From the earliest days of the election cycle, tax reform has been a consistent topic of focus. During campaigning, all of the Republican candidates recommended reductions to personal and corporate income taxes. Now-President Trump's was the most aggressive. He proposed bringing the corporate income tax rate down to 15%.
In boardrooms, around water coolers, on the news cycles, and in Washington D.C. debate environments, people on both sides of the political aisle have discussed and debated how and when this move would happen. Over that same time frame, House Republicans have moved toward the 15% target, reducing their proposed corporate rate to 20% (from 25%). Because they control both houses of Congress and the White House, Republicans are in a position to advance a plan to reduce tax rates for individuals and businesses. And while progress is happening and legislation is imminent, the specific timing for consideration and passage is very much up in the air.
Estimating the Timing for New Tax Reforms
The latest estimates have the new legislation expected sometime between August and October. This timeframe raises questions about whether the new tax provisions can be made retroactive to the beginning of 2017, or if they will even pass before 2018.
This timeline uncertainty is due to a few factors. The Trump administration has numerous costly campaign promises already in the works, including efforts to augment the country's defense system, infrastructure, and border protection. Add to that list an escalating debate around the repeal of the Affordable Care Act (ACA), and indications of a battle over increasing the national debt ceiling.
With all of these issues comes the significant, unanswered question of how the U.S. will fund these proposals. Certainly, tax reform plays a role.
Border Adjustment Tax
House Republicans proposed the Border Adjustment Tax as the capstone for a host of tax-based funding sources. But as of right now, it is the focus of significant debate and is the largest “open question” in tax reform.[1] In effect, this “border adjustable” corporate income tax would broadly exclude U.S. exports from taxation, while fully taxing all imports. Because we import much more than we export, this new tax regime could raise $1 trillion over a decade. The exclusion of exports from taxation also would stimulate business and job creation here at home, ostensibly generating even more tax revenue.
There are three main arguments against the proposed tax structure. First, U.S. companies that import into the country (and tend to employ a large number of American workers) oppose the added costs of doing business domestically. Second, it appears that the plan could end up shifting more of a cost burden to lower and middle-class consumers who would end up paying increased prices for imported products. Third, with a closely divided Senate and no Democratic support, a sweeping proposal like this one from the House will be tricky to pass.
What to Expect from Tax Reform
Currently, the Border Adjustment Tax is on life support. Congress and the White House need more time to develop alternate plans to pay for campaign promises. The solution certainly will include tax reform.
The timing and magnitude of corporate and individual tax cuts are hard to predict. Politically speaking, a tax plan must pass eventually. What we do know is that House Republicans, in step with the Trump White House, will continue to work on tax policy changes including the Border Adjustment Tax. The key will then be whether they can gain support in the Senate. Whatever the outcome, we know that these policies will impact U.S. businesses of every size and individual taxpayers.
There's every reason to stay tuned to the proposed and passed policies. HORNE is staying on top of the details that are important to your bank and for your clients and customers. Contact us anytime with questions about what changing tax policies mean for you, and subscribe to the blog to receive timely updates and planning ideas in your inbox.
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[1] http://www.npr.org/2017/02/10/514458693/trumps-possible-border-adjustment-tax-explained