The tail end of the 113th Congress and the first few months of the 114th Congress included tax reform legislation, talk, public input, study, and hearings. Since January 2015, the House has passed several tax bills that indicate greater interest in minor changes than major ones. This article reviews tax reform efforts from December 2014 through May 2015. In addition, a sampling of tax bills introduced in 2015 is summarized to illustrate some of the less-major reforms of interest to members.
Comprehensive tax reform activities
In December 2014, as the 113rd Congress wound down, two significant actions suggested that comprehensive tax reform would remain active on the congressional agenda. First, the outgoing chair of the House Ways and Means Committee, Rep. Dave Camp, R-Mich., formally introduced his tax reform proposal as H.R. 1, the Tax Reform Act of 2014. Second, the incoming chair of the Senate Finance Committee, Sen. Orrin Hatch, R-Utah, made a speech to the Senate outlining his seven principles of tax reform. These principles were explained along with the challenges of tax reform in a 300-plus page report by Republican staff of the committee released in December titled, Comprehensive Tax Reform for 2015 and Beyond.
In January 2015, the Senate Finance Committee formed five bipartisan working groups on tax reform (1/15/15 press release). The groups sought public input and received over 1,400 letters (4/29/15 press release). The House FY 2016 budget report, released in March, calls for comprehensive tax reform (page 12).
In February, Rep. Paul Ryan, R-Wis., chair of the House Ways and Means Committee, indicated that tax reform would only happen if significant work was completed by summer’s end (“Paul Ryan Sees End-of-Summer Deadline for Making Strides on Tax Reform,” The Washington Post (Feb. 13, 2015)). In a presentation to the AICPA governing Council in May, Ryan stated that he aims for tax reform in 2016 to move to a territorial system and lower tax rates (“Tax Reform, Lower Rates Among Top Legislative Goals, Ryan Tells AICPA,” Journal of Accountancy (May 19, 2015)).
All of this seems to suggest that tax reform is moving forward. But what else is happening might tell a different tale. Described below is a sampling of tax proposals for the 114th Congress.
One tax bill has already become law in 2015—Don’t Tax Our Fallen Public Safety Heroes Act, P.L. 114-14. This bill modifies Sec. 104, which excludes amounts paid to compensate for injuries and sickness, to add an exclusion for payments for injuries or sickness received by public safety officers or their dependents.
Tax bills passed in the House
Several bills have been passed by the House, including ones to make permanent a few of the 50-plus provisions that expired at the end of 2014.
Note: To better understand the significance of the votes provided below (if any), of the 435 House members in the 114th Congress, 245 are Republicans, 188 are Democrats, and there are two vacancies (as of May 22). The Senate has 54 Republicans, 44 Democrats, and two Independents. (Per information from the Office of the Clerk.)
Permanent, higher Sec. 179 expensing: America’s Small Business Tax Relief Act of 2015, H.R. 636, passed on Feb. 13 (vote total: 272–142). This bill makes permanent the $500,000 expensing and $2 million threshold amounts for expensing business property, also indexing them for inflation. Software and qualified real property, as well as air conditioners and heaters, would now be Sec. 179 property, and taxpayers can revoke a Sec. 179 election without IRS consent. The Joint Committee on Taxation (JCT) estimates the cost at $77 billion over 10 years (JCX-12-15).
Permanent sales tax deduction: State and Local Sales Tax Deduction Fairness Act of 2015, H.R. 622, passed on April 16 (272–152). This bill makes permanent the option to claim an itemized deduction for sales tax rather than state income tax, which has existed in temporary form since 2004. The JCT estimates the cost at $42 billion over 10 years (JCX-41-15). House Report 114-51 accompanying H.R. 622 notes that tax reform may eliminate all itemized deductions for state taxes, but the majority believes that until then, there should be parity for all itemizers regarding state tax deductions.
Permanent research tax credit: American Research and Competitiveness Act of 2015, H.R. 880, passed on May 20 (274–145). H.R. 880 makes the credit permanent and increases the rate for the simplified credit from 14% to 20%. The traditional credit with the 1984–1988 base years would be terminated. This bill also allows small businesses (gross receipts of $50 million or less on average over a three-year period) to use the credit against either regular tax or alternative minimum tax. The JCT estimates the cost at $182 billion over 10 years (JCX-86-15).
Estate tax repeal: Death Tax Repeal Act of 2015, H.R. 1105, passed on April 16 (240–179). This bill repeals the estate tax for those dying on or after the date of enactment. It also repeals the generation-skipping transfer tax (GST), modifies the gift tax, and reduces the rate from 40% to 35%. The JCT estimates the cost at $269 billion over 10 years (JCX-74-15).
