Tax Policy Update

PICTURE OF THE WEEK

McGuireWoods’ tax policy team lost one of ourown last week. Some of you may have alreadyseen ourtributeto Danielle. But I want to take a moment inthis week’s Tax Policy Update (TPU) toshare a few words about our friend.

It is fitting to do so here because therewouldn’t be a TPU without Danielle. She createdthe update back when the tax-writing team wasjust a two-woman shop, setting the tone andformat for this weekly distribution, which sheonce called her “baby.” In those early days,we’d throw around corny titles, trying toout-pun each other. We had our laughs (snorts,really) and cringes. This was Danielle —creative and engaging.

Danielle passed the TPU torch a couple of yearsago when her client work demanded more time onCapitol Hill. I would not have had theconfidence to take up the TPU without herencouragement and support. Danielle was mybiggest advocate — she always had my back. Areader once took issue with the way a story wascovered, and before I even had time to sputterout a defense, Danielle was already on thekeyboard drafting a retort. This was Danielle —loyal and unafraid to speak up.

For those of you who did not get a chance tomeet Danielle, what can I say except that thisis your loss, too. She was a genuine soul — arare find in this town and in this line ofwork. A good friend, a good colleague whoalways tried to make life a little bit betterfor those around her — this was our Danielle.And we miss her so.

Thank you for reading,
LKL

LEGISLATIVE LANDSCAPE

To the Windooooow – No, Come Back.House Speaker Paul Ryan (R-WI) really wantsrevenue-neutral tax reform. At the 2017 NAMManufacturers Summit, Ryan argued that taxreform must be permanent as temporary tax cutswould do little to give businesses thecertainty they need to help grow the economy.The quest for permanence has led Ryan todismiss talks of extending the budget windowbeyond the standard 10-year period. The speakerreminded lawmakers that they cannot run fromthe revenue neutrality issue forever: Underreconciliation, the out-years in any givenbudget window must not add to the deficit.

Talks of budget windows and out-years are niceand make everyone sound smart. But Republicansmust quickly decide how to proceed to the FY2018 budget resolution, the designated vehicleto carry the reconciliation instructions fortax reform. The House Budget Committee hasalready missed its goal to mark up the budgetduring the week of June 19. With consensus onspending numbers still out of reach, committeeaction will likely have to wait until July,when lawmakers will be rushing to get it donebefore departing for August recess.

Wake Me Up When September Ends.And let me know if Republicans on both ends ofPennsylvania Avenue have produced a unified taxreform plan. September is the month that theWhite House is aiming for, according toNational Economic Director Gary Cohn.Republicans will then spend the next threemonths moving the bill through the House andSenate and getting it signed by the presidentbefore the year runs out. Great plan! But willRepublicans be able to stick to it? That willdepend on how quickly the caucus can resolvetheir differences over those sticky policyquestions that the Tax Policy Updatehighlighted a few weeks ago — for instance,revenue neutrality, border adjustment tax, andinterest deductibility.

The House Ways and Means Committee is planningto hold two more hearings on tax reform inJuly. None of the hearings, however, will takeon the controversial topics. One of thehearings will examine the impact of tax reformon small businesses, and the other will focuson how tax simplification will benefittaxpayers. Yawn.

Ready or Not. It’s go-time. Senate Majority Leader MitchMcConnell (R-KY) announced that he has everyintention of moving forward with a vote priorto the July 4^th recess. This givesSenate leaders little time to garner thenecessary 50 votes for the legislation to pass.Let the vote-whipping commence!

McConnell’s office has outlined an idealtimeline for the passage of the Senate-versionof the American Health Care Act.First, a “motion to proceed” on the bill isscheduled for June 28. If the vote issuccessful, it will allow the debate on thehealthcare bill to begin. Senate reconciliationrules provide for 20 hours of debate, dividedequally, giving both Democrats and Republicansa chance to offer amendments and air grievanceson the bill.

