House Ways and Means Committee Chairman Dave Camp, R-Mich., unveiled his long-awaited comprehensive tax reform package on February 26 to mixed reaction. Camp’s proposed Tax Reform Bill of 2014 would reduce the number of individual tax brackets, cut the corporate tax rate, simplify, repeal or curtail many popular tax credits and deductions, and make a host of other changes to the tax code. “This is a comprehensive plan that reflects input and ideas championed by Congress, the administration and, most importantly, the American people,” Camp said.
“Camp’s bill is definitely not short on ambition,” Dustin Stamper, director, Washington National Tax Office, Grant Thornton, LLP, told CCH. “Camp is proposing to completely rewrite the tax rules in almost every area of the tax code. It looks like the most sweeping tax reform proposal actually put into legislative language since 1986,” Stamper observed.
Hearings and Discussion Drafts
The tax reform proposals are the outgrowth of many hearings the Ways and Means Committee has held in recent years. The committee also released several discussion drafts on tax reform. In addition, Camp joined his former Senate counterpart, Max Baucus, who served as Senate Finance Committee chairman through January 2014, at tax reform events nationwide in 2013. Camp and Baucus, while differing on specifics about tax reform, each said that an overhaul of the tax code was long overdue.
Camp’s proposal, as described in a summary by the Ways and Means Committee, would consolidate the current seven individual tax brackets into three: 10, 25 and 35 percent. The new 25-percent bracket would begin at $71,500 for married couples filing a joint return and at half that amount for single taxpayers. The new 35-percent bracket would begin at $400,000 for single individuals and $450,000 for married couples filing a joint return.
A number of tax incentives for individuals would be enhanced or repealed. The Child Tax Credit would jump to $1,500. The Earned Income Credit would refund employment-related taxes. The deduction for personal exemptions would be repealed. Existing education tax preferences would be consolidated into one incentive. Taxpayers in the 35-percent bracket would not be eligible for many tax preferences.
Camp’s plan retains but modifies the popular home mortgage interest deduction. The amount of acquisition indebtedness would be limited $500,000, with the change being implemented over several years. Similarly, the popular charitable contribution deduction would be modified. Among other changes, an individual’s charitable contributions would be deducted only to the extent they exceed 2 percent of adjusted gross income. The medical expense deduction for itemizers would be repealed. However, taxpayers would be allowed to use health flexible spending arrangement (health FSA) dollars for over-the-counter medications.
The American Taxpayer Relief Act of 2012 (ATRA) (P.L. 112-240) also patched the alternative minimum tax (AMT). Camp’s plan would repeal the AMT. This change is among the most costly to federal revenues. Camp noted that repeal of the AMT would cost more than $1.3 trillion over 10 years.
Camp’s proposal would gradually reduce the corporate tax rate. For 2015, the rate would be 33 percent, falling to 25 percent in 2019 and subsequent years. Small business expensing would be enhanced. Many temporary business tax incentives, such as the Work Opportunity Tax Credit (WOTC), special expensing rules for film and television productions and more, would be eliminated. Additionally, the Code Sec. 199 domestic production activities deduction would be gradually reduced and eventually repealed. Camp would also modify the rules for S corporations and partnerships.
Energy incentives targeted to producers of alternative fuels would be modified or repealed. Camp included in this list some tax preferences that President Obama has recommended be eliminated. The research credit would survive but in a modified form. The credit would be made permanent and generally reach 15 percent.
Businesses with average annual gross receipts of more than $10 million would be required to use the accrual method, rather than cash method, of accounting. The last-in, first-out (LIFO) method of accounting would be repealed as would the lower of cost or market method of inventory. The farm income-averaging method likewise would be jettisoned.
New contributions to traditional individual retirement accounts (IRAs) would be prohibited and income eligibility limits for contributing to Roth IRAs would be eliminated. Camp’s plan would also prohibit new Simplified Employee Pension (SEP) IRAs and SIMPLE 401(k) plans. The exception to the 10-percent early-withdraw penalty for first-time home purchases would be repealed.