The rationale for the repeal, per House Report 114-52, includes to provide relief to family businesses and farms and to promote economic growth. The report also notes: “the Committee believes that the estate tax imposes a double or, in some cases, triple tax on assets. Repeal of the estate tax eliminates this unfair tax burden.” The dissent notes: “The estate tax has been an important component of our tax code that promotes fairness and reduces economic inequality. Repeal of the estate tax would increase the deficit by more than a quarter of a trillion dollars to provide tax cuts to the wealthiest estates in our country.”
Tax gap: Contracting and Tax Accountability Act of 2015, H.R. 1562, passed on April 15 (424–0). It includes measures to prevent a taxpayer from obtaining a government contract or grant if that individual or business has “seriously delinquent federal tax debts.”
Taxpayer Bill of Rights: Taxpayer Bill of Rights Act of 2015, H.R. 1058, passed on April 15 (voice vote). This bill adds 10 rights to Sec. 7803, which provides the responsibilities of the IRS commissioner and other officials, including rights to quality service, privacy, and confidentiality.
IRS employees and email: IRS Email Transparency Act, H.R. 1152, passed on April 15 (voice vote), prohibits any IRS officer or employee from using a personal email account to conduct any official government business.
Bill by House and Senate
Ensuring Tax Exempt Organizations the Right to Appeal Act, H.R. 1314, passed in the House on April 15 (voice vote) and in the Senate on May 22 (62–37). This bill would require regulations that allow a tax-exempt organization to request an administrative appeal upon receiving an adverse determination of tax-exempt status.
Sampling of proposals introduced
Prepopulated returns: Simpler Tax Filing Act of 2015, S. 940, calls for the IRS to offer pre-prepared tax returns by 2020 to as many taxpayers as feasible.
Inflation equity: Tax Equity Act of 2015, H.R. 1758, amends the Code to allow for regional cost-of-living adjustments for individual tax rates.
Donating wild game meat: Wild Game Donation Act of 2015, H.R. 461, increases the tax deduction for charitable contributions of “qualified wild game meat” by the amount of the fees paid to process such contributions, and it excludes from the gross income of meat processors processing fees paid by a charitable organization for the processing of donated wild game meat.
Distilling relief: Aged Distilled Spirits Competitiveness Act, H.R. 867 and S. 1179, modifies Sec. 263A(f) to exclude the natural aging process in determining whether production of distilled spirits requires interest capitalization.
Marijuana: Small Business Tax Equity Act of 2015, H.R. 1855, modifies Sec. 280E to allow deductions for businesses that operate within the bounds of state law.
Higher education credits: Higher Education Tax Benefit Compliance Improvement Act, S. 1413, addresses some concerns raised by the Treasury Inspector General for Tax Administration (TIGTA) regarding improper claiming of education credits. For example, the bill would require a proper Form 1098-T, Tuition Statement, to claim a credit.
Hearing aid credit: Hearing Aid Assistance Tax Credit Act, S. 315, adds Sec. 25E to allow a credit up to $500 for the purchase of certain hearing aids.
Angel tax credit: Angel Tax Credit Act, S. 973, adds a 25% credit at Sec. 30E for equity investments of $25,000 or more in a domestic corporation or partnership if it is based in the United States, has gross receipts under $1 million, employs fewer than 25 full-time employees, has been in existence for less than seven years, and is a high-tech business.
Pigouvian tax: Tax Pollution, Not Profits Act, H.R. 2202, taxes greenhouse gas emissions with the revenues used to reduce the corporate tax rate, provide payments to low- and middle-income taxpayers, and fund job training.
In his address to the AICPA Council in May, Ryan described the bills passed in the House to permanently extend certain expired provisions as a “down-payment” on tax reform. Yet, there is no discussion of how any of the provisions that expired at the end of 2014 fit into the big picture of tax reform. The bills passed are piecemeal. These bills mask a budget question by attempting to enact the bills without revenue offsets and later repealing the provision in tax reform (such as the state tax deduction) to raise revenue.
The timelines do not look favorable for tax reform. The Senate Finance Committee working groups have yet to report out, but Ryan still seeks tax reform by the end of summer, even though no bill exists (other than H.R. 1 from the last Congress). Tax reform will also require reaching consensus on the revenue-scoring approach (whether the budget effects should be calculated dynamically, meaning including the effect the cuts are presumed to have on economic behavior, or statically, which presumes no effect on economic behavior). Also, Congress has other big items on its agenda including the FY 2016 budget, the debt ceiling, and funding problems with the Highway Trust Fund.
Meanwhile, as the sampling of other bills described above indicates, Congress continues to tinker with the tax law in uncoordinated ways.
What might happen? Administrative reform proposals (tax gap, identity theft, due dates, etc.) can be enacted outside of comprehensive tax reform, and expired provisions might once again be renewed retroactively for one year. Tax reform likely will continue to be discussed, but there likely is insufficient time or consensus to reach completion this year—or next year. We’ll see.
Annette Nellen, Esq., CPA, CGMA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is a member of the AICPA Tax Executive Committee and Tax Reform Task Force. She has several reports on tax policy and reform and maintains the 21st Century Taxation blog.