Congress Pivots From Health Care to Tax Reform
Ultimate outcome on taxes in 2017 still up in the air

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Benjamin Franklin is frequently credited with saying that there’s nothing certain in life except death and taxes. I would suggest an addendum to this adage for 2017: another certainty is the steady drumbeat of news stories claiming that tax reform is imperative and imminent. Years of hearings, commissions, white papers, and press releases have educated Americans about the reasons for tax reform, but careful observers still question the methods and timing for it.

There has been no shortage of proposals in recent years, at least some of which have been turned into legislative text. Moreover, the White House and Congressional Republicans have set an ambitious goal to pass comprehensive tax reform by the end of 2017. They’ve formed a group—the Big Six—to focus on reaching agreement on the parameters for tax reform.

This article will describe the current tax reform proposals, what needs to happen legislatively for tax reform to occur, the proposed timing for tax reform, and what companies can do to participate in the process.

Who Are the “Big Six”?

Several months ago, the Trump administration and Congressional Republicans formed a group to reach consensus on what should be included in tax reform as part of an effort to streamline the legislative process and to avoid the pitfalls that plagued the attempt to repeal and replace the Affordable Care Act. Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Majority Leader Mitch McConnell (R-Kentucky), Senate Finance Committee Chair Orrin Hatch (R-Utah), Speaker of the House Paul Ryan (R-Wisconsin), and Ways and Means Committee Chair Kevin Brady (R-Texas)—known inside the Beltway as “the Big Six”—began meeting on a regular basis to discuss tax reform.

In many respects, the framework is “all dessert, no vegetables,” because it describes all the goodies that taxpayers will like . . . but is silent or vague about what taxpayers will have to give up in return.

What Have the Big Six Proposed?

On September 27, the Big Six released a Unified Framework for Fixing Our Broken Tax Code (“the framework”), which provides a high-level overview of the items they would like to include in tax reform. The framework contains sections on individuals, businesses, and the international tax system. In many respects, the framework is “all dessert, no vegetables,” because it describes all the goodies that taxpayers will like (lower rates! immediate expensing!) but is silent or vague about what taxpayers will have to give up in return (which deductions and credits will be eliminated? how much will the interest deduction for C corporations be limited?).

Proposals for Individuals

The framework says its “focus” is on hardworking Americans and its goal is to strengthen and increase the middle class. It proposes to:

  • double the existing standard deduction (to $12,000 for single filers and $24,000 for married couples filing jointly);
  • condense the seven existing tax brackets into three brackets of twelve, twenty-five, and thirty-five percent (although the tax-writing committees may impose an additional top rate on the highest-income taxpayers to satisfy President Donald Trump’s promise that the wealthy will not get an absolute tax cut);
  • eliminate itemized deductions other than the mortgage interest and charitable contribution deductions;
  • retain the tax benefits that encourage work, higher education, and retirement security (while still encouraging the tax-writing committees to simplify those benefits);
  • repeal the personal exemption for dependents and “significantly” increase the Child Tax Credit;
  • introduce a $500 nonrefundable credit for non-child dependents;
  • repeal the individual alternative minimum tax (AMT); and
  • repeal the estate and generation-skipping transfer taxes.

In addition, the framework “envisions the repeal” of “numerous other exemptions, deductions and credits for individuals [that] riddle the tax code.”1

Proposals for Businesses

The framework provides a twenty-five percent income tax rate for the business income of “small and family-owned businesses” that are organized as pass-through entities. The Big Six seem to have learned the lesson taught by Kansas’ experiment with drastically reducing the rate on pass-through businesses, because the framework charges the tax-writing committees with developing measures to prevent wealthy individuals from converting personal income into business income to take advantage of the lower rate. However, preventing gaming is easier said than done, particularly in an area long fraught with controversy between taxpayers and the IRS.

The framework reduces the corporate income tax rate to twenty percent, eliminates the AMT, and gives the tax-writing committees the discretion to consider other methods to reduce the double taxation of corporate earnings. One such option that the Senate Finance Committee is considering is a corporate integration proposal, which Senator Hatch and his staff have refined since it was last discussed in the pages of this magazine. Under the proposal Senator Hatch is considering, companies would receive a forty percent deduction for dividends and interest paid (retained earnings would still be subject to the corporate income tax). Previously, Senator Hatch considered imposing a nonrefundable withholding tax on recipients of dividends and interest, but that proposal has now been eliminated. If enacted, the corporate integration proposal would be a straightforward way for companies to help themselves to lower their effective tax rate.

The Big Six previously announced, in a joint statement issued in July, that the border adjustment tax proposal (commonly referred to as the BAT) from the House Republican Blueprint was eliminated from tax reform, and the framework contains no proposals for a consumption or destination-based cash flow tax.

