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That doesn’t mean the first significant tax reform in nearly three decades is imminent. It does mean, however, that the two parties have meaningful areas of agreement that they can build upon, and that the two sides may not be as hopelessly divided as conventional political wisdom suggests.
Yes, Republicans and Democrats often do see taxes differently. Tax reform is highly complex and a notoriously difficult issue to negotiate, with many entrenched interests complicating the process. But if you focus only on the differences between the White House and Congress, Republicans and Democrats, you overlook many areas of similarity and consensus. In particular, a careful reading reveals a substantial number of similarities between the Administration’s FY16 budget tax proposals and former Ways & Means Chairman Dave Camp’s Tax Reform Act of 2014.
Because Republicans and Democrats will likely attempt to build on these similarities in constructing any tax reform bill, it’s important for financial executives to be aware of these areas of apparent consensus.
Similarities of Competing Tax Reform Proposals
Despite their differences, it is perhaps inevitable that Republican and Democratic tax reform proposals would grow closer together in approach. Once the parties established consensus on the broad framework of tax reform, the number of possible solutions within that framework were reduced significantly. For example, both parties agree that the corporate tax rate should be reduced. Both also agree that tax reform should be done on a revenue neutral basis. That is, even though the corporate rate is reduced, tax receipts to the federal government should remain constant. That almost certainly means that tax reductions in one area must be offset with tax increases elsewhere.
KPMG's John Gimigliano
Once the parties have agreed on revenue neutral rate reduction as the goal of tax reform, the limited number of ways to pay for rate reduction then force the solutions into an ever-smaller universe of possibilities. Because of this dynamic, it is not surprising that many aspects of the tax reform proposals bear a strong resemblance to one another.
These resemblances are borne out in a number of examples of overlapping proposals between the Camp bill and the President’s most recent budget proposals. They include:
- A significant reduction in the corporate rate from 35% to 25% in the Camp bill and 28% in the Administration’s proposal
- Elimination of the deferral system and the so-called ‘lock-out effect’
- An exemption for certain foreign earnings
- Expansions to existing anti-base erosion rules
- A one-time tax on previously untaxed foreign earnings
- Further limitations on interest deductibility for U.S. inbound taxpayers
- The repeal of last-in, first-out (LIFO) accounting
- Limitations on the domestic manufacturing deduction
- Modifications of the rules governing carried interest taxation
- A new excise tax on certain financial institutions
Considerations for Financial Executives:
While in many cases there are major differences in approach to the above proposals, the similarities suggest a narrowing of the field of potential solutions to the tax reform problem. With many fundamental differences between the parties yet to be resolved, taxpayers may be well-served in directing attention to these areas where the parties have already achieved some degree of consensus. Indeed, these areas where some agreement exists could become the infrastructure around which the rest of tax reform will ultimately be built.
So what then should companies do with these common elements in evaluating the risks and opportunities of tax reform? The revenue neutral aspect of tax reform sets the stage for taxpayers to be divided into winners and losers in the aftermath of enactment of tax reform. One objective should be for companies to be in the “winners” category or, at a minimum, mitigate the effect of being a loser.
This goal suggests several actions that financial executives could pursue:
First, understand these overlapping proposals and determine whether they materially affect the company.
Second, to the extent these proposals do have a material effect, many taxpayers have pursued various versions of economic modeling to evaluate to what extent the company would be effected and under what scenarios.
Finally, if these various proposals are viewed favorably or unfavorably, consider how to get engaged in the tax reform debate. In some cases, this may mean greater participation within a trade association. In other cases, it may be necessary to find other like-minded taxpayers and approach policy-makers directly.
Regardless, the coming months could be important as legislators continue to evaluate their options in tax reform. While a comprehensive resolution may not be imminent, what Congress focuses upon today will almost certainly shape tax reform when it finally comes to fruition.
John Gimigliano ([email protected]) is principal-in-charge of Federal Legislative & Regulatory Services in the Washington National Tax practice of KPMG LLP. He is based in Washington, D.C.
These comments represent the views of the author only, and do not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 162,000 people, including more than 9,000 partners, in 155 countries.