Towards the end of the debate, a “vote-a-rama”will commence. This is a chance for allsenators to offer amendments to the bill. Giventhat there is no time limit to vote-a-rama,Democrats may use this time to postpone thepassage of the bill, filing amendments as adelay tactic. However, as of this writing, oursources indicate that Democrats do not have acohesive strategy for amendments to offerduring vote-a-rama. After vote-a-rama iscomplete, the Senate will vote on McConnell’ssubstitute amendment, which will allow thechamber to strip out the language of theHouse-passed AHCA and insert their ownlanguage. There’s talks of McConnellintroducing a “wrap-around” amendment prior tothe final vote. The final vote — if we get thatfar — will likely take place in the wee hoursof the night of June 29 or June 30.

Haters Gon’ Hate. Of course, this timeline is largelyaspirational. Sens. Dean Heller (R-NV), SusanCollins (R-ME), Rand Paul (R-KY), and RonJohnson (R-WI) have already indicated that theywill vote “no” on the procedural measure.Additionally, Sens. Shelly Moore Capito (R-WV)and Marco Rubio (R-FL) may also vote “no” onthe procedural vote. Several senators,including Sens. Mike Lee (R-UT) and Ted Cruz(R-TX) have said they will not vote in favor ofthe underlying bill.

So how does McConnell plan to get to 50 votes?The majority leader’s strategy is simple,though not foolproof. Senior staff hasindicated that leadership will not negotiatewith individual offices before the proceduralvote. Instead, McConnell will employ a similarapproach to the one used by House Speaker PaulRyan: calling senators’ bluffs, betting thatthey will vote “yes” on the procedural vote.Individual senators will have a chance to amendthe bill during vote-a-rama. Additionalamendments will also likely be included in a“wrap-around amendment,” or a final manager’samendment that includes various provisions tograb last-minute votes. A similar strategy wasemployed by Democrats before the passage of the Affordable Care Act in 2010.

Should McConnell’s strategy fail, the Senatewill use July to come to an agreement on healthcare reform. Sen. John Cornyn (R-TX) hasidentified Aug. 1 as the “drop deadline” forthe Senate to pass its bill.

Oops I Did it Again… Once again, the Congressional Budget Office(“CBO”) is playing with the GOP’s heart. OnJune 26, the CBO released an analysis of theSenate’s discussion draft of its health carereform bill. A few of the top-line numbers fromthe report are below:

• Revenue Effects
  • The bill would reduce the federal deficit by $321 billion – $202 billion more than the estimated net savings for the House-passed version of the AHCA.
  • Reduce revenue by $701 billion.
  • Provide the largest increases in deficits come from repealing or modifying tax provisions in the ACA that are not directly related to health insurance coverage, including repealing the net investment income tax and repealing annual fees imposed on health insurers.
  • Reduce direct spending by $1 trillion.
  • Cut Medicaid spending by 26 percent over the next 10 years.

• Effects on Coverage and Premiums
  • Increase the number of people who are uninsured by 22 million, relative to current law estimates.
  • Increase average premiums in the non-group market prior to 2020 by about 20 percent in 2018 and 10 percent in 2019.
  • Lower average premiums by about 30 percent by 2020 – the reduction in premiums is a result of fewer services being covered under a benchmark plan. In current-law terms, the benchmark plan will go from being a “silver” plan to a “bronze” plan.
  • Increase deductibles to $6,000 for a benchmark plan versus $3,600 under Obamacare.

It’s Beginning to Look a Lot LikeChristmas.Yes, we know it’s July. While the CBO score mayhave dealt a major blow to the GOP, there is asilver lining: the Senate discussion draftsaves $202 billion more than the House-passedversion of the American Health Care Act. This givesMcConnell some wiggle room when negotiatingwith senators who are currently planning tovote “no” on the bill. McConnell may be able tocut a deal with Sens. Capito, Rob Portman(R-OH), and Cory Gardner (R-CO), who want tosee more money on the table for treating opioidaddiction. Others, like Sens. Lee and Cruz, arehoping to raise the limit on how much taxpayerscan put away in Health Savings Accounts.Staffers close to the negotiations haveindicated that leadership is seriouslyconsidering this request to bring conservativesback on board.