At a news conference before Camp unveiled his proposals, House Speaker John Boehner, R-Ohio, said it is “time to have a public discussion about tax reform” but stopped short of endorsing Camp’s plan. House Minority Whip Steny H. Hoyer, D-Md., speaking at a trade association event, said that Camp’s proposal did not incorporate Democratic input. “Ultimately, tax reform must be done in a bipartisan way, address revenues and contribute to achieving a sustainable fiscal future. If Mr. Camp’s effort helps move the conversation forward in a way that leads to bipartisan compromise, then it may be a positive step,” Hoyer said. House Ways and Means ranking member Sander Levin, D-Mich., echoed Hoyer, saying that Camp’s proposals “open up a discussion that Democrats have wanted to engage in on a bipartisan basis.” On February 25, however, Senate Minority Leader Mitch McConnell, R-Ky., indicated that prospects for tax reform in 2014 are dim (TAXDAY, 2014/02/26, C.1).
Camp’s plan generated mixed reactions from the tax community and lawmakers. Many commentators said they would adopt a wait-and-see approach to the legislation as they examine the specifics. “My staff and I are still reviewing the full details of the bill, but I am encouraged by the acknowledgment that research and development is key to the revival of our domestic manufacturing sector,” said Rep. Linda Sanchez, D-Calif. “I hope that today’s proposal sparks further serious discussion about how Congress can create a federal tax code that supports American industry and hardworking Americans.”
President Obama on Taxes
Speaking in St. Paul, Minn., on the same day that Camp released his tax reform package, President Obama signaled that he is open to reforming business taxation but did not elaborate on specifics. The president’s proposal would call for a $302 billion, four-year transportation reauthorization bill, which would be partially paid for by using $150 billion in one-time transition revenue from business tax reform, the White House said in a written statement.
Robert S. McIntyre, director of Citizens for Tax Justice, a Washington, D.C.-based tax advocacy group, said that Camp’s draft is headed in the wrong direction, especially since many of the nation’s most successful corporations pay higher taxes abroad than they do in America. He said Camp’s approach to tax reform makes no sense and is not supported by the American people. “It is bizarre and unbelievable that Congress just spent the past couple of years fighting about whether or not children must be kicked out of Head Start, food aid must be restricted, and medical research must be slashed all because of an alleged budget crisis,” McIntyre said. “And yet, the top tax-writer in the House of Representatives proposes that we make no attempt to increase the amount of tax revenue paid by large, profitable corporations,” he continued.
Clarence Anthony, executive director of the National League of Cities, said he opposes aspects of Camp’s proposal, which he called an honest attempt at solving the problems of the nation’s tax code. However, the proposal will have unintended consequences in many areas of cities’ operations and harm economic growth. He criticized the provisions that would eliminate the federal tax deduction for local government tax payments and cap the use of municipal bonds.
Specifically, Anthony said the legislation would reduce cities’ ability to promote construction jobs. “The proposal would increase the costs for cities to borrow and raise the cost of infrastructure investment in our cities by capping the tax exemption for municipal bonds and eliminating private activity bonds,” Anthony stated. “The surtax on tax-exempt municipal bonds will increase rates and may prevent some projects from going forward.”
The Boeing Co. issued a statement in support of the Camp tax reform draft, calling it an important first step that would strengthen U.S. competitiveness. “We are pleased to see this process move forward and encourage our elected officials to get behind a bipartisan tax reform effort that grows the economy and creates more jobs in the United States.”
The National Association of Manufacturers (NAM) also applauded Camp’s efforts but cautioned it might have side effects. Dorothy Coleman, NAM’S vice president of tax and domestic economic policy, said tax reform has the potential to unleash significant economic growth. “Federal tax revenues account for nearly one-fifth of GDP, and any change needs to be looked at very carefully,” Coleman stated.
Content provided by CCH.