House Ways and Means Committee Chair Dave Camp, R-Mich., included in his comprehensive tax reform draft released February 26 a proposal from education working group co-chairs Diane Black, R-Tenn., and Danny K. Davis, D-Ill., to consolidate four education tax credits into one, a revamped version of the American opportunity tax credit. But the influence of the working groups on the draft goes beyond that, Camp told Tax Analysts.
Much of the draft was built on goals and ideas the working groups discussed, such as allowing taxpayers to deduct charitable contributions made after the end of a tax year and before April 15 and reducing the complexity of the research credit while making it permanent, a Ways and Means aide said. The groups were helpful in identifying problems in the current code and beginning work on solutions to those problems, the aide added.
Committee members also recalled some of the policy ideas they discussed during the working groups that ended up in Camp's draft, the Tax Reform Act of 2014.
"The international tax [reforms], the final language is a product of some of the work done in the working group," Rep. Charles W. Boustany Jr., R-La., said. "I know that because I was involved in that. Specifically with oil and gas, the intangible drilling cost provisions and keeping current law was a result of work I did on that working group."
Ways and Means member Kevin Brady, R-Texas, co-chair of the energy working group, said his group visited with 23 different sectors of the energy industry, hearing from trade groups and individual companies to gain perspective on their priorities. He also cited the draft's intangible drilling cost provision, as well as its approach to master limited partnerships, as examples of where the working group incorporated industry feedback into the draft.
Overall, the output varied by working group, but the groups helped forge bipartisan relationships that can be helpful in moving a final product, Boustany said. "Now we're having these closed-door meetings to further discuss all this and refine ideas on the draft," he said.
Democrats are involved in the ongoing closed-door briefings on the draft that Boustany referred to -- as they were with the working groups. But Ways and Means ranking minority member Sander M. Levin, D-Mich., said he wished Camp had kept Democrats involved throughout the drafting process.
"We got off to a useful start at bipartisanship, but then it wasn't continued," Levin said. "I think it would have been much wiser to continue to go beyond the working groups. It was just the first step, and then it stopped."
Because Democrats were not involved in the meetings Ways and Means Republicans had to discuss specific provisions that would be incorporated into Camp's plan, they didn't have much to offer in the way of details of what provisions were picked up from working group discussions. But they were complimentary of the working group process.
"It gave people an opportunity to defend the exclusion or the preference or the credit that was in the code," committee member Richard E. Neal, D-Mass., said, adding, "The irony of it was that the notion was pretty universal that if you got to a 25 percent rate, you would give up all the preferences."
Although Neal said he found the working groups to be a good model overall, he cited an example in which one of the groups discussed a proposed change that didn't end up in the draft. He said there was broad agreement that tax reform should address the problem of allowing people to deduct interest paid on second mortgages. "But the answer became the $500,000" cap on new mortgages, he said.
Ways and Means member Kenny Marchant, R-Texas, also cited an example in which the draft varied from the working group discussions. "Our working group actually came to the conclusion that we don't need to do anything on carried interest, because if you have a flat rate, the marketplace will take care of itself," he said. "There will be very little incentive to have a carried interest."
But under Camp's draft, which aims to end the carried interest preference by distinguishing between investment income and wages, Marchant argued there is still "a tremendous amount of incentive to reclassify income into long-term capital gain."
Still, Marchant was also complimentary of the working group process, saying that it saved staff time by allowing committee staff members to hear from multiple experts during the working group meetings rather than having to hold individual meetings with them.
The working groups also benefited Democrats, Marchant said. "There are some things in this draft that Democrats on the committee wanted," he said. "And that really wouldn't have happened if we didn't have a working group strategy."
Ways and Means member John B. Larson, D-Conn., said that the working groups are illustrative of the legislative process, in which ultimately, not everybody got everything they wanted.
