Tax reform, particularly corporate tax reform, will be on the agenda in 2015, congressional observers said.
The new year will bring a new Congress, with Republican majorities in both the House and the Senate. In 2015, there will two new tax-writing committee chairmen. Rep. Paul Ryan, R-Wis., is poised to become the House Ways and Means Committee chairman, and Sen. Orrin Hatch, R-Utah, is likely to become the Senate Finance Committee chairman.
Ryan has expressed an interest in doing corporate tax reform as a first step. Frank Shafroth, director of the Center for State and Local Leadership at George Mason University, said Ryan "is going to make a significant effort to do corporate tax reform."
Susan Collet, president of H Street Capitol Strategies, noted that President Obama is also interested in tax reform that applies to businesses. "That will be a natural starting point," she said.
Some experts said they think Congress will work hard at corporate tax reform in the coming year.
"Don't discount the possibility that Congress takes a serious run at it," with the new Republican majority in the Senate and Ryan as Ways and Means chairman, said Michael Decker, Securities Industry and Financial Markets Association managing director and co-head of municipal securities.
Congressional observers have mixed views on how corporate-only tax reform would affect the municipal bond market.
Collet said that under tax reform that is not comprehensive, the tax-exemption for municipal bonds is less at risk.
Micah Green, chair of the financial services and tax policy practice group at Squire Patton Boggs, said that if Congress works only on corporate or a broader business tax reform, governmental bonds and retail investors shouldn't be relevant. However, bonds whose proceeds benefit private activity and banks' ability to buy tax-exempt bonds "could come under the scope of corporate and business tax reform," he said.
Decker said that there's a risk that Congress could curtail the muni exemption in any tax initiative. "That's a risk we take seriously," he said.
Similarly, Mike Nicholas, chief executive officer of the Bond Dealers of America, said that the muni exemption will be included in a discussion of all exemptions and deductions. "It is clearly on the table" as a revenue raiser, he said.
Shafroth said that if Ryan gets close to formulating a proposal, he will ask the Joint Committee on Taxation to put together a menu of ways to pay for it, and that menu will probably prominently feature changes to tax-exempt bonds. A tax reform proposal will be expensive even if it is scored dynamically, meaning that the economic activity that would or wouldn't occur if a plan went into effect is taken into consideration for revenue estimates.
Green said that whether or not a tax-reform proposal is scored dynamically will be one of the big debates that will occur about tax reform even before specific issues are looked at.
If Congress requires dynamic scoring for tax bills, it could be beneficial for munis. If the muni community articulates that losing the tax-exemption could prevent infrastructure projects from going forward, restrictions on the exemption could be seen as raising less revenue than they otherwise might appear to. However, if the muni market doesn't communicate the benefits of the exemption strongly enough, JCT could just assume that projects would be financed on a taxable basis absent the exemption, Green said.
"I think the muni bond community needs to properly define what the use of proceeds of municipal bonds are, and how the economic activity that occurs as a result of the issuance of tax-free municipal bonds would be curtailed if the tax exemption were further restricted from current law," he said.
There are challenges to doing corporate-only tax reform. Very few companies would be affected by corporate-only tax reform, since many businesses are not taxed at the corporate level but rather have their earnings passed through to shareholders who are then taxed at the individual level. Decker said that Congress would not want to create a situation where smaller companies pay higher taxes than large corporations.
Green said that there are many members of Congress on both sides of the aisle that would want to do both corporate and individual tax reform. He pointed out that many Americans dislike the current tax code.
While Republicans will control both chambers of Congress for the first time in eight years, there will still be a Democratic president. Additionally, Republicans do not always agree with each other, said Gleckman, a resident fellow at the Urban Institute, who predicted a "slightly different variation on gridlock."
Most experts believe that the 2016 presidential election will complicate tax-reform efforts. Since the presidential campaigns will ramp up in the fall, Congress will have a hard time moving legislation on serious policy issues after 2015, or even after the summer.
The presidential election will make it particularly hard for the Senate to make inroads with tax reform because a number of Senators are likely to run for president, Shafroth said.
"They don't want to alienate any potential contributors to their campaigns," he said. Shafroth noted that even in corporate tax reform, preferences have to be changed to lower rates.
In 2014, House Ways and Means Committee Chairman Dave Camp, R-Mich., released a tax reform proposal that would impose a 10% surtax on municipal bond interest for high earners and eliminate the tax-exemption for new private-activity bonds. Camp did not receive support for his proposal from his colleagues.
