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Annette Nellen
Annette Nellen
Budget proposals and the tax system

What do the House and Senate budget resolutions portend for federal tax reform?

April 11, 2013
by Annette Nellen, Esq., CPA

In March 2013, both the House and Senate Budget Committees released their budget resolutions as required by the Congressional Budget Act of 1974. Among the ideas and goals included in these lengthy reports are ones dealing with tax reform. While there is still a bumpy road to travel to reach any consensus on the budget and tax changes, a review of both reports sheds light on the tax reform perspectives and goals of the House Republicans and Senate Democrats.

As noted by Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee, in the Statement of Constitutional and Legal Authority of the FY 2014 House budget resolution: “Ultimately, the budget is more than a list of numbers. It’s an expression of our governing philosophy.” (House FY 2014 Budget Resolution, page 4)

This article summarizes the tax reform information included in these budget proposals. Similarities and differences are noted along with some observations.

House’s continued focus on a Path to Prosperity

The House Budget Committee’s budget resolution for FY 2013 was titled The Path to Prosperity: A Blueprint for American Renewal. The title of the FY 2014 budget resolution has been modified to The Path to Prosperity: A Responsible, Balanced Budget. The focus of the FY 2014 resolution is on challenges of not controlling the deficit. The plan provides for $4.6 trillion in spending cuts to eliminate the budget deficit by 2023. The House plan also “seeks to revive” communities by addressing these six areas (House resolution, page 6):

  1. Grow the economy;
  2. Strengthen “the safety net by retooling federal aid”;
  3. Reform entitlements to secure retirement for seniors;
  4. Stop “cronyism” in order to bring back “fair play to the marketplace”;
  5. Rebuild the military; and
  6. Terminate “Washington's culture of reckless spending.”

Senate’s promise of restoration

The Senate Budget Committee's FY 2014 Budget Resolution is titled, Foundation for Growth: Restoring the Promise of American Opportunity. The plan describes its “highest priority” as creating “the conditions for job creation, economic growth, and prosperity built from the middle out, not the top down.” (Senate resolution, page 4.)

The plan aims to protect economic recovery by: (pages 7–8)

  1. Replacing sequestration cuts with a combination of specific spending cuts and “closing loopholes and eliminating wasteful spending in the tax code”;
  2. Investing in “infrastructure, education, job training, and innovation” for “long-term economic growth and national competitiveness”;
  3. Creating a “$100 billion targeted jobs and infrastructure package”; and
  4. Protecting and continuing “tax cuts for the middle class and low-income working families.”

Comparisons

The following table summarizes the tax reform ideas in the budget resolutions; page numbers are noted in parentheses.

Topic House Senate
Purpose of tax reform To grow the economy (8 and 19) and make the system fairer and simpler. (19) Improve the tax system by reducing tax expenditures. (64–65)
Some tax reform descriptors “long overdue” (8) “The current state of the tax code is simply indefensible.” (64)
Complexity The system’s “maddening complexity” results in annual compliance costs of “over $160 billion and 6 billion hours.” (23) The tax law “has grown unacceptably complex.” (64)
International tax reform Make the system more competitive. (20)
Reference to House Ways and Means Committee Chairman Dave Camp’s tax work suggests a move to a territorial system. (23)
“Business income taxes should be reformed to help U.S. enterprises compete in the global marketplace
and to ensure that America remains the best place to start a business and create jobs.” (68)
New tax reform arguments Some phaseout provisions can result in low-income taxpayers facing up to a 95% marginal tax rate. (30)
Social Security is in need of reform due to change in ratio of workers to retirees. Calls for both the president and Congress to develop plans to “shore up the Social Security Trust Fund.” (42-43)
Refers to the $450 billion annual tax gap, noting two of its causes: erroneous refunds paid to identity thieves and “offshore tax abuses.” (64)
Hidden/subtle message The tax base should be broadened to generate funds for deficit reduction and to address the problem of “confusing deductions, credits, limitations, phaseouts.” (23) Individual tax expenditures will be reduced for higher income individuals, such as through phaseouts, rate benefit caps, and/or conversion of deductions and exclusions to tax credits. Not clear if there would also be reductions in the number of special rules or cutbacks in the current benefit of any particular preferences.
Questionable statement Attributes some complexity to the “maze of different statutory tax rates.” (23) States that the House tax plan “rejects any kind of revenue contribution.” However, the House plan seems to call for reduction of some tax expenditures, which would produce revenue.
Basics of the tax reform plan
  • “The tax-reform framework outlined in this budget reflects the views of the Republican members of the House Ways and Means Committee, led by Chairman Dave Camp.”
  • “Simplify the tax code to make it fairer to American families and businesses.”
  • Make “the tax code more conducive to innovation, investment, and sustained job creation.”
  • Individual rate structure of 10% and 25%.
  • Top corporate rate of 25%.
  • Repeal the alternative minimum tax.
  • Transition to a territorial system.
  • Reduce renewable energy tax preferences.
  • Repeal health care law enacted in 2010.
(23-24 50, 54)
  • Permanently extend 2009 enhancements to the earned income tax credit and other credits that were extended through 2017 by the American Taxpayer Relief Act, P.L. 112-240. (67)
  • “[E]liminate or modify tax breaks that disproportionately benefit the wealthiest Americans, aggressively address the tax gap and offshore tax abuse, and eliminate unfair and inefficient business tax loopholes.” (67)
  • Unspecified reforms to help businesses compete. (68)
  • Tax rate reductions “if the Senate Budget’s revenue and progressivity goals are achieved or maintained.” (68)
Time frame During FY 2014 (per letter from Republicans on House Ways and Means Committee to Ryan referenced in footnote 28 of the resolution. (23) No specific reference, but notes that tax reform can be done either via “the reconciliation process or as a separate effort.” (62)

Observations

Tax expenditures: The roughly $1.1 trillion of annual tax expenditures included in the tax system in the form of special deductions, exclusions, credits, and tax rates will be the focal point for tax reform in both the House and Senate. To achieve rate reductions, the House will need to eliminate or cut back on many of these provisions. To make the tax system more progressive, the Senate will likely want to cap the benefit of some special rules at a rate below the top marginal rate or implement other phaseouts. Reaching consensus on the details of this key aspect of tax reform will be a challenging, but necessary task for revenue neutral reform.

Corporate rate reduction: The House resolution calls for both the top individual and corporate tax rates to be lowered to 25%. The Senate does not provide a target but suggests that a corporate rate reduction is possible if it does not harm progressivity or revenue. Reaching a revenue neutral rate reduction will pose challenges in terms of whether the business community supports reductions in business tax preferences and what the effect might be to competitiveness. (See Nellen, “The Rough Road to a 28% Corporate Tax Rate,” Corporate Taxation Insider (11/10/11).)

Looking forward

The road ahead on tax reform may be foretold by what happens with the remainder of the budget process for FY 2014. That road also includes the question of the administration’s role. Both the House and the Senate issued their budget resolutions before receiving the president’s budget proposal, which was due Feb. 3, 2013 (per Sec. 300 of the Congressional Budget Act of 1974), but has been delayed until April. (“Obama Budget Likely to Come in April,” by David Jackson, USA Today, March 12, 2013.)

In his January 2013 State of the Union address, President Barack Obama stated: “Now is our best chance for bipartisan, comprehensive tax reform that encourages job creation and helps bring down the deficit.”  Does the budget delay mean he is working on new or more specific tax reform plans than he pursued in his first term? Let’s see what happens in April.

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Annette Nellen, CPA, Esq., is a tax professor and Director of the MST Program at San José State University. Nellen is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is the immediate past chair of the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax policy and reform and a blog.