"I'm hard-pressed to say that [Camp] didn't attempt to be fair, and he didn't attempt to embrace all that he heard," Larson said. "Now, that always produces mixed results. And so there's a part of me that's got to give him a little credit for having the guts to put something out in writing. And so I think if we continue in regular order, then there's an opportunity for further compromise to evolve. Will that be allowed by the handlers in Republican leadership? I'm not so sure."
Groups that submitted comments to the working groups also described mixed results, but like the lawmakers, they mostly had good things to say about the process.
"We've had a lot of conversation with the staff over there and appreciate the process upon which Chairman Camp endeavored to craft the legislation," said Nancy McLernon, president and CEO of the Organization for International Investment (OFII). "It was a very open process."
The Ways and Means Committee has been receptive to OFII's comments, but there are some provisions in the draft on which the OFII will continue to provide feedback, McLernon said. The OFII wants to ensure that tax reform, when looked at holistically, ensures parity between foreign-based companies and domestic companies, she said. For example, under current law, section 163(j) is discriminatory in that foreign companies operating in the United States are unable to borrow to the extent that U.S. companies can, McLernon said.
The Small Business Council of America (SBCA) also has some concerns with Camp's draft that it plans to continue to address in comments to the committee, but the organization acknowledged that the wide-ranging perspectives on tax reform guarantees that not everyone will be happy with the end result.
"For every position that one individual or group might take, it is generally not hard to find someone who is arguing in favor of the exact opposite position," SBCA Chair Paula Calimafde said in a statement to Tax Analysts. "It is therefore difficult to assess and identify the extent to which any of the submissions influenced or were incorporated in Chairman Camp's tax reform draft. Given our experience with Chairman Camp and the committee's staff, we are confident that all of the submissions were given due and serious consideration."
The SBCA doesn't agree with some of the retirement changes Camp proposed in his draft, such as the proposal to eliminate the retirement plan contribution deduction for many taxpayers, Calimafde said. "The SBCA opposes this on the basis that it does not encourage, and is actually likely to discourage, small business owners from offering retirement plans and plan participants from making contributions," she said. "Additionally, the proposal would force a non-spouse who inherits a retirement plan to take all of the money out of the plan and [put it] into income within five years of the plan owner's death, instead of allowing them to stretch the distributions over their lifetime (what is known as the 'stretch IRA'). This would discourage people from saving 'too much' in their retirement plans for fear that it could have negative tax implications for their beneficiaries and thus result in undersaving for retirement."
Tax Foundation Chief Economist William McBride said his organization also advocated in its comments to the working groups that the Ways and Means Committee stay away from changes to retirement accounts, but he said the committee didn't listen and instead added new limits. But there were other recommendations the Tax Foundation made that the committee did follow, such as reducing rates, eliminating the alternative minimum tax, and moving toward a territorial system, he said.
"If they ever read our comments, I do not know," McBride said, explaining that the Tax Foundation did not hear from the committee after submitting comments to roughly half of the working groups. "Doesn't seem very transparent to me," he added.
Michael Novogradac of Novogradac & Co. LLP said the working groups allowed members to drill down into specific areas of the code. His firm participated in a working group meeting on the low-income housing tax credit, which he described as an educational meeting in which committee members asked great questions. "We just wanted to make sure there was a better understanding of the contribution [the credit] was making," Novogradac said, noting his belief that the discussion contributed to the committee's decision to retain the credit.
Novogradac said his firm also supported making the new markets tax credit a permanent fixture of the code, but that ultimately the draft was silent on that provision, which expired at the end of 2013.
A Real Estate Roundtable spokesperson also acknowledged in a statement to Tax Analysts that Camp's draft does not reflect every principle the group had recommendations on, but said the group had an open dialogue with the committee about how tax reform should encourage capital formation and promote risk-taking and entrepreneurship. "For the most part, the chairman has tackled reform of the labyrinthine tax code in a straightforward and transparent way," the spokesperson said.
Meg Shreve contributed to this article.
Follow Lindsey McPherson (@lindsemcpherson) on Twitter for real-time updates.
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