Nicholas said that Ryan and Hatch will work together to take a look at Camp's plan and figure out what they want to do with it. Shafroth said that Ryan may ask Camp what could have been done differently to get more action.
Jeff Hurley, a committee director with the National Conference of State Legislatures, said that items in Camp's plan could be discussed in hearings, and it would be concerning if there's "increased enthusiasm" for eliminating or modifying the muni exemption or the deduction for state and local taxes.
In 2014, several bond-related bills were introduced. Many dealt with specific types of bonds, including a few bills that would revive the Build America Bond program.
Pending legislation that isn't enacted in one Congress has to be reintroduced in the next one. Rep. Randy Hultgren, R-Ill., who sponsored bills that would increase the limit on bank-qualified bonds and would ease rules for industrial development bonds, said he would likely reintroduce his bills next year. And Congressional observers said they expected BAB bills to also be reintroduced, though Shafroth said it will be hard for them to move very far once they are introduced.
The Marketplace Fairness Act, which would allow states to require out-of-state remote sellers to collect sales taxes, also did not get enacted this year. While it passed the Senate in 2013, House Speaker John Boehner, R-Ohio, had problems with the bill and did not bring the legislation for a vote in the House.
Experts said they expect the MFA and/or similar legislation to be introduced next year. Dan Crippen, executive director of the National Governors Association, said that the Senate sponsors of the MFA and some House advocates for the bill are interested in reintroducing the bill at the beginning of 2015.
Shafroth said the MFA will take on new importance because of the rise of the Chinese e-commerce company Alibaba. Without the MFA or similar legislation, Alibaba would have an advantage over many American companies because Alibaba would not have to remit sales taxes.
Gleckman said that there will be "a lot of pressure from business groups" for Congress to address the issue of sales taxes for online purchases. Many businesses would prefer one federal rule to many different rules from many different states.
However, the topic will be a "real challenge for Republican leadership" because some Republicans believe that the MFA would amount to a tax increase, Gleckman said.
Proponents of the bill do not believe it would increase taxes. Currently, states cannot compel retailers to collect sales taxes unless the business has a physical presence in the state. However, customers are supposed to pay taxes on online purchases even if retailers don't collect the sales tax, though they often do not do so and the requirement is frequently not enforced.
Debt Limit and Sequestration
Congress will have to act on the debt limit in 2015. The current suspension of the debt limit goes through March 15, 2015. After that, the Treasury Department can use extraordinary measures to continue to pay the federal government's obligations for a short period of time. Some experts said that a vote to increase or suspend the debt limit could be contentious.
Shafroth said a vote on the debt limit "the castor oil of 2015." Some Republicans may be reluctant to raise the limit, so in order to get the House to pass an increase, Ryan may be forced to give tax breaks to companies located in the districts of members who are hesitant to raise the limit.
Meanwhile, if Republicans try to tie a debt limit increase to issues like immigration or repealing provisions of the Affordable Care Act, Democrats will not want to vote for the increase, Gleckman said.
Decker said that must-pass legislation like debt limit increase could become a vehicle for broader initiatives. It also is possible that Congress could look for revenue raisers to offset an increase in order to get more votes or offset costs. Anything revenue raising option that already exists could be targeted, he said.
Sequestration may also be an issue that Congress deals with in 2015. The budget agreement enacted in December 2013 set discretionary spending caps for the 2014 and 2015 fiscal years that were higher than the caps set by the Budget Control Act of 2011. However, absent any action, in fiscal 2016, which starts Oct. 1, 2015, Congress will have to abide by the BCA caps again or face automatic spending cuts known as the sequester.
John Godfrey, senior government relations representative for the American Public Power Association, said that he doesn't see Congress passing bills that fund government agencies at levels that are higher than the caps. Gleckman said that Republicans will use the threat of sequestration to get Democrats to agree to spending cuts.
Shafroth said that if Congress decides it wants to lift the spending caps for fiscal 2016, they would have to figure out how to pay for doing so. The money that would be used to pay for relaxing the discretionary caps could be used for tax reform instead.
Meanwhile, sequestration for mandatory programs, including the subsidies to issuers of direct-pay bonds, is set to continue through fiscal 2024. The mandatory spending cuts were originally supposed to last only through fiscal 2021, but they were extended through fiscal 2023 under the budget agreement and through fiscal 2024 under legislation enacted in February that repealed reductions in cost of living increases for younger military retirees.
Godfrey said there's a real threat that Congress could extend the cuts to direct-pay bond subsidies and other mandatory spending through 2025 to pay for something else.
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