July 17, 2017 - Weekly Legislative Update

Congress Returns To Begin Addressing Major Issues

 

A returning Congress will be greeted by swift GOP leadership actions on "Obamacare repeal and replace," a budget for FY 2018, and reconciliation instructions on tax reform that will impact WOTC's chance of winning permanent authority. 

The Senate can't write a budget for FY 2018 and get to tax reform until "repeal and replace" is decided because it impacts the budget baseline.  McConnell will likely move soon to restore billions of dollars in Medicaid cuts that caused revolt in GOP ranks and near-riots in town-hall meetings.  He'll then confront the main GOP holdouts-Cruz, Paul, Lee, Johnson-that it's this last-chance bill or failure. 

In event of failure, McConnell can assure return to "repeal and replace" next year by adding reconciliation instructions to the FY 2018 budget (in addition to reconciliation instructions for tax reform.)

In the House, Speaker Ryan and his leadership team will meet to finalize a Budget Resolution for Fiscal Year 2018, leaning on Budget Committee Republicans to go along. Ryan will then begin interminable caucus meetings extending perhaps to the middle of August to heal internal divisions among the GOP and win 218 votes for a final compromise.

GOP fault lines on the budget include defense hawks vs. deficit hawks and entitlements slashers vs. moderates, but the main obstacle continues to be a group of around 35 conservatives in the Freedom Caucus who are prepared to block the majority from acting unless their demands are met. 

Passage of a joint budget resolution by the House and Senate is critical to tax reform because reconciliation instructions allow expedited passage by simple majority and no filibuster.  The GOP will get no help from Democrats, so the message Ryan will be delivering is, "Are we going to unite and do great things, or show the world we cannot govern?" 

The Speaker has already worked through two versions of a budget resolution-a task much complicated by the way reconciliation instructions for tax reform are written.  If a tax reform bill yields deficits in years beyond the usual ten-year budget window, the Budget Act requires expiration after ten years; i.e., tax reform won't be permanent.  Yet permanency to reduce tax uncertainty in all parts of the economy is one of the most highly desirable benefits of tax reform, detracting from the goal of boosting economic growth to 3 percent.  

This issue is so crucial that it's being tackled in top-level negotiations by Speaker Ryan and Leader McConnell with Treasury Secretary Mnuchin and National Economic Council Director Gary Cohn as part of their effort to come together on a single framework for tax reform to be unveiled in September.

The next couple months will be showdown time for the Republican party.  Relying on the fact that Ryan and McConnell are skilled leaders and have been through the fires before, we should count on them pulling through with victories in the budget resolution (which launches tax reform) and the continuing resolution to fund the government before October 1.

(Democrats will likely join in a "grand bargain" for a continuing resolution to fund the government, which is a spending bill, but will unite to oppose a budget resolution, which is a plan that includes instructions which weaken their ability to bargain-these are entirely different acts of Congress.)

 

Senate Delays August Recess as Health Bill's Fate Hangs in Balance

 

Majority Leader Mitch McConnell said the Senate would begin its August break two weeks later than expected, as the chamber labors to pass a health-care bill.

The Kentucky Republican cited the need to "complete action on important legislative items and process nominees."

 

Progress on Death Tax Regulations

 

TIA continues to march forward towards withdrawal of the proposed regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes (REG-16311302; 81 F.R. 51413). Two new updates on that front:

1) The House FY18 appropriation bill contains a policy rider which defunds the implementation of the proposed regulations. The rider is under Sec. 115 of Financial Services and General Government appropriation. It would prevent the IRS from finalizing the regulations as written, or any similar regulations that could be proposed under 2704. 

2) On July 7th, the IRS issued Notice 2017-38, an interim report in accordance with President Trump's Executive Order 13789 which directs the Treasury Secretary to identify any regulations issued after 2015 that: 1. impose undue financial burdens on taxpayers; 2. add undue complexity to federal tax laws; 3. exceed the IRS's statutory authority.

Of 105 total regulations considered, 8 were flagged in Treasury's interim report as significant and meeting at least two of the three conditions above. Listed 4th in the interim report is the Section 2704 regulations. According to the report:

Section 2704(b) of the Internal Revenue Code provides that certain non-commercial restrictions on the ability to dispose of or liquidate family-controlled entities should be disregarded in determining the fair market value of an interest in that entity for estate and gift tax purposes. These proposed regulations would create an additional category of restrictions that also would be disregarded in assessing the fair market value of an interest. Commenters expressed concern that the proposed regulations would eliminate or restrict common discounts, such as minority discounts and discounts for lack of marketability, which would result in increased valuations and transfer tax liability that would increase financial burdens. Commenters were also concerned that the proposed regulations would make valuations more difficult and that the proposed narrowing of existing regulatory exceptions was arbitrary and capricious.

IRS Notice 2017-38 also provides us two new dates: 

1) August 7, 2017: The IRS is accepting new comments on their interim report until this date. Today, FBC submitted this short letter, reiterating our support for withdrawal of the regs. TIA is urging coalition partners to submit their comments at: Notice.Comments@irscounsel.treas.gov with Notice 2017-38 in the subject line.

2) September 18, 2017: The IRS will issue their final recommendations on "specific actions to mitigate the burden imposed by regulations identified in the interim report." The only solution we are pushing is complete withdrawal. As I told Investment News at the beginning of the year, we need to pull these regulations out by the roots!

According to President Obama's FY2013 budget (page 203 "modify rules on valuation discounts") implementation of these regulations would cost small businesses $18 billion over a ten year period, not including additional compliance costs. That is money that will now likely stay in the pockets of family owned businesses so they can expand, pay workers more, and create new jobs.