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NAW News


- January 2017

The GOP Leadership in both houses of Congress, some key Democratic tax-writers, and the incoming Trump Administration are all vocal advocates for some form of tax reform. It is conventional wisdom in Washington that the chances for meaningful tax reform are greater now than they have been in decades – most likely since the 1986 tax reform act. House Ways and Means Committee Chairman Kevin Brady (R-TX) says reform will be done before the Congressional August recess, and incoming White House Chief of Staff Reince Priebus concurs, saying we’ll have it done in the first seven months of the year.

That is likely a very ambitious prediction, but whether it is done in July, later this year, or in the first half of 2018 (which some suggest is a more realistic time table), there is no doubt that tax reform has moved from a back-burner wish-list to the top of the agenda. How it will be done and the policy specifics remain uncertain, but some things are beginning to take shape.

The process – bi-partisanship or reconciliation?

Democrats, now in the political wilderness with a Republican president and GOP majorities in both houses of Congress, are calling for bipartisanship, arguing that tax reform is far too big an issue to be passed on a partisan basis with only GOP votes. That is the same argument the GOP minority made when the Obama Administration and Democrat-controlled Congress passed Obamacare without a single Republican vote. GOP pleas for bipartisanship on health care in 2009-2010 were rejected by the Democratic majority, and it is very likely that Democratic pleas today will be treated the same.

Although some Republican tax-writers have indicated their willingness to begin consideration of tax reform on a bipartisan basis, most believe that the Senate Democratic minority will obstruct passage of a tax reform bill that does not include significant tax increases that Republicans are unwilling to impose. With only 52 GOP votes in the Senate and the unlikelihood that 8 Democrat senators will break ranks with their Leadership to support a GOP bill, plans are being made to consider tax reform under a filibuster-proof reconciliation bill.

To get to a reconciliation bill, both houses of Congress will first have to pass a fiscal year 2018 budget – a simple-sounding feat that has been accomplished rarely in recent years. While a budget resolution cannot be filibustered in the Senate, the resolution is subject to an unlimited number of amendments, most of which are offered to score political points and provide copy for campaign ads in the next election.

The players and the policy:

The primary players:

  • The House Ways and Means Committee: The GOP released a broad and well-developed “Blueprint” on tax reform last June (more on the Blueprint below).
  • The Senate Finance Committee: Chairman Orrin Hatch (R-UT) has been working on a “corporate integration” bill for a couple years, which will now take a backseat to a more comprehensive approach; Ranking Democrat Ron Wyden (D-OR) has released two previous broad tax reform bills, and could prove to be a willing partner should a bipartisan approach be taken.
  • The White House: Trump released a tax reform proposal during the campaign which was widely criticized as being too generous to upper-income earners and dramatically adding to the Federal debt, and his transition team is now considering its options (and has not indicated how or whether they will defer to the Congressional tax writers on reform).
  • “The Swamp”: No issue attracts more advocates and interest groups than tax reform, and despite Trump’s vow to “drain the swamp,” the taxpayers and those who speak for them in Washington will – and should – be involved in the tax reform debate.

And the primary issues to watch for:

Corporate-only tax reform vs pass-thru rate parity:  While there is still an occasional call for corporate-only reform that would reduce the tax rate only for the 1.6 million C Corporations and not for the more-than-30-million pass-through businesses subject to the top individual rate, that would be aggressively opposed by those pass-through businesses, which would doom tax reform politically. There is much stronger support today for business tax reform that would lower the tax rate for all businesses, regardless of how they are structured, to reach or get close to parity in tax rates for C Corporations and pass-through entities.

Effective vs marginal rates:  The issue of effective tax rates –the taxes that companies actually pay – has increased in intensity in the last few years as a result of news reports about multi-national corporations taking advantage of the many complex provisions in the tax code that enable them to pay effective rates much lower than the statutory 35% rate. Most wholesaler-distributors are high effective rate payers and they are bearing an unfair and disproportionate share of the corporate income tax burden.

International-only tax reform: In recent years some Congressional tax writers discussed reform that would deal only with our international tax law, without reducing corporate or individual tax rates. Under current law, U.S. corporations are taxed on profits earned abroad as well as those earned at home, but taxes on their foreign income are deferred until that income is “repatriated” back to the U.S. As a result of the high U.S. corporate income tax rate of 35%, our multi-national corporations have declined to bring their foreign earnings back to the States. International tax reform was seen as a way to make the US tax code more competitive with our trading partners and to encourage companies to remain headquartered here and to repatriate their foreign earnings. With the increased impetus for comprehensive tax reform, the push for international-only reform is likely to weaken.

Repatriation and “deemed” repatriation: A decade ago a repatriation bill was passed that allowed companies to repatriate foreign earnings with a “tax holiday” rate of only 5%, and it is generally assumed that multi-national corporations will not bring their foreign earnings back to the U.S. until a similar tax rate reduction is offered. To get around this stalemate and generate the revenue that would result from a broad repatriation, several recent tax reform proposals have proposed imposing a “deemed repatriation” tax on those foreign earnings – a one-time tax on corporations’ foreign-held earning as if they had been repatriated back to the U.S. Repatriation and deemed repatriation remain a part of the tax debate today, with a push from some legislators to use repatriation revenue to fund an infrastructure/highway bill. How repatriation is handled is of interest to all tax reform watchers, since if repatriation is used for infrastructure, tax writers will inevitably look for other sources of new tax revenue to “pay for” tax rate reductions.

