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January 12, 2015
Nunes Business Reform Plan Uses 25 Percent Rate, Full Expensing
by Lindsey McPherson

Full Text Published by Tax Analysts®

House Ways and Means Committee member Devin Nunes, R-Calif., told Tax Analysts on January 9 that his business tax reform plan to reduce rates to 25 percent for both corporations and passthroughs and replace most existing deductions and credits with full expensing would produce the "best business environment in the entire planet."
In an interview, Nunes described the plan as a "cash flow tax" that looks like the existing income tax system but is really a completely different system that would encourage investment and dramatically grow the economy. "It allows capital to move through the economy freely to its best place of use," he said.

The American Business Competitiveness Act, still in discussion draft form, would gradually lower the maximum tax rate on net business income to 25 percent over 10 years. The schedules used to phase in the rate differ between individual and corporate business tax bases, with the former starting at a higher rate to reflect the current disparity between the two forms of taxation.

The draft would phase in the percentage of business expenses companies can immediately deduct from 50 percent to 100 percent over 11 years. Any business costs that exceed taxable income could be carried forward. In the process of moving to full expensing, the draft would eliminate most existing deductions and credits. Interest expense deductions, except for mortgage interest, would be disallowed, and interest income would be taxed at the same rate as dividends and capital gains.

"On the individual tax side, since that can be so controversial sometimes, I just don't deal with that," Nunes said. "That's for other people to figure out. But in terms of all business activity, this would be a system that would be much preferable."


Revenue Neutral

Nunes said the bill as drafted is revenue neutral under the Joint Committee on Taxation's conventional scoring method. He noted that he's been working on the bill for about seven years and that for the past four, with help from former Ways and Means Committee Chair Dave Camp, he has been working with the JCT on scoring it. Nunes has not released the JCT score.

The original idea for the plan came to Nunes in 2008 while he was working on a GOP outline of budget principles, called "A Roadmap for America's Future," with Rep. Paul Ryan, R-Wis., who has replaced Camp as Ways and Means chair. "In that roadmap for reform, we laid out what we called at the time a collective business activity tax," Nunes said, explaining that he took the concept and realized he could create a cash flow tax that would produce significant growth. "It's essentially the same as the flat tax or the FairTax, without being the flat tax or a FairTax, in terms of its economic capability," he said.

Nunes said he has discussed his plan with Ryan and that Ryan encouraged him to release it for public vetting, which Ryan confirmed. "I think members should think outside the box and come up with innovative ideas," Ryan told Tax Analysts.

Although Nunes claims his plan would be a boon for most businesses, he acknowledges some of its shortcomings. "We're concerned a little bit in the financial sector dealing with banks and how that's treated because interest income, interest expense can no longer be deducted, so we want to make sure that's structured right," he said.

Releasing the bill first as a draft allows time for the financial services sector and other stakeholders to offer feedback and help perfect the plan, Nunes said. "We released the draft, so we want to get it out there for people to comment [on] because this is an entirely different system," he said. "It's important for us to get it as far and wide as possible to get good input so that we can go back and make the proposal better."

Comments can be emailed to ABCtaxplan@mail.house.gov.


International Provisions

Under its international provisions, the draft would move the U.S. tax system toward territoriality. The proposal would only tax income that is effectively connected with a trade or business within the U.S., and thus eliminates foreign tax credits for those types of income. The draft allows corporate taxpayers to elect to treat FTC carryovers from 2012 or earlier as general business credit carryovers, but repeals section 902, which allows a taxpayer to claim an indirect FTC for taxes paid by a foreign corporation in which the domestic corporation owns at least 10 percent of the voting stock.

While the draft's move toward territoriality is similar to the Camp discussion draft released in 2014, Nunes's draft differs in that it repeals nearly every subpart F section of the code, with the exception of section 965, the temporary dividends received deduction. As such, the current main anti-deferral regime would be eliminated. Camp, meanwhile, had proposed modifying rather than repealing subpart F to subject to U.S. tax some types of income that were subject to low foreign tax rates.

Asked about the elimination of most of the existing base erosion protections, Nunes said the proposal cannot be viewed with the same lens as the existing income tax system. "It's irrelevant," he said. "The old tax code, you might as well not think about it because it's not the same tax code. You've got to get your mind out of thinking about how companies work because they [won't] have to make that decision anymore... the decision based on, 'Where is the best internal rate of return?'"

