Tax executives have their eyes on the 2017 tax overhaul’s instability as Democrats now in control of the House are set to begin a thorough review of the law and consider which parts of it they would change.
When one party passes a law, there is always the chance that the other party will seek to undo parts of it once they gain control, said John Deshong, principal vice president and head of global tax at Bechtel Group Inc., an engineering and construction multinational.
“It was not bipartisan like 1986, and it is an ultimately unstable tax law change,” he said during a Feb. 21 panel discussion at the International Fiscal Association in Washington.
Lobbyists and stakeholders have said the new House majority members will almost certainly have the 21 percent corporate rate in their crosshairs. There is speculation that the new 20 percent deduction for pass-through businesses like Deshong’s Bechtel Group is likely to be put on the chopping block as well. Pass-through businesses include partnerships and S corporations, in which income is taxed at the owner level.
Others, including Ken Hayduk, vice president of tax at General Dynamics Corp., echoed Deshong’s concerns. Most businesses don’t primarily base their decisions on tax favorability, but on what the best option is for growing and maintaining their operations, he said.
Businesses should understand that it is possible the laws could change, said Hayduk, who also spoke on the panel. “This is probably more unstable politically.”
No Democrats in the House or Senate voted in favor of the tax overhaul, and just one Republican senator and 12 GOP representatives voted against it. House Ways and Means Committee Chairman Richard Neal (D-Mass.) has said he wants to conduct a thorough review of the law, including holding multiple hearings, before proposing any changes to it.
The panel’s Oversight Subcommittee held a Feb. 13 hearing on the law’s effects on the middle class, and the House Budget Committee held a Feb. 27 hearing on the law and its effect on the budget and families.
“What we are doing is we’re having a series of thoughtful hearings to hear from experts about the impacts of the Republican tax bill and trying to go through regular order to make sure any changes we make will be the right changes,” Rep. Mike Thompson (D-Calif.), chairman of the Ways and Means Select Revenue Measures subcommittee, said Feb. 26.
‘Things May Change’
Tax lawyers and certified public accountants for many pass-through businesses are still struggling to figure out whether they qualify for the 20 percent deduction under new tax code Section 199A. The political uncertainty is stopping potential C corporation converts in their tracks.
C corporations—entities taxed separately from their owners—don’t face the myriad limitations to the 20 percent write-off offered to pass-through businesses under the 2017 law. Those restrictions, which kick in above certain income thresholds, are based on which industry the business operates in, how much it pays its employees, and how much capital it owns.
The restrictions have pushed many to consider converting to C corp status—but not so fast, tax professionals said during another event in Washington.
“How long is that rate really going to be 21 percent? If Democrats take over the White House and the Senate in 2020, is that 21 percent rate going to jump to 25 or 28?” said Tony Nitti, a CPA and partner at RubinBrown LLP in Denver, speaking at a Feb. 22 talk on the pass-through tax break hosted by the Tax Foundation. “The only reason 199A is here is parity between shareholders and C corps, and if that C corp rate jumps up to 25 or 28 percent, what becomes of 199A?”
Kyle Pomerleau, chief economist and vice president of economic analysis at the Tax Foundation, pointed to the 2017 tax overhaul’s contribution to the government’s towering deficit. That could be a motivator for lawmakers to reverse some of the recent changes to the tax code, he said.
“Where are lawmakers going to look to try to bring down the deficit, if they do so? Is it going to be the corporate rate? Is it going to be 199A?” he said. “That needs to be weighing on policy makers’ minds, on clients’ minds—things may change.”
GILTI and the Budget
One provision potentially subject to political turmoil is the new tax on global intangible low-taxed income (GILTI), said McCormick & Co. Vice President of Tax and Public Affairs Paul Nolan, who spoke on the IFA panel.
The GILTI provision places a 10.5 percent tax on overseas profits above a deemed rate of return that aren’t already taxed at at least 13.125 percent, under tax code Section 951A. The IRS proposed rules (REG-104390-18) for the provision in September 2018.
While some see GILTI as a revamp of U.S. taxation of multinationals’ offshore profits, others see it as ripe for abuse, Nolan said.
The GILTI income subject to the tax is the income earned through a controlled foreign corporation that exceeds 10 percent of the value of the CFC’s tangible, depreciable assets, such as machinery and other equipment.
The Institute on Taxation and Economic Policy, a Washington think tank, said in a June 2018 post that this measurement actually encourages companies to move their tangible assets offshore, and pointed out that multinationals can use foreign tax credits generated from foreign taxes they have previously paid to further reduce their GILTI hit.
Democratic lawmakers have already proposed what they view as fixes to this problem. Sens. Tammy Duckworth (Ill.), Chris Van Hollen (Md.), and Amy Klobuchar (Minn.)—a 2020 presidential race contender—announced a bill (S. 3674) addressing it in November. Rep. Peter DeFazio (Ore.) introduced his version (H.R. 6015) in June.
Republicans’ decision to proceed with the tax overhaul under budget reconciliation—which required only a majority passage but also doesn’t allow a deficit increase outside of a 10-year window—resulted in plenty of phase-outs within that 10-year span. It could cause the GILTI provision to play out a bit differently than as advertised, Nolan said.
There’s some debate over whether this is due to a need for lawmakers to hit certain revenue targets, he said, but the reality is some multinationals subject to GILTI are facing effective rates of 30 percent to 35 percent on their non-U.S. income.