The House GOP Tax Blueprint: The House Blueprint is the most fully-developed tax reform plan today, and proposes dramatic structural changes in the tax code, rather than just tinkering with the existing law. Notable provisions in the Blueprint include –

  • A corporate tax rate of 20 percent
  • A top individual tax rate of 33 percent, along with repeal the Obamacare taxes that raise the current top effective individual tax rate to about 42 percent
  • Separation of business pass-through income from the individual tax code, with that income taxed at a top rate of 25 percent
  • Full first-year expensing of capital investments except land and inventory
  • Retention of LIFO temporarily, while they continue consideration of including inventory in the first year expensing (see LIFO section below)
  • Elimination of the deductibility of business interest expenses
  • A border adjustable, destination-based cash-flow business income tax

By far the most controversial provision in the House Blueprint is the border adjustable tax proposal. Under the BA tax regime, importers would no longer be allowed to deduct the cost of the goods they import (effectively a 20 percent tax on imports), and exporters would no longer pay tax on the revenue generated by goods they export.    Goods would be taxed where they are consumed, rather than where they are produced.   Border adjustability is a fundamental component of the House GOP tax plan, in no small part because it is estimated to raise approximately $1.2 trillion. 

Proponents of border adjustability assert that the tax plan would encourage production in the US and the purchase of US-produced goods, and that it would therefore go a long way toward eliminating the competitive disadvantage that our tax code imposes on business, reducing the incentive for US companies to move their operations overseas or “invert” their companies.  A key to the proponents’ position is their assertion that under a border adjustable regime, exchange rates would respond favorably and immediately and that the resulting stronger dollar would offset the increased taxes on importers.

Opponents of border adjustability argue that the tax increase they would face would be crippling, that denying the deduction of the costs of imported goods would unfairly punish companies which import goods that are not produced or available for purchase in the USA, and that consumers would ultimately pay the tax through much higher prices for imported goods.  They also reject the claim that a stronger dollar and favorable exchange rate would offset their increased taxes, and that since not all of our trading partners have fluctuating currency, the exchange rate argument is simply not accurate.

Not surprisingly, large retailers are adamantly opposed to the House border adjustability plan since they import much of what they sell – in some cases upwards of 90 percent. Oil and gas companies have joined the opposition, as have domestic manufacturers which import component parts essential to their manufacturing processes, and the segments of the food industry which import off-season produce from South America.

Although the distribution industry is not as uniformly impacted as are others, those distributors which do import will be directly affected, and we are watching this issue very closely to determine whether there are indirect impacts on the industry that we will need to respond to.

NAW Tax Coalitions:

NAW helped form and helps manage the Coalition for Fair Effective Tax rates, which is actively involved in the tax reform debate, urging that reform be seen through the lens of effective, not just statutory, tax rates.

NAW also manages the Tax Relief Coalition, which has advocated for pro-business tax policy and lower tax rates since its creation in 2001; and serves on the Steering Committee of Parity for Main Street Employers, which leads the fight for tax rate parity between C corporations and pass-through businesses.


In 2006 NAW organized, and today continues to manage, the LIFO Coalition. NAW member companies and the members of the LIFO Coalition have been aggressive and effective in making the case for LIFO to critical members of the House and Senate, and we believe are largely responsible for the fact that no action has been taken on repeal legislation to date. The success in preventing action on repeal is a text-book case of what business can achieve when it fully engages in the legislative process.

LIFO vs Full Expensing:

LIFO has been brought up in the most recent tax reform discussions in an entirely new context.

In June, the House Republicans released “A Better Way,” their blueprint for tax reform.  The blueprint states, “With respect to inventory, the Blueprint will preserve the last-in-first-out (LIFO) method of accounting. The Committee on Ways and Means will continue to evaluate options for making the treatment of inventory more effective and efficient in the context of this new tax system.”  

Another feature of the blueprint is full expensing for capital investments, with the exception of land.  At a recent meeting with House Ways and Means Republican tax staff, it was strongly suggested to us that they are likely to provide for current and full expensing of inventory to replace the inventory methods currently allowed in the tax code, including LIFO.

A preliminary survey of NAW’s LIFO companies indicated a division of opinion on whether the company would prefer to stay on LIFO or would welcome moving to full expensing – writing off the cost of inventory in the year of purchase. Many asked questions about how a move from LIFO to expensing would be done, i.e., how would current LIFO reserves be handled.

We are now in the process of taking a more detailed survey, both within NAW and in the LIFO Coalition broadly, this time providing the different possible “transition rules” for a move from LIFO to expensing.

LIFO repeal is certain to be a part of the debate on tax reform this year, and NAW will continue to lead the fight against repeal or, in the case of a move to expensing, for transition rules which do not impose a retroactive recapture tax on LIFO companies.