September 19, 2017
Senate Finance Committee “Business Tax Reform”
Key Topics & Takeaways
- Capital Gains and Dividends: Committee Chairman Orrin Hatch (R-Utah) cited a report that showed U.S. tax rates are the second highest among developed countries when corporate-level taxes and investor-level taxes, such as those on capital gains and dividends, are integrated.
- Full Expensing: In his written and oral testimony, the Tax Foundation’s Scott Hodge stressed the need for providing full expensing for capital investments. However, The Real Estate Roundtable’s Jeffrey DeBoer’s testimony was skeptical of full expensing for structures and he questioned the “bump” in economic growth that could be created through full expensing.
- Dividends-Paid Deduction: Hodge stated that corporate integration would improve and equalize the treatment of debt and equity financing, he added, and a dividends-paid deduction is a “very thoughtful way to approach it,” as businesses would be able to deduct dividends paid to their shareholders.
- Global Competitiveness: Sen. Ben Cardin (D-Md.) commented that every global industrial nation uses consumption revenues except for the U.S., and questioned how the U.S. could compete with them without harmonization. The Urban Institute and Urban-Brookings Tax Policy Center’s Donald Marron replied that to get corporate rates down, “you have to go shopping for new revenue sources,” and listed a destination-based tax, value-added tax (VAT), and carbon tax as options.
- Scott Hodge, President, Tax Foundation
- Donald Marron, Institute Fellow, Urban Institute and Urban-Brookings Tax Policy Center
- Troy Lewis, Immediate Past Chair, Tax Executive Committee, American Institute of Certified Public Accountants
- Jeffrey DeBoer, President and Chief Executive Officer, The Real Estate Roundtable
Sen. Orrin Hatch (R-Utah), Chairman, Senate Finance Committee
In his opening statement, Hatch praised the bipartisan awareness that tax reform for businesses is needed, and cited a report that showed U.S. tax rates are the second highest among developed countries when corporate-level taxes and investor-level taxes, such as those on capital gains and dividends, are integrated. He continued that Congress is working on corporate integration proposals, to include allowing businesses to deduct dividends paid to alleviate the problem of double taxation. Hatch noted that due to the U.S. corporate tax rate not being lowered for decades, U.S. businesses are less competitive than foreign competitors. He concluded with his goals in business tax reform, which include increasing economic growth, creating new jobs, increasing wages for employees, and improving the standards of living for Americans.
Sen. Ron Wyden (D-Ore.), Ranking Member, Senate Finance Committee
Wyden criticized tax reform proposals that would allow “tax cheats” to abuse pass-through status, adding that the consequences would be “worse than what is on the tax book today.” He continued that if the pass-through loophole passes, it would be “Christmas morning in America for the tax cheats,” adding that it would mock President Trump’s pledge that tax reform will not benefit the rich.
Scott Hodge, President, Tax Foundation
In his testimony, Hodge discussed four complementary tax reform priorities that Congress should consider: 1) Provide full expensing for capital investments; 2) Cut the corporate tax rate to a competitive global level (such as 20 percent); 3) Move to a competitive territorial tax system; and 4) Make all three policies permanent (not temporary). He stressed that expensing is “key to revitalizing capital,” as it will increase employee productivity and wages. Hodge warned that if the three policies are made temporary, they will only provide temporary results, and that permanence is needed for lasting economic benefits.
Donald Marron, Institute Fellow, Urban Institute and Urban-Brookings Tax Policy Center
In his testimony, Marron discussed the “needlessly complex” and “harmful” U.S. tax system, and listed his top points for business tax reform: 1) Be realistic about how much of the effects from tax reform will be seen past the 10 year budget window; 2) Corporate tax cuts would help people with high incomes; 3) Workers will benefit from reforms that encourage investment in the U.S.; 4) New tax avoidance will be inspired through taxing pass-through business income at preferential rates; 5) Capping the top tax rate on pass-through income will only benefit those with high incomes; 6) Taxing pass-through business income at the corporate rate will not create a level playing field; 7) To pay for large tax cuts, other taxes will have to be raised or new ones created, such as a value-added tax (VAT) or carbon tax; and 8) Making business tax cuts retroactive to January 1, 2017 will not promote economic growth, it will actually weaken it.
Troy Lewis, Immediate Past Chair, Tax Executive Committee, American Institute of Certified Public Accountants
In his testimony, Lewis recommended Congress take a holistic approach to tax reform by including all types of businesses in a reform package. He noted his support for expanding the number of taxpayers that can use the cash method of accounting and opposed any limitations on the use of this method. If income tax rates for C corporations are lowered through tax reform, Lewis continued, all business types should receive a rate reduction. He stressed the importance of the deductibility of interest expense for small businesses, explaining that if it is limited, it would “effectively eliminate the benefit of a valid business expense deduction.” Lewis then voiced his support for repealing the alternative minimum tax (AMT), as well as his support for S. 540, the Mobile Workforce State Income Tax Simplification Act of 2017.
