taxation, Dec. 18, 2017.)
• Tax cuts on intangible income are the primary source of international tax reductions: Of those who expect to be affected by the TCJA’s international tax provisions, 67 percent report that a lower tax on intangible income will be the primary tax benefit.
• TCJA is not likely to change incentives to locate businesses abroad: Respondents don’t think the TCJA made much of a difference in decisions regarding moving production overseas—64 percent report the new tax law has had no impact on such decisions.

Tariffs, trade and tax policy

• A trade war could undo the benefits of tax reform: A large majority of respondents (74 percent) believe that the economic costs of a trade war are at least somewhat likely to exceed any potential economic benefits from the TCJA.
• A trade war is likely to cause a recession: A large majority (62 percent) also believe that a trade war is at least somewhat likely to push the U.S. economy into a recession.
• Free trade is effective business policy: A large majority 73 percent of respondents believe free trade is generally very good for their business or industry.
• Modeling tariffs has not been a major priority for businesses: A majority of respondents (55 percent) report doing no modeling on the impact of tariffs on their company or industry.

Federal government’s long-term fiscal outlook

• Mixed views on the likelihood of a tax extenders passage this year: Respondents believe there’s a 47 percent likelihood that there will be legislation enacted in 2018 that retroactively extends tax extenders that expired in December 2017.
• The federal government is unlikely to address its long-term fiscal problems: Respondents believe legislation addressing the federal government’s long-term fiscal imbalance won’t be enacted anytime soon. They believe there is a 58 percent likelihood that there will be no such legislation in the next five years.
• Cuts in discretionary spending or an increase in corporate taxes are the most likely approaches to fiscal imbalance: The most likely solutions respondents cited to significantly reduce the federal government’s long-term fiscal imbalance are reducing discretionary spending, increasing corporate income taxes, and reducing mandatory spending.

Infrastructure

• Deteriorating infrastructure is a major problem for businesses: 72 percent of respondents believe deteriorating infrastructure poses a problem (large, medium or small) to their business, industry or markets.
• Respondents think increasing the gasoline tax is the way to pay for infrastructure improvements: Respondents overwhelmingly prefer a gasoline tax to other sources of federal funding for infrastructure projects.

Life After the Enactment of the Tax Cuts and Jobs Act

In December 2017, Republicans’ tax reform efforts culminated in the passage of the TCJA. In our September 2017 Tax Reform Barometer, respondents thought that proposed tax reform legislation had, on average, a 62 percent likelihood of passing in 2017 or 2018, while believing there was an 18 percent chance that no tax reform would be passed in the next 5 years.

In this August 2018 Barometer, we asked several questions on the likelihood of technical corrections legislation, legislation making permanent various sunsetting provisions, and corporations’ plans for using their tax savings.

Technical corrections and extending sunsetting provisions

The business community does not have high expectations for the passage of a technical corrections bill by the end of 2018. On average, respondents believe that there is only a 31 percent likelihood that technical corrections legislation will be enacted before the end of the year. Half of respondents believe there is a 20 percent or less likelihood of enactment.

The TCJA contains a number of provisions that will sunset or be phased out by 2022. These include the reduced individual tax rates, the 20 percent qualified pass-through income deduction, 100 percent bonus depreciation, and changes to the individual tax base. In general, respondents don’t believe legislation extending or making these provisions permanent will happen soon:

• Respondents believe on average that there is a 28 percent likelihood that major expiring provisions of the TCJA will not be made permanent until 2022 or after; they also give a 27 percent likelihood that these major TCJA provisions will not be extended at all.
• On average, respondents give a 14 percent likelihood for legislation making these provisions permanent being enacted in 2019, an 11 percent likelihood of enactment in 2020, and an 11 percent likelihood of enactment in 2021.
• Half of respondents believe there is no chance that major provisions set to sunset will be made permanent in 2018.

Of the respondents who believe major provisions of the TCJA will be extended (93 percent), the consensus is that individual rate cuts are almost certain to be made permanent. Eighty-two percent believe that individual rates will be included in any legislation extending or making permanent sunsetting provisions in the TCJA. Slightly more than half (58 percent) of respondents believe that the deduction for certain pass-through income will also be included in any such legislation.

Respondents are split on the fate of bonus depreciation and the changes to the individual tax base, with 50 percent and 49 percent, respectively, thinking those provisions will be included in legislation extending sunsetting provisions. Very few respondents believe any other provisions will be included.

Putting tax savings to work

In general, respondents expect the tax savings from the TCJA to be passed on to shareholders (89 percent) through stock repurchases or dividends. Companies are also expected to use some of their savings to support additional investment, according to 75 percent of respondents. Forty percent of respondents think companies will increase workers’ wages or other compensation and 16 percent think some of the benefits will flow to consumers through lower prices on products.

