With Ryan’s blessing, lawmakers press ahead with tax reform talks

Negotiators are pushing ahead with tax reform talks in hopes of reaching a deal by the end of the year even though Senate Majority Leader Mitch McConnell (R-Ky.) has made clear he’s opposed to the effort. 

Their optimism is fueled by the renewed commitment of Ways and Means Committee Chairman Kevin Brady (R-Texas), who is giving the talks fresh attention following the conclusion of his tough primary race. He hired a new chief tax counsel, Barbara Angus, in January, and is expected to ramp up negotiations in the weeks ahead.

{mosads}Brady and Speaker Paul Ryan (R-Wis.), who has given the green light to pursue a deal, are seen as the keys to getting an agreement in 2016. Congressional sources say the next two months will show just how serious they are. 

Despite McConnell’s preference that corporate tax reform be addressed as part of a comprehensive overhaul of the tax code next year, Senate Finance Committee Chairman Orrin Hatch (R-Utah) and members of his panel are working with Brady to see what the talks might produce.

Brady, Hatch and Sen. Rob Portman (Ohio), a Republican member of Finance who faces a tough reelection race in November, are talking with Sen. Chuck Schumer (D-N.Y.), who will take over as Senate Democratic Leader next year. Schumer actively pursued overseas corporate tax reform with Ryan last year. 

Ryan worries that if Congress drags its feet on the issue for too long, the corporate tax base will become badly eroded by companies moving their headquarters overseas. 

“We’re having a good discussion. Maybe not every day but we’re building off the discussions that Speaker Ryan and Sens. Schumer and Portman have had,” Brady said, referring to the 2015 tax talks, which were part of an effort to find revenues for a multi-year transportation bill.

The Treasury Department issued new rules this month to make it more difficult for U.S.-based multi-nationals to move to foreign tax jurisdictions, a gambit known as a corporate inversion, but some Republicans see this as giving Congress more incentive to act soon. They see the administration’s action as punitive and failing to address corporate tax disparities. 

“If we can build consensus this year, I’d like to see it move this year. But we’re going to let that support determine the timing,” Brady said. “Every week that we can narrow the differences on how to permanently bring those dollars back home, it’s time well spent.”

The negotiators’ goal is to find a way to return an estimated $2.1 trillion in corporate profits stashed overseas. Multi-national companies are keeping their cash in foreign counties to avoid having to pay the 35 percent U.S. corporate tax rate.

There are three big questions outstanding: At what rate should those profits be taxed when they are repatriated, at what rate should foreign earnings be taxed going forward, and how should Congress spend the windfall of revenues?

The lawmakers feel confident about reaching a compromise on the tax rate for profits returned from abroad. The number is likely to fall somewhere between the 8.75 percent rate — 8.75 percent for cash and 3.5 percent for non-cash accumulated earnings — set by former Ways and Means Committee Chair Dave Camp (R-Mich.) and the 14 percent rate put forward by President Obama last year. 

A GOP member of Congress told reporters during a recent wide-ranging background briefing that colleagues “are talking about 8 percent now.”

But a senior Democratic aide said Republicans and Democrats are not yet swapping proposals on what the repatriation rate should be, and noted that 8 percent is so close to the Camp proposal that it doesn’t represent anything in the way of a compromise.

Hatch said Democrats were “talking about 10 percent,” which he said “looks like a non-starter.” 

A tougher question is how to transition to a territorial system, under which foreign earnings would be taxed going forward. 

Camp proposed exempting 95 percent of foreign income from domestic corporate taxes and taxing some of it, such as royalties, at 15 percent, according to a summary by the Tax Foundation.

Obama’s plan would impose a 19 percent tax on future foreign income.

The biggest sticking point, however, is what to do with the hundreds of billions of dollars in new tax revenues that would be collected by the government. McConnell believes all that money should go toward lowering individual and corporate tax rates, a major reason why he wants to tackle repatriation as part of a comprehensive revision of the tax code. 

“The question is what happens to [the money.] Is it another big spending bill or is it something both sides can agree on?” Hatch said.

He would like to see the revenues go toward military spending.

“I would put it into the military,” he said. “The military is starved for funds.”

Hatch said the ongoing tax talks are “complimentary” to the Finance panel’s work on corporate integration, which would allow companies to deduct dividends paid to shareholders. Corporate integration would give companies an option to repatriate overseas profits at a lower tax rate if they chose to pay out those earnings as dividends.

He said he was skeptical of the likelihood of a deal happening this year but added, “I’m open to it.”

Even so, Hatch said he doesn’t want to clash with McConnell if the GOP leader insists on quashing any agreement reached by Senate and House negotiators.

“I’m going to follow our leader, Sen. McConnell, and he’s not enthusiastic about it at all,” he said.

Hatch said Democrats would be willing to direct half of the revenues to the military if the other half went to domestic spending programs.

“They’d agree to put 50 percent [to the military] but then they want to spend the other 50 percent and I don’t think McConnell is going to be part of another spending binge, and I don’t blame him, especially in an election year,” he said.

A senior Democratic aide, however, denied that Democrats are willing to allocate that large a chunk of money to the Pentagon.

Schumer said the talks haven’t made as much progress as he would’ve liked because Ryan has been preoccupied with settling into his new job as Speaker.

“You need the House to be part of this to make it serious, otherwise no one’s going to go forward,” Schumer said. “And [Ryan] who is for it has been so busy being Speaker that he hasn’t had much time.”

Schumer said another obstacle is the conservative House Freedom Caucus, “which has huge power in the House” and has been skeptical of bipartisan deals of any sort.

“Brady’s positive about this [but] we haven’t seen much,” he added. “There are some talks going on at a low level but until the House is ready to really take it up, I’m not optimistic.”