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TCJA Hearings May Help Advance Key Tax Measure

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Two House Committees took up the issue of extending the 2017 TCJA tax cuts in hearings designed to identify next steps for an extension. The hearings also were a way to send a message to the Senate to take up the partial extension bill that has already passed the House,.RHH H.R. 7024 (click here for earlier coverage). The Committees heard from small business representatives, economists, think-tanks and even a former Senator, with most witnesses firmly in favor of extending the 2017 law.

The positions of Democrats and Republicans on the debate are clear. Republicans want to reauthorize most of law, both the business and high-wealth tax breaks and the middle-class cuts. The Democrats want to roll back some of the business tax breaks favoring high-wealth taxpayers and corporations while continuing or expanding the child tax credit. The witnesses addressed the economic effects of rolling back the law and made recommendations to the Committees on extension. Most of the TCJA provisions expire after 2025.

Who Pays Corporate Tax?

The first witness in the House Ways and Means Committee hearing, former Senator Phil Gramm of Texas, started his testimony with a discussion of the merits of the corporate tax rate reduction to 21%. Noting that this rate is in the mid-range of global corporate tax rates, he touted an estimated 3% increase in GNP that resulted from this change. His key message, however, was that corporate taxes are not paid by corporations, but instead are paid by individuals. Gramm explained it this way:

A corporate entity is just a “pass through” legal structure. When the corporate tax rate is increased, corporations try to pass the cost onto consumers. To the degree that the entire cost of the tax increase cannot be passed on to consumers, those costs are borne by workers and investors. Most economic studies suggest that 50-70% of a corporate tax increase is borne by workers and 30-50% borne by investors.

The Small Business Perspective

The qualified business income (QBI) deduction was the main concern of National Federation of Independent Business (NFIB) member and small business owner Michael Ervin, owner of Coal River Coffee Company in West Virginia. Ervin reported that the Sec. 199A provision allowed him to deduct 20% of his business income, which enabled him to invest in the business, his employees and his community. Ervin also pointed out that his corporate competitors, like Starbucks, pay a 21% tax rate. ”If the small business deduction lapses and my marginal rates increase, I could be staring at an effective tax rate of nearly 45% when you combine federal and state income tax rates,” he explained. The lack of uncertainty with regard to the tax plan going forward also is making it difficult for Ervin to plan for the future of his business, he observed.

U.S. Manufacturer Says R&D, Depreciation are Key

Austin Ramirez of Husco, a Wisconsin private company that sells vehicle components to corporations, testified that the TCJA’s changes not only helped his company but also made his corporate customers more globally competitive, which…”allowed them to expand production and ultimately purchase more components from companies like Husco.”

Husco admonished the Senate to go ahead and pass the pending Tax Relief for American Families and Workers Act (H.R. 7024) into law. “Disincentivizing R&D and making capital investments more expensive directly harms manufacturers like Husco, limiting our ability to support our workers and drive the American economy.” Husco also said bonus depreciation and removing the interest deduction limit are essential to investment in capital equipment for U.S. manufacturers.

Battle of the Numbers

The Committee heard the opposite message from Kathryn Anne Edwards, Ph.D. Labor Economist (formerly of RAND corporation and now freelance economic policy consultant) who stated at the outset of her testimony, “There is no policy justification for extending the 2017 tax law, especially not with a 50% higher price tag.” Edwards cited a Congressional Budget Office (CBO) report that estimated that the 2017 tax law cost $1.9 – $2.25 trillion. She also pointed to a Congressional Research Service (CRS) analysis that found the largest demonstrated effect of the corporate tax cut was a trillion dollars of stock buybacks in 2018 and that individual taxpayers received much lower benefits.

In short, Edwards’ testimony was an expected counterbalance to the Committee Chairman’s statements on the effectiveness of the 2017 cuts and the business representatives’ information on what the law did for them. Expect the debate of the distribution of the TCJA tax cut benefits to continue while extension is on the table.

R&E, QBI Boost Small Business

The inability for businesses to plan and continue their operations while the fate of TCJA is up in the air was the focus of the House Small Business Committee hearing. Chairman Roger Williams (R-Tx) called on the witnesses to explain why the provisions of TCJA must be continued but also to address why it is essential to pass H.R. 7024 now. The witnesses, including small business representatives, observed that the R&E expensing extension and the Sec. 199A deduction are particularly important for a small business’s profitability, hiring, and growth.

Chuck Wetherington, President of BTE Technologies, LLC, in Hanover, Maryland, put it this way:

Well, as I stated in my testimony, this is slowing us down from bringing out major redesigns of our two flagship products that represent 80% of our product revenue. Our expectation is that we’re going to grow by 50% once those launch, but we continue to have to push those out because of the inability to, to cover the expenses without the assuredness of having the R&D tax credit. It’s back to predictability and consistency in what the code is.

Committee Tax Teams Appointed to Study Key Provisions

In another effort to preserve TCJA, House Ways and Means Committee Chairman Jason Smith (R-MO) has formed ten Committee Tax Teams comprised of Ways and Means Republican members to study key tax provisions from the 2017 TCJA that are set to expire in 2025. The teams are tasked with identifying legislative solutions to the coming fiscal cliff.

Teams have been assigned to the following specific tax policy areas for review.

  • American Manufacturing
  • Working Families
  • American Workforce
  • Main Street
  • New Economy
  • Rural America
  • Community Development
  • Supply Chains
  • S. Innovation
  • Global Competitiveness

The success of these committees will depend on the results of the 2024 election, when all House members are up for reelection. Still, the Republicans are getting a jump on negotiations by formulating the details of their positions now. It is unclear whether any type of report will be issued by these teams, but it will be interesting to see how they proceed.

Takeaways

These committee hearings and formation of the tax teams are more steps in the direction of addressing the expiring TCJA provisions. Congress has two choices: either go ahead and pass H.R. 7024 to continue expensing of R&E costs, extend bonus depreciation, relax the business interest deduction limit and increase the child tax credit, or wait and address all TCJA expiring provisions later in 2025. Congress’s track record on these dilemmas is not good. Most laws of consequence are passed at the very last minute. Additionally, if only the few key provisions covered by the pending legislation are extended, there is less pressure to take up the entire plan. The 2024 election will definitely be an impetus to pass something before November, so there may still be hope for the pending R&E extension package.

Lucia Smeal, Adjunct Professor, Georgia State University, J Mack Robinson College of Business

Lucia Nasuti Smeal is a guest blogger on tax topics for Frazier & Deeter. Smeal is an attorney, an adjunct tax professor with Georgia State University’s J. Mack Robinson College of Business and with Franklin University, and former editor of Tax Notes Today, published by Tax Analysts. Smeal also worked as a legislative analyst for the Congressional Research Service and is a former member of the U.S. House Periodical Press Corps. She is a frequent speaker and writer on current tax developments.

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Lucia Nasuti Smeal, Adjunct Professor, Georgia State University

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