Impact of international tax changes

The TCJA also included a number of international tax provisions that expand and change the tax base. These provisions have expanded the tax base and increased revenue, as well as brought foreign earnings of U.S. corporations back stateside. (“Estimated Budget Effects of the Conference Agreement for H.R.1, The ‘Tax Cuts And Jobs Act’,” The Joint Committee On Taxation, Dec. 18, 2017.)

By a small margin, business leaders expect taxes on foreign-source income to decrease

Respondents are split on expectations regarding U.S. taxes on foreign-source income—while 44 percent expect taxes to be lower than they would have been without enactment of the TCJA, 35 percent still expect taxes to be higher. About a quarter (22 percent) believe that taxes will stay about the same. Of those who believe taxes will be lower, 89 percent believe they will only be somewhat lower, not much lower. 31 percent of respondents who expect taxes on foreign-source income to increase expect to pay much higher taxes.

Benefits of international tax reform

Of the 38 percent of respondents who will be affected by the international tax provisions of the TCJA, 67 percent report that the primary benefit will be lower tax on intangible income earned in the U.S. About 33 percent view something else as the primary tax benefit their industry or company will receive from the TCJA’s international tax provisions

Although some have suggested that the TCJA would help bring back jobs to the U.S. from abroad, respondents indicate that the new tax law has not affected the likelihood their company or industry will move production out of the U.S. Sixty-four percent say the TCJA has no impact on the location of production, while 22 percent believe it has made it somewhat less likely they will relocate production abroad. Seven percent of respondents believe the tax law has greatly decreased the likelihood that production will be relocated abroad, while 7 percent believe it has made it much or somewhat more likely.

A potential trade war?

In January 2018, the Trump Administration announced the implementation of a first set of tariffs, on solar panels imported from China. In March, the administration imposed broadly applicable steel and aluminum tariffs. In April, China retaliated with its own tariffs, sparking fears of a trade war. The trade war was “put on hold” in May, only to be revived again almost immediately. Recent developments include additional proposed and enacted tariffs on Chinese imports, proposed tariffs on automobiles and parts, retaliation by major U.S. trading partners, and a potential trade deal with Mexico. (For updates on the U.S. trade situation, see EY’s Tax Alerts, including the “QUEST Trade Policy Brief” and “This Week in Trade”.)

In the August 2018 Tax Policy Barometer, we asked respondents their thoughts on the impacts of tariffs and a potential trade war.

The economic costs of a trade war are likely to exceed any benefit from the TCJA

The fear of a trade war is very real among respondents—43 percent believe it is at least very likely that the economic costs of a trade war would exceed any potential economic benefits from the TCJA, and 74 percent think it is at least somewhat likely. Only 24 percent think it is not very likely, and only 2 percent believe that it is not likely at all.

Respondents also fear that a trade war will eventually push the U.S. economy into a recession. Sixty-two percent believe it is at least somewhat likely that a trade war would push the U.S. economy into recession. Only 38 percent believe it is not very likely or not likely at all, indicating there is still concern among business professionals about the possibility of a trade war-induced recession.

Most companies are not modeling how tariffs will impact their business

A majority (55 percent) of respondents report having done no modeling of the impact of tariffs. However, a large proportion (45 percent) of respondents report doing at least some form of modeling of the impact of tariffs on their organization, industry or markets. Of those who are engaging in modeling, only 36 percent report that they have done extensive modeling, while the rest report doing only some modeling.

In May 2017, seven months before the final TCJA was passed, 80 percent of respondents to the Barometer reported modeling the effects of at least one of the proposed tax plans on their federal tax liability. At the time, 54 percent were also modeling the potential effect of tax reform on their organization’s markets.

Business and industry leaders generally favor U.S. free trade policy

Respondents are strongly supportive of a low-tariff and free-trade policy in the U.S. Almost three-quarters (73 percent) of respondents believe that the U.S. free-trade/low-tariff policy is very good for their business or industry. Only 2 percent believe it is very bad, and 24 percent report the policy has no impact on their industry or business.

Fiscal outlook for the federal government

With decreased revenue projected due to the TCJA and increased federal spending, the federal deficit and debt are growing at a rapid pace and are projected to exceed $1 trillion by 2020. (CBO, The 2018 Long-Term Budget Outlook, June 26, 2018.) In this August 2018 Tax Policy Barometer, we asked respondents questions about tax extenders, as well as their thoughts on the approach the government will likely take to address the federal government’s long-term fiscal imbalance. This section summarizes their responses.