One area of initial disagreement among the Big Six was whether to propose immediate expensing. Readers will recall that the House Republican Blueprint for Tax Reform included a proposal for immediate expensing for investments in tangible and intangible property, but not land. In exchange, the Blueprint would have eliminated the deduction for net interest expenses. While some Republicans and conservative economists believe that immediate expensing will incentivize investment and unleash economic growth (at the high end, some conservative economists have suggested that full expensing could increase GDP by as much as five percent), other Republicans and economists disagree. Those who disagree are skeptical that businesses make investment decisions based largely on whether expensing is immediately available and believe that other factors play a larger role in business decisions about whether, how much, and when to invest.

The framework contains a compromise position between these two groups, and allows businesses to immediately expense new investments in depreciable assets (other than structures) for at least five years. The proposal would apply to investments made after September 27, the date the framework was released.

The framework does not eliminate interest deductibility (as the House Republican Blueprint proposed to do), but it provides that interest deductibility for C corporations will be “partially limited” and that the tax-writing committees will consider the appropriate treatment of interest deductibility for non-corporate taxpayers.

The framework will repeal or limit many deductions and credits, presumably to help pay for lowering the corporate income tax rate. While the framework specifically identifies the deduction in Section 199 for domestic production as an item to be eliminated (because “[d]omestic manufacturers will see the lowest marginal rates in almost 80 years”2), the framework does not specifically identify other provisions to be eliminated. The framework identifies only two credits—for research and development and for low-income housing—that will explicitly be retained. Although not explicitly mentioned, the deduction for research and development will likely also be maintained, since it satisfies the policy goals underlying tax reform. Businesses should assume that every credit and deduction will be subject to a fresh review and that the default position will be to eliminate or restrict the provision.

Finally, the framework takes aim at “special tax regimes” that apply to particular industries and sectors and provides that such regimes will be “modernized.” Although this discussion in the framework was intentionally left vague, businesses should assume that—like deductions and credits—any industry-

specific tax regimes will likely be subject to a fresh review as to whether they should be retained.

Proposals for International Tax

The framework proposes a deemed repatriation provision as a transition to a territorial system. Although many design questions for what a deemed repatriation provision will look like remain unanswered, the framework provides that a bifurcated rate will be applied to foreign accumulated earnings (with a higher rate imposed on cash and cash equivalents) and indicates that businesses will have several years to pay the resulting liability. Businesses interested in options for how to design a mandatory repatriation provision should look to the 2014 proposal of former Ways and Means Chairman Dave Camp (R-Michigan)3 and the 2012 proposal of Senator Mike Enzi (R-Wyoming) for international tax reform.4 While Senator Enzi’s proposal provided for a voluntary repatriation and Chairman Camp’s proposal provided for mandatory repatriation, their proposals continue to be valuable because they describe how repatriation would occur and answer important questions such as, will there be a single pool of earnings and profits for all controlled foreign corporations (CFCs) or will there be a separate pool of E&P at the level of each lowest-tier U.S. shareholder, and will any foreign tax credits be available?

The territorial system described in the framework would allow a one hundred percent exemption for dividends paid from foreign subsidiaries where the U.S. parent owns at least a ten percent stake. The framework also states that the system will include base erosion rules “to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations. The committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies.”5

This reference is somewhat cryptic, but some options for base erosion rules were discussed at the Senate Finance Committee hearing on reforming the international tax system on October 3. There did not appear to be any consensus among committee members about which options to pursue and the options are discussed below.

What Are the Unresolved Issues?

The framework raises more questions than it answers. Many details appear to have been punted to the tax-writing committees, which the framework has charged with the responsibility to “develop additional reforms to improve the efficiency and effectiveness of tax laws and to effectuate the goals of the framework.”6

While many unaddressed questions have already been briefly addressed, the question of how the United States will address the possibility of base erosion in a territorial system has not. A key question that the framework leaves up to the committees is to determine what base erosion provisions, if any, are necessary when the United States moves to a territorial system. One option the Senate Finance Committee may consider is a minimum tax. There are various ways to design a minimum tax—Chairman Camp’s proposal would have created a new category of subpart F income for “excess intangible income” where a U.S. person has transferred intangible property from the United States to a related CFC and the income attributable to the use or exploitation of the intangible property was not subject to a minimum fifteen percent effective rate of foreign income tax. In contrast, the Obama administration7 proposed a nineteen percent minimum tax on foreign earnings, less a foreign tax credit equal to eighty-five percent of the per-country average effective foreign tax rate. The Obama proposal also would have reduced the minimum tax base by an allowance for corporate equity.

Bret Wells, a professor at the University of Houston Law Center who testified on October 3 before the Senate Finance Committee on international tax reform, laid out additional options to prevent base erosion in a paper he co-wrote in 2014,8 where he advocated adopting (1) a mandatory two-sided transfer pricing methodology and (2) a Base Protecting Surtax (BPS). Briefly, the mandatory two-sided transfer pricing method would adopt a profit split as the best method to allocate residual profits within a multinational group. The BPS would operate as a backstop to the mandatory two-sided transfer pricing method and would require an upfront collection of a tax (presumably a withholding tax) imposed on the gross amount of any tax-deductible base erosion payment made to a foreign affiliate. If a multinational believed that the amount of the BPS was excessive, it could file a refund claim based on the application of the two-sided transfer pricing methodology, but the multinational would be required to disclose all its books and records to demonstrate the amount of the residual profits and the functions that contributed to their creation.