A Quick Refresher. For those of you who need a quick review, theSenate released a discussion draft of the AHCAon June 22 and a slightly revised version onJune 26. A summary of the draft is below:

• Major Changes to Medicaid.
  • Termination of Medicaid Expansion.
  • Convert the traditional Medicaid program to a per-capita-cap.
  • Starting in 2020, states may choose block grants or per-capita-caps.
• Obamacare Subsidies. The Senate draft continues Obamacare’s premium tax credit subsidies for two years. However, starting in 2020, premium subsidies will be reduced and available to those who are 350 percent below the Federal Poverty Line (FPL). In a departure from the House-passed AHCA, the Senate draft bases premium subsidies on income, similar to Obamacare.
• State Waivers. Includes the option for states to elect a Section 1332 state innovation waiver. These waivers allow states to opt out of major parts of Obamacare and create their own health care rules, including redefining what benefits insurers must cover.
• Pre-Existing Conditions. Maintains protections for those with pre-existing conditions.
• Age-Rating Band. Allows insurers to charge older customers five times more than younger enrollees for the same health plan. The ratio under Obamacare was three-to-one.
• Coverage. Includes a six-month “lock out” period during which people who were uninsured for at least 63 days may not obtain coverage.
• Obamacare Taxes. The Senate draft repeals most Obamacare taxes.

Retroactively Repealed:

• Individual and Employer Mandate . Repealed after Dec. 31, 2015.
• Net Investment Income Tax. Repealed for tax years after Dec. 31, 2016.
• OTC Medication. Repeal of tax on amounts withdrawn from HSAs, Archer MSAs, FSAs, and HRAs used to purchase OTC medication, effective for tax years after Dec. 31, 2016.
• Elimination of Medicare Part D Subsidy Deduction. Reinstate the tax deduction for employers who receive Part F retiree drug subsidy (RDS) payments to provide creditable prescription drug coverage to Medicare beneficiaries. Effective for tax years after Dec. 31, 2016.
• Repeal of the Chronic Care Tax. Tax lowered from 10 percent to 7.5 percent, for tax years after Dec. 31, 2016.
• Health Insurance Tax (HIT). Repealed for tax years after Dec. 31, 2016 .
  • HSA and Archer MSA Contributions. Decreases the tax (from 20% to 10%) on HSA and (from 20% to 15%) on Archer MSA distributions that are not used for qualified medical expenses. Repealed for tax years after Dec. 31, 2016.
  • Remuneration. Limitation on deductibility of salaries to insurance industry executives. Repealed for tax years after Dec. 31, 2016.

Effective Date of Repeal in 2017 or 2018:

• Tax on tanning beds. Repeal effective Sep. 30, 2017.
• Medical Device Tax. Repealed for tax years after Dec. 31, 2017 .
• Tax on Pharmaceutical Manufacturers. Repealed for tax years after Dec. 31, 2017.
• FSA Contributions. Repeal of limitations on contributions to a Flexible Spending Account (FSA) for tax years after Dec. 31, 2017.are Payroll Tax. Repealed after22.
• Cadillac Tax. Postpones effective date of Cadillac tax until tax/plan years after Dec. 31, 2025.

REGULATORY WORLD

I’m Just Saying You Could Do Better.On June 22, a report by the Treasury InspectorGeneral for Tax Administration (TIGTA) foundthat there were over 800,000 people who havebeen affected by the agency’s ineffectiveprocess for identifying victims of identitytheft in 2015. Upwards of half of these victimswere not identified because they did not havean account with the IRS, which prevented theagency from issuing an employment identitymarker at the time. TIGTA suggested 10improvements the IRS can make to ratify theemployment identity theft process. The IRS hasagreed to some of those recommendations,including:

• Amending programming so that theft markers are on all victims accounts
• Putting markers on victims listed in the report
• Expanding policies for identifying mismatches
• Adding an identity marker to the valid account.

