Differences between the parties in Congress have stymied corporate tax reform. To resolve those differences, the Republicans have the opportunity to use the same procedure used by the Democrats to pass portions of the Affordable Care Act: budget reconciliation.
Sen. John ThuneJohn ThuneHow airport security lines got so bad Self-driving cars: The next great leap in automotive safety Overnight Tech: Senate panel poised to advance email privacy bill MORE (R-S.D.), chairman of the Senate Republican Conference and chairman of the Commerce, Science and Transportation Committee, has been promoting the use of reconciliation. He backs tax reform that would include a sharp cut in corporate tax rates as well as a way to finance long-term transportation improvements.
Through reconciliation Senate Republicans could pass a bill with a simple majority of 51 votes. They hold 54 seats to the Democrats’ 46. Budget reconciliation rules also set protocols for consideration of the bills in both chambers, including limiting debate in both houses to 20 hours and prohibiting Senate filibusters entirely. Finally a bill could get out of Congress and be sent to the president.
But what would a corporate tax reform bill include? It’s no secret that the U.S. corporate tax rate is the highest in the world. As a result, U.S.-based multinational companies are keeping trillions of dollars in countries with lower tax rates, rather than bringing them back home. According to a report from Capital Economics, an international macro-economic research firm, U.S. companies are holding more than $2 trillion overseas, more than the $1.9 trillion the Federal Reserve reports they are holding in the U.S.
Additionally, the inability of Congress to agree on tax reform – for individuals as well as businesses – has meant years of passing increasingly costly temporary tax breaks. In December 2014 Congress approved a package of 50 “extenders” at a cost of about $42 billion to the government. But their long-term cost will be nearly $1 trillion during the next decade because Congress has not offset those tax breaks with spending cuts or other tax increases as they would if they were permanently in the tax code.
The president has called for lowering the top corporate tax rate from 35 percent to 28 percent for corporations and 25 percent for manufacturers, while Republicans prefer a straight 25 percent tax rate. Both sides want the outcome to be revenue neutral. If they can find common ground, suddenly our rate is competitive around the globe.
Lowering the rate could also lead to the repatriation of the $2 billion in profits that corporations are keeping overseas. Tax income generated by those revenues could pay for changes to the corporate tax and perhaps fund a multi-year transportation and infrastructure bill that Congress must decide upon this spring. Thune and other Republicans believe tax reform that funds infrastructure upgrades could gain the support of Obama, as well as other Democrats.
One potential roadblock to an agreement could be the possibility of creating inequity in the system between large corporations and small businesses. Owners of small businesses are not subject to the corporate tax. Rather they pay business taxes as part of their personal income taxes at a rate of up to 39.6 percent (which does not include their state tax burden). So lowering the corporate rate to 25 percent would put small businesses at a disadvantage. Reforming small business taxes at the same time as corporate tax reform, however, would mean restructuring the personal income tax system and renewing a battle over personal rates that the two parties waged three years ago. This battle is likely to be particularly contentious in light of the president’s recent State of the Union address that called for higher personal tax rates.
Using reconciliation to push through legislation is essentially a strong-arm tactic. But it has been used frequently in recent years as Democrats and Republicans have become less compromising. Obama used it for the Affordable Care Act. It was used by Republicans to pass President George W. Bush’s tax cuts and supporters of President Bill ClintonBill ClintonClinton allies see big boost from Brown endorsement Aide: Clinton wasn't close to IT expert who managed server The Hill's 12:30 Report MORE’s deficit reduction and tax package broke it out in 1994. After years of delaying corporate tax reform, the time is right to use it again.
Stransky is a U.S. international tax partner for the law firm of Sullivan & Worcester in the firm’s Boston office.