In his paper, Wells neither fully fleshes out these proposals nor provides guidance as to how a mandatory two-sided transfer pricing methodology would be applied, nor does he address the possible treaty concerns raised by these proposals. In addition, if the United States adopts these proposals in legislation, there is a possibility that foreign countries (particularly market countries) may successfully apply the methodology to the disadvantage of the United States, with the result that a greater share of the profit split will be allocated to emerging market countries than to the United States.

Timing and Process for Reform

The framework is described as a “template” for the Senate Finance and the House Ways and Means committees, which have pledged to develop legislation through regular order—which means committee hearings, introduction of legislation in committee for a markup, and a committee vote.

But before Congress can vote on tax reform, it needs to pass a budget. The Senate Budget Committee introduced its FY2018 budget resolution on September 29, 2017. It includes two sets of reconciliation instructions, one of which is for the Senate Finance Committee (allowing the Senate to pass tax reform with only fifty-one votes). The instructions to Senate Finance allow it to increase the deficit by no more than $1.5 trillion over the next ten years. Another important provision in the budget resolution instructs the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) to use dynamic scoring when estimating the effects of tax legislation.

Although the House currently has drafted a budget, the budget has not been considered by the full House (it contains significant budget cuts, and it is unclear whether it could pass the full House). Moreover, the House’s budget contains different reconciliation instructions regarding tax reform, although the House already required the CBO and the JCT to use dynamic scoring. Therefore, the House budget will need to be revised to reflect the Senate budget resolution’s reconciliation instructions, and other revisions may need to be made before the House budget can be successfully voted upon.

Businesses should assume that every credit and deduction will be subject to a fresh review and that the default position will be to eliminate or restrict the provision.

Once a budget is passed, the tax-writing committees plan to introduce legislation for a markup in committee (both the Ways and Means and the Senate Finance committees have already held hearings on tax reform during this Congressional session and do not intend to hold further hearings).

The Big Six have set a goal of enacting tax reform by the end of 2017, which is highly ambitious. To meet this goal, they expect Congress to pass a budget in October, with the Ways and Means committee to hold a markup of tax legislation around Halloween. Once Ways and Means marks up a bill and votes it out of committee, the Big Six expect it to be quickly passed by the House of Representatives so the Senate Finance Committee can take up the bill for consideration around Thanksgiving. The Big Six hope to have a bill on the president’s desk for signature by the end of the year.

Given that there are fewer than forty legislative days scheduled for the House and fewer than forty-five legislative days scheduled for the Senate from October through December, and that other items must be addressed before the end of the year (including reauthorizing the Children’s Health Insurance Program, which ran out of funds on September 30; enacting another hurricane relief package to aid the victims of Hurricane Maria; and funding the federal government, whose current funding expires on December 8), it will be very challenging to enact tax reform by the end of the year. It would not be surprising if the date for tax reform slips past 2017, or if Congress decided to try to enact tax cuts first, followed by more comprehensive reform at a later date.

Participating in the Legislative Process

Companies have various options to pursue if they are interested in participating in the legislative process. While there is always the option of direct participation with a company’s Congressional delegation and the tax-writing committees, companies should also review which industry associations they participate in and what role those associations intend to play in tax reform. Finally, companies should remember that groups like TEI are well positioned to provide technical comments on draft legislation when it becomes available (assuming the legislative schedule provides enough time for consideration of such comments) and to make suggestions to Treasury and the IRS on implementation once legislation is enacted. Enacting legislation is, after all, only the first step in a long process toward reform.


Just because a proposal is included in the framework doesn’t mean that it will necessarily be included in legislative language. Within a day of the framework’s release, Americans Against Double Taxation, Republican members of Congress from high-tax states, and some governors were objecting to the elimination of the state and local tax deduction for individuals, and at least one member of the Big Six, Chairman Hatch, appeared sympathetic to their concerns.

Companies should keep this fluidity in mind as they evaluate the framework and how they might fare under the proposals contained within it. Monitoring and responding to legislative developments will be critical this fall, and companies that are interested in engaging in the legislative process (either on their own or through industry associations) should start immediately.

Alexandra Minkovich is Of Counsel in Baker & McKenzie’s Washington, D.C., office.


  1. “Unified Framework for Fixing Our Broken Tax Code,” Committee on Ways and Means, U.S. House of Representatives (2017): 4–6, accessed October 4, 2017,
  2. “Framework”: 8.
  3. H.R. 1, Tax Reform Act of 2014.
  4. S. 2091, United States Job Creation and International Tax Reform Act of 2012.
  5. “Framework”: 9.
  6. “Framework”: 3.
  7. “The President’s Framework for Business Tax Reform: An Update, A Joint Report by the White House and the Department of Treasury,” U.S. Department of the Treasury (2016), accessed October 4, 2017,
  8. Bret Wells and Cym Lowell, “Tax Base Erosion: Reformation of Section 482’s Arm’s Length Standard,” 15 Florida Tax Review 737 (2014),

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