The IRS did not agree to some of the otherrecommendations for fear of exposing taxpayers’personal information.

IRS Accepts ITIN Renewals. As a part of the IRS’s efforts to improve itsrenewal program, taxpayers with expiringIndividual Taxpayer Identification Numbers(ITINs) can start renewing their informationthis month instead of in October. The IRSgenerally issues ITINs, a nine-digittax-processing number, for individuals who arerequired to file a federal tax return but arenot eligible for a Social Security number. Thisincludes foreign nationals, resident aliens,and undocumented workers. The Protecting Americans from Tax Hikes(PATH) Act automatically expires anyITINs that have not been used for a federal taxreturn at least one time in the previous threeyears on December 31, 2017. Additionally, ITINSwith middle digits 70, 71, 72 or 80 will alsoexpire December 31, 2017. The IRS continues toexpand its education efforts on betterinforming taxpayers so that they can complywith tax laws.

Get It While It’s Hot.The IRS’s attempt to regulate private taxpreparers continues. On June 21, the IRSreactivated its preparer tax identificationnumber (PTIN) system — however, this timearound, getting a PTIN is free (at least fornow). The IRS briefly shut down its PTIN systemafter a group of tax preparers won a classaction against the agency ( Steele v. United States) for chargingtaxpayers a fee to obtain these identificationnumbers.

While the IRS has not announced whether or notit would attempt to appeal the court decision,Commissioner John Koskinen stated that PTINsare vital in providing individual protectionwhen dealing with tax preparers, and the IRSshould “have authority to actually be able torun this program without eroding further theresources we [the IRS] have.” President Trump’sFY 2018 budget proposes to increase theagency’s oversight of tax return preparers. Astax reform legislation begins to move thisyear, the IRS hopes to regain its ability tocharge a fee for acquiring PTINs.

We Never Ask for Your Password.Tax criminals have long focused their effortson scamming individual taxpayers to filefraudulent returns. However, as a result of theIRS’s renewed efforts to combat identity theft,scammers have shifted their attention tostealing private identifier information fromtax preparers. This scam targets victims viaemail, in which criminals pose as a taxsoftware education provider. These emails asktax professionals to provide identifiers suchas e-Services credentials, personalidentification numbers, and CentralizedAuthorization File numbers — all of which wouldallow the scammers to steal client data andfile fraudulent returns. The IRS has respondedto this scam by reminding tax preparers thatlegitimate businesses never ask for privateinformation via email.

ROAD WORK AHEAD

Cleared for Takeoff: FAA Reauthorization.Last week Congress made progress towardreauthorizing Federal Aviation Administration(FAA) programs when House and Senate committeeleadership introduced long-term FAA bills.Currently, FAA programs are operating under ashort-term extension that will expire at theend of September. In order to prevent ashutdown of the FAA, Congress must pass areauthorization bill (or another extension) inthe next three months.

In the House, Transportation and InfrastructureCommittee Chairman Rep. Bill Shuster (R-PA)unveiled a six-year bill called the21st Century Aviation Innovation, Reform,and Reauthorization Act. The bill title may seem familiar, as willmost of the bill text because the committeepreviously made an attempt to advance a similarbill in 2016.

While there are obvious similarities, the 2017legislation does differ in a few key areas.Principally, the bill includes an amendedversion of a proposal to transfer air trafficcontrol (ATC) operations to a nonprofitcorporation, a concept promoted by PresidentTrump in recent weeks (although the House andWhite House versions differ).

