September 27, 2017
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This morning the Administration and Republican leaders in both the House and Senate together released their Unified Framework for Fixing Our Broken Tax Code, a broad tax reform outline intended to serve as a template for the tax-writing committees to develop tax reform legislation. We are excited to report that the Administration and congressional leaders propose to retain the Low Income Housing Tax Credit, saying that "the framework explicitly preserves business credits in two areas where tax incentives have proven to be effective in promoting policy goals important in the American economy: research and development (R&D) and low-income housing."

The Framework does not speak to municipal bonds; however, NCSHA has learned from both congressional and industry sources that, when asked explicitly about the authors' intentions regarding municipal bonds, a White House spokesperson speaking at a press briefing yesterday said that the authors of the Framework intend to protect them. NCSHA is working to clarify whether private activity bonds, which are type of municipal bonds, would be preserved.

The Framework was developed over the last several months by the "Big Six"—National Economic Council Director Gary Cohn, Treasury Secretary Steven Mnuchin, Senate Majority Leader Mitch McConnell (R-KY), Senate Finance Committee Chairman Orrin Hatch (R-UT), House Speaker Paul Ryan (R-WI), and House Ways and Means Committee Chairman Kevin Brady (R-TX).

Specific reforms proposed in the Framework include:

  • Reducing the corporate tax rate to 20 percent from its current level of 35 percent;
  • Eliminating the Alternative Minimum Tax for both individuals and corporations;
  • Allowing businesses to immediately expense for at least five years the cost of new investments in depreciable assets other than structures;
  • Partially limiting the net interest expense incurred by C corporations;
  • Establishing a tax rate of no more than 25 percent for sole proprietorships, partnerships, and S corporations;
  • Establishing a territorial taxation system for global American companies;
  • Consolidating the current seven individual tax brackets into three brackets of 12 percent, 25 percent, and 35 percent; and
  • Roughly doubling the standard deduction.
     

The Framework envisions repeal of business tax credits other than the Housing Credit and the R&D Credit, but states that the tax-writing committees may decide to retain some other business credits to the extent budgetary limitations allow. Similarly, it envisions elimination of most itemized deductions for individuals, with the exception of the mortgage interest and charitable giving deductions.

The tax-writing committees must now begin the process of drafting actual legislation in keeping with the Framework. However, passing that legislation is likely to prove challenging. Congressional leaders hope to use the budget reconciliation process to prevent a filibuster of tax reform legislation in the Senate, thereby making way for the bill to pass there with just a simple majority, rather than a 60-vote threshold. But to accomplish this, Congress first must pass an FY 2018 Budget Resolution that includes reconciliation language related to tax reform.

The House Budget Committee last July reported its FY 2018 Budget Resolution, which provides reconciliation protection for deficit-neutral tax reform. However, House leadership has not brought the measure to the floor, lacking the votes to pass it. To a large extent, this is because most House Freedom Caucus members had expressed that they would not vote for a Budget Resolution facilitating tax reform legislation until they had more details on that reform. We should learn in the coming days if the Freedom Caucus will be satisfied enough with the level of detail provided in the Framework to vote in favor of a Budget Resolution.

The Senate Budget Committee has not yet considered an FY 2018 Budget Resolution, but plans to do so soon. Key Senate Budget Committee members said last week that they expect the Senate version to allow reconciliation protection for up to $1.5 trillion in net estimated revenue loss from a tax reform bill. Should Congress take this approach, it would give tax writers far more flexibility to cut tax rates significantly without including as many revenue-raising offsets.

Despite the push towards moving a tax bill through reconciliation, which would not require votes from Democratic senators if at least 50 Republican senators support it, President Trump is courting moderate Democrats, in the hopes of getting some bipartisan support for a tax reform bill. The Administration has been reaching out mostly to Senators Joe Donnelly (D-IN), Heidi Heitkamp (D-ND), and Joe Manchin (D-WV).

In the weeks ahead, NCSHA will be focusing on ensuring that tax reform legislation not only retains the Housing Credit, but also tax-exempt Housing Bonds; expands and strengthens the Housing Credit by incorporating the provisions included in the Affordable Housing Credit Improvement Act, S. 548/H.R. 1661; and ensures other modifications to the Housing Credit are included in reform to make certain that the program is not negatively impacted by a lower corporate income tax rate.

For more information, contact NCSHA's Jennifer Schwartz.