Tax reform outlook for 2015: Compromise or gridlock?

Will 2015 be the year for major tax reform legislation? President Obama and Republican Congressional leaders have said they want to work together and have identified tax reform as one of the few priority issues on which agreement could be possible. But policy differences between the President and Congress over immigration, healthcare, energy policy, environmental regulations, and other economic and social issues will continue to make it challenging to reach agreement on tax reform. That said, I’ll be watching three key areas to gauge the possibility for significant tax legislation in 2015:

1. Administration proposals: In his State of the Union address, President Obama set forth his legislative goals for 2015, including a new tax reform strategy that focuses on ‘middle class’ taxpayers. The Administration also has expressed support for business tax reform that lowers the US corporate rate, the highest in the world, reforms the international tax rules, provides revenue for improving US infrastructure, and addresses the needs of small businesses.
   
   The President’s Fiscal Year 2016 budget, which will be released February 2, is expected to include tax proposals to increase the top rates on capital gains and dividend income to 28 percent for upper-income taxpayers, and to tax certain capital gains at death instead of the current law ‘step-up’ in basis of inherited property. The budget also will include a new fee on large financial institutions. Revenue from these proposals would be used to provide tax credits for families and additional retirement savings incentives.
   
   While Congressional Republican leaders have announced their opposition to the President’s tax increase proposals, the issue of how to improve the tax code for both individuals and businesses appears to be on the table for negotiations this year, and as Treasury Secretary Jack Lew has stated, there are a lot of areas of agreement on business tax reform. Secretary Lew remarked this week that he was generally optimistic about the prospects for tax reform being enacted before the end of President Obama’s second term.
2. Congressional committee chairs: The House and Senate taxwriting committees have new chairmen who will shape the debate around tax policy issues, and both appear committed to advancing tax reform in the current Congress. House Ways and Means Committee Chairman Paul Ryan (R-WI) has said Republicans on the committee will be discussing an ‘aggressive’ schedule for advancing tax reform. Chairman Ryan also has said that the tax reform bill introduced by previous Ways and Means Chairman David Camp (R-MI) may serve as a ‘marker’ for future reform efforts. Commenting on the prospects for a bipartisan agreement on tax reform with President Obama, Chairman Ryan said that ‘there are areas where we can find common ground.’
   
   In the Senate, Finance Committee Chairman Orrin Hatch (R-UT) has established five bipartisan working groups to examine key tax reform issues, with recommendations to come by May so that his committee can mark up a bill later this year. Chairman Hatch also released a lengthy report on tax reform issues and options in December and has outlined seven principles for tax reform legislation: growth, fairness, simplicity, permanence, competitiveness, promotion of savings and investment, and revenue neutrality.
3. Is there a ‘plan B?’ If, in coming months, President Obama and Congress cannot reach an agreement on tax reform legislation, I would look for Congress later this year to make a strong push to make permanent the research credit and other significant business and individual tax provisions that have expired, along with temporary extensions of certain other provisions and possible elimination of some temporary provisions.

I’ll be watching the Hill for further developments and advise anyone interested in tax reform to stay engaged in the work being done. As we detail in our 2015 Tax Policy Outlook, even if tax reform is not enacted during this Congress, the proposals being developed this year may shape future reform legislation.