Jeffrey DeBoer, President and Chief Executive Officer, The Real Estate Roundtable
In his testimony, DeBoer explained that tax reform will provide “wide-ranging” impacts on the economy, job creation, and gross domestic product (GDP). He explained that in tax reform, taxes must be reduced on job creating businesses, not just limited to corporate income. DeBoer continued that risk through capital gains should be encouraged and rewarded. However, he cautioned about unintended consequences, stressing to “not end the deduction for business expense.” DeBoer explained that proposals to expense assets are “trouble,” as they could lead to negative consequences, but urged the continuance of the deduction for federal, state, and local tax payments, as well as like-kind exchange rules. Lastly, he urged Congress to consider incorporating infrastructure in tax reform, as “action in this area is badly needed,” and if carried out correctly, will increase productivity for workers and businesses.
Question & Answer
When asked by Hatch about corporate integration proposals, Hodge replied that it is necessary to remove the double taxation of corporate income and make business taxation more equitable. Hodge continued that integration would lower the corporate tax rate and have a long-term impact on economic growth. Corporate integration would improve and equalize the treatment of debt and equity financing, he added, and a dividends-paid deduction is a “very thoughtful way to approach it,” as businesses would be able to deduct dividends paid to their shareholders.
Deductibility of Interest
Hatch asked the panelists about concerns regarding limiting the deductibility of interest. Lewis replied that more burdens would be put on small businesses by taking away the interest expense deduction. DeBoer replied that if there is an issue of overleverage, it should be examined by regulators on an individual basis, not through the tax code. He continued that it is important businesses have the flexibility to use debt, as they retain more control over their business operations.
Sen. Chuck Grassley (R-Iowa) asked if there should be a restriction on the deductibility of interest, to which Marron explained that if deductions are taken too far, there could be excessive investment in certain sectors, and that he would possibly be open to reducing the deduction of interest. Hodge added that it may be one of the trade-offs for economic growth.
Sen. Debbie Stabenow (D-Mich.) asked about the impact of cutting interest deductibility, to which Marron explained that one challenge would be for parts of the economy, such as small businesses, that already have full expensing for investments, a tax reform proposal moving toward expensing but limiting interest deductibility “won’t help them.”
Sen. Tom Carper (D-Del.) stated that the U.S. is not globally competitive due to the corporate tax rate, and that any tax reform needs to be fair, foster economic growth, make the tax code less complex, and its fiscal impact must be analyzed.
Sen. Tim Scott (R-S.C.) asked what the compliance costs for U.S. small businesses means for their competitiveness. Hodge replied that Americans spend over 9 billion hours complying with the U.S. tax system, stressing that the corporate tax part is the “most complex and costly.” He added that the amount of time and money spent complying with the tax system is a “waste.” Lewis added that tax reform needs to have “equity and fairness on one side,” and “simplicity on the other,” as many times one is compromised at the expense of the other.
Sen. Ben Cardin (D-Md.) noted that pass-throughs are still paying higher rates than their global competitors, to which DeBoer replied that most real estate businesses are pass-throughs, and that he is “highly concerned and focused” on ways to achieve a lower tax rate for them.
Cardin commented that every global industrial nation uses consumption revenues except for the U.S., and questioned how the U.S. could compete with them without harmonization. Marron replied that to get corporate rates down, “you have to go shopping for new revenue sources,” and listed a destination-based tax, VAT, and carbon tax as options. Hodge added that he modeled Cardin’s Progressive Consumption Tax Act from last year and it was pro-growth and revenue positive.
Sen. Mark Warner (D-Va.) stressed that the global competitors all have lower corporate rates and revenue sources than the U.S., that these countries can continue lowering their rates due to having a VAT, and that when it comes to total tax burden, America ranks 31 out of 34 globally.
Sen. Patrick Toomey (R-Pa.) noted that DeBoer’s written testimony was skeptical about full expensing for structures, and asked about other assets, such as vehicles and machinery. DeBoer echoed his skepticism about the “bump” in economic growth that could be created through full expensing.
Sen. John Thune (R-S.D.) also asked about DeBoer’s thoughts on immediate expensing. DeBoer explained that while he does not disagree with the “power of expensing,” it is capital intensive. He gave the example that people do not want to live or work in a building that has not been updated, arguing that depreciation is about physical wear and tear.
Sen. Maria Cantwell (D-Wash.) asked the panel what Congress should be doing about housing in America, to which DeBoer replied that most businesses in urban areas are aware of the decrease in workforce housing. He continued that workers are being “priced out” of cities, and that housing for these workers needs to be incentivized.
For more information on this hearing, please click here.