Similar to the Camp draft, the Nunes draft seeks to impose a toll charge on undistributed foreign earnings. Whereas the Camp draft had called for a one-time transition tax on previously untaxed foreign earnings and profits of either 3.5 or 8.75 percent, the Nunes draft calls for a 5 percent tax on a company's undistributed earnings.


'Not Holding My Breath' for Obama's Support

While it's too early to conclude how Nunes's plan will be received, it does notably hit on some of the broad tax reform principles that both parties have discussed. President Obama and some congressional Democrats have called for a business-only approach, and Republicans have expressed openness to that but said it must provide tax relief for passthroughs in addition to corporations. The fact that the plan meets those criteria isn't lost on Nunes, but he was still cautious in describing his plan's political viability.

"I don't have much confidence in the White House right now, but . . . I'm working with my Ways and Means Committee colleagues to help us make the product better," Nunes said. "Obviously, if the president of the United States would adopt the plan, it would be much better. I just don't -- I'm not holding my breath on that. But I do think that presidential candidates that are running for president now -- you know they're all announcing -- they'd be smart to take this up and make it their own."

Tax Analysts spoke with half of the Ways and Means Republican members on January 9, and most said they had not yet looked at Nunes's plan in-depth but suggested it merits discussion among the committee.

"It's a pretty attractive idea," Rep. Charles W. Boustany Jr., R-La., said, adding that he'd be willing to look at it with an open mind and that the committee should consider all ideas for reform.

New Ways and Means member Kristi L. Noem, R-S.D., agreed that Nunes's plan is worth considering as the committee discusses reform options. "What I like about it is it's a fresh idea that we can take into consideration as we go through that process these next two years," she said.

Rep. David G. Reichert, R-Wash., Ways and Means Select Revenue Measures Subcommittee chair, said that Nunes will present his plan at the committee's upcoming Republican retreat the week of January 19. "We will see how that folds into the final bill," he said, but noted that Camp's draft would "probably be the starting point" for discussions.

"Each member of the committee has ideas as to what they'd like to see as tax reform, but the overall effort is to simplify the tax code, and . . . broaden the base," Reichert said.

One Ways and Means member who has a somewhat different idea from Nunes is Rep. Kevin Brady, R-Texas. "I would like to see us stretch to see what the trade-offs would be to get to a 20 percent corporate tax rate," he said. "It would take some serious trade-offs, and we ultimately may not be able to achieve it, but I think one of our areas to explore going forward is just how low and competitive can we get these rates and keep pro-growth issues such as depreciation."

Brady said he has not yet looked at Nunes's plan but added that it's always good to have new ideas. However, it's unlikely there will be an abundance of detailed plans coming from Ways and Means members. "Not that I know of," committee member Mike Kelly, R-Pa., said when asked if any of his other colleagues were working on their own reform plans.

Ways and Means member Kenny Marchant, R-Texas, who also said he's unaware of any other committee members developing reform plans, called Nunes's draft a "bold alternative" but said he has questions about it. "My top three questions are: How do you do the transition? What's the transitional revenue consequences? And is it a dynamic enough program to match the economy [so that] we create revenue?" he said.

Democratic taxwriters were unfamiliar with the details of Nunes's proposal but some expressed willingness to review it. "The idea right along has been to avoid complexity, and I'd be anxious to see what the proposal looks like, but I also think there are certain deductions that are prescribed for [encouraging] economic behavior so I'd want to measure precisely what it is that he's proposing," Ways and Means member Richard E. Neal, D-Mass., said.

Committee member John B. Larson, D-Conn., also said he'd be interested in looking at Nunes's proposal as long as Ways and Means picks up its work on tax reform where the committee's bipartisan working groups left off in 2013. But fellow Democratic taxwriter Bill Pascrell Jr. of New Jersey pointed out that Democrats were shut out of the process when the working groups concluded, after which Republicans worked with Camp to develop the details of his draft. "I don't expect anything better this year at all," he said.

Luca Gattoni-Celli, Andrew Velarde, and Stephen K. Cooper contributed to this article.

Follow Lindsey McPherson (@lindsemcpherson) on Twitter for real-time updates.

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