Fiscal impact of tax reform—attitudes have changed

Attitudes in the Barometer have tended to hold steady over time, but regarding expectations for the fiscal impact of tax reform, business tax professionals’ opinions have changed. In the last Barometer, released in September 2017, shortly before the passage of the TCJA, only 2 percent of respondents believed that a tax reform package would raise revenue, as compared with almost 60 percent who thought that in 2013.

The 75 percent of respondents who believed a tax reform package would reduce revenue turned out to be right—JCT estimates the fiscal impact of the TCJA over the next 10 years (2018-2027) to be a decrease in revenue of $1,456 billion.

Will Congress let “tax extenders” expire?

Not included in the TCJA were a number of tax provisions that expired on Dec. 31, 2017, referred to as “tax extenders.” Generally, Congress has renewed these provisions as they expire, typically on a yearly basis. Among others, these provisions include those allowing individuals to exclude from gross income discharge of indebtedness on their principal residence, and providing tax credits for biodiesel and alternative fuel. On average, respondents believe there is a 47 percent chance that Congress will act in 2018 to retroactively reinstate most or all of the provisions that expired on Dec. 31, 2017. Half believe there is at least a 50 percent chance that Congress will act.

Addressing the long-term fiscal imbalance

Respondents are not optimistic that major legislation to address the federal government’s long-term fiscal imbalance will be enacted anytime soon. On average, respondents believe there is a 58 percent likelihood no legislation addressing the fiscal imbalance will be passed in the next five years. Very few respondents believe there is a high possibility of this type of legislation being enacted in 2018, 2019, or 2020. They believe there’s an increased (15 percent) likelihood of legislation addressing the fiscal imbalance being enacted in 2021, which would be the first year of a potentially new administration, pending the results of the 2020 presidential election. They believe there is an 11 percent average likelihood of the legislation being enacted in 2022.

When asked about the likely approaches to significantly reducing the long-term fiscal imbalance, respondents are split on the most probable legislative solution. While 32 percent think increasing corporate income taxes is the most likely first approach, 30 percent think reducing discretionary spending would be the first action by legislators. Overall, respondents believe reduced discretionary spending will be the most likely action, with 64 percent ranking the approach as a top three most likely approach. Increasing corporate taxes and reducing mandatory spending are also considered likely overall, with 58 percent of respondents independently ranking those approaches in their top three.

Adopting a value-added tax (VAT) or carbon tax are not considered particularly likely approaches, with only 36 percent and 28 percent ranking those options in their top three most likely, respectively.

Addressing infrastructure needs—potential funding sources

During the 2016 election, both candidates stressed the importance of funding infrastructure improvements. In our January 2017 Tax Reform Barometer, 61 percent of respondents believed an infrastructure bill would be funded by deemed repatriation of previously reinvested foreign earnings. That funding source is no longer available due to international tax changes from the TCJA. In 2017, infrastructure took a back seat to tax reform, but with the passage of the TCJA, it is possible that infrastructure could again become part of the debate. Now, however, there is a need for a new funding source.

Deteriorating national infrastructure poses a problem for most companies and industries

Some 72 percent of respondents report that deteriorating infrastructure posed at least somewhat of a problem for their business or industry, with most (40 percent) believing it represented a moderate problem. Only 15 percent believe the nation’s infrastructure decline presents a large problem, and 17 percent say it presents a small problem. More than one-quarter (28 percent) report that deteriorating infrastructure is not a problem at all for their business or industry.

An increased tax on gasoline is seen as the best infrastructure financing option

Respondents overwhelmingly prefer funding U.S. government spending on infrastructure with an increase in the gasoline tax. Some 83 percent of respondents rank the gasoline tax as a top three choice, and 46 percent rank it as their top choice. A carbon tax is the second most popular choice, with 59 percent of respondents preferring that method. Among some of the other options suggested for preferred revenue approaches are infrastructure-focused taxes or fees and roadway tolls.

About The Tax Council and Ernst & Young LLP

The Tax Council is a Washington, DC-based non-profit, membership organization promoting sound tax and fiscal policies since 1966. Its membership comprises (but is not limited to) Fortune 500 companies, leading accounting and law firms, and major trade associations.

The global Ernst & Young Global Limited organization, of which Ernst & Young LLP is a member, is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

Lynda K. Walker, Esq. is the executive director and general counsel for The Tax Council and Tax Council Policy Institute.

Robert Carroll is national director of EY’s Quantitative Economics and Statistics (QUEST) practice and a member of the EY Center for Tax Policy.

The views expressed herein are intended to represent the results from TTC/EY Tax Reform Business Barometer and do not necessarily reflect the views of The Tax Council or EY.