House ATC Proposal Highlights

• The House bill splits up the FAA, transferring ATC services to a new non-profit corporation, which would be financed by user fees instead of federal excise taxes. However, the Ways and Means Committee would still need to weigh in. The FAA would remain in charge of safety regulation and airport grants.
• The newly established “American Air Navigation Services Corporation” (as coined by the bill) would receive all FAA ATC assets and all ATC-related spectrum for free.
• The American Air Navigation Services Corporation would be governed by a 13-member Board of Directors, which would include board seats for the corporation’s CEO, major passenger airlines, regional passenger airlines, cargo airlines, general aviation, business aviation, air traffic controllers, airports, commercial pilots, aerospace manufacturers, two members appointed by the secretary of transportation, and two board members selected by the board itself.

Other Highlights from the House Bill

• Includes several provisions intended to facilitate the integration of drone operations into the national airspace.
• Directs the U.S. Department of Transportation to put out regulations banning passengers from making in-flight cellular phone calls.
• Rolls back a 2011 rule requiring airlines to advertise the total price (base fare, fees and taxes) of tickets when quoting a price to customers.
• Offers some consumer protection provisions in response to the controversial bumping incident on a United flight last spring.
• Permits the FAA administrator to allow for the use of an unleaded aviation gasoline in an aircraft as a replacement for a leaded gasoline with some qualifications.

The Senate version differs from its Housecompanion in several ways. Most notably theSenate’s bill does not remove air trafficcontrol operations from the FAA. Anotherdistinguishing factor is the bill’s length –unlike the House’s six-year bill, the Senate’slegislation only provides a four-yearauthorization.

Highlights from the Senate Bill

• Includes a number of consumer protections and air travel enhancements in response to high-profile airline incidents.
• Includes several provisions intended to facilitate the integration of drone operations into the national airspace while addressing safety and privacy issues.
• Includes funding for airport infrastructure and authorizes a study to develop recommendations on further upgrading and restoring airport infrastructure.

The House Transportation and InfrastructureCommittee is holding a markup today, Tuesday,June 27, and the Senate Commerce Committee willhold its markup on Thursday, June 29. If bothbills make it through the committees asexpected, floor action will likely commenceafter the July 4^th recess. Aconference committee would convene in Septembermaking it possible for a final bill to clearboth chambers before the current authorizationexpires (September 30). Then again, thesignificant differences between the two billscould result in the need for another short-termextension of FAA programs.

A copy of the House bill and additionalresources can be foundhere. A copy of the Senate bill and additionalresources can be foundhere.

COMMANDER-IN-TWEET

LINE ITEMS

1. The House passed, by voice vote, H.R. 1393 – the Mobile Workforce State Income Tax Simplification Act , which would limit the authority of states to tax certain income of employees whose employment duties are performed in other states.
2. The House passed, by voice vote, H.R. 1551 – a bill that would extend the availability of the nuclear production tax credit beyond the 2020 deadline for nuclear power plants. Under the bill, the credit would be made transferable.

IN THE QUEUE

Congressional Activity

Tuesday, 6/27

House Transportation Committee
Markup of the FAA reauthorization bill.

House Financial Services Committee
Capital Markets, Securities and InvestmentsSubcommittee hearing on “U.S. Equity MarketStructure Part I: A Review of the Evolution ofToday’s Equity Market Structure and How We GotHere.”

Senate Appropriations Committee
Subcommittee hearing to review the FY 2018budget request for the Labor Department.

Senate Appropriations Committee
The Senate Appropriations Financial Servicesand General Government Subcommittee hearing onbudget estimates and justification for fiscal2018 for the SEC and the CFTC.

Wednesday, 6/28

House Financial Services Committee
The House Financial Services FinancialInstitutions and Consumer Credit Subcommitteeholds a hearing on “Examining the BSA/AMLRegulatory Compliance Regime.”

House Financial Services Committee
Monetary Policy and Trade Subcommittee hearingon “The Federal Reserve’s Impact on MainStreet, Retirees, and Savings.”

Thursday, 6/29

Senate Commerce Committee
Markup of the FAA reauthorization bill.

House Ways and Means Committee
Social Security & Oversight Subcommittees’joint hearing on the “Complexities andChallenges of Social Security Coverage andPayroll Tax Compliance for State and LocalGovernments.”