While tax reform legislation has undergone several false starts over the past three years, emerging signals from Capitol Hill suggest that credit unions would be well-advised to keep a close eye on developments in 2016 as a prelude to serious efforts to overhaul the code in 2017-2018.
New House Ways and Means Chairman Kevin Brady (R-Texas) returned from the annual agenda-setting committee retreat Feb. 1 saying that, while business tax reform legislation won't happen in 2016, he intends to lay the groundwork for a comprehensive bill by using international reform as a dress rehearsal. "It is urgent that we move forward on international tax reform; success on that front allows us to focus in 2017 on comprehensive tax reform that includes both the personal and business codes," Brady commented. The first Ways and Means hearing on the subject will occur Feb. 24.
House Republican staff present at the Ways and Means retreat said members are optimistic an international bill can pass in that chamber, and believed influential Senate Democratic Leader in-Waiting Charles Schumer (D-N.Y.) will help sell legislation to otherwise reluctant Democrats. However (and there always seems to be a however when it comes to tax reform), optimism ends there. The Obama Administration has laid down a marker suggesting it would not support proposals that reduce rates. A Democratic Senate Finance Committee aide was more succinct: "Talk about common ground on international tax reform, is just that, talk. There isn't even agreement on what reform means in the first place." Bottom line: Even a modest, piecemeal tax reform package will be hard to pass in the current political environment.
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Meanwhile, credit unions received good preliminary news in a new corporate tax reform bill introduced by Rep. Devin Nunes (R-Calif.). The legislation, H.R. 4377, unveiled in January, explicitly maintains the credit union tax exemption. Ways and Means staff said the bill is intended to be a "conversation starter, a first step in writing a blueprint"; in introducing the measure, Nunes suggested the committee would hold a hearing on it in 2016. My own view is that Nunes' bill is the first of many tax trial balloons that will set parameters for comprehensive reform in the next Congress.
Some not-so-good news for credit unions was contained in a December report by the Congressional Joint Committee on Taxation on so-called "tax expenditures." This annual tally of revenue foregone due to exemptions in the federal tax code pegged the credit union exemption at $12.7 billion over five years. The figure is an all-time high, topping the prior estimate of $11.9 billion issued in 2014. Even more alarming is that the same committee estimated the tax exemption's five-year price tag at a modest $2.8 billion as recently as 2011.
Historically, the list of expenditures has functioned as a menu of options for lawmakers seeking to write tax reform legislation. Congressional staff familiar with Joint Tax Committee deliberations said it's unclear why the amount of the credit union exemption jumped so dramatically, but speculated that lobbying by the American Bankers Association influenced the outcome. They also caution that larger line items received more scrutiny during drafting of the 2014 tax reform measure authored by then-House Ways and Means Chairman Dave Camp (R-Mich.) – credit unions may no longer qualify as a proverbial "drop in the bucket."
All of this represents a foundation for the coming round of tax reform in 2017, after a new administration and Congress are seated. And those familiar with the process counsel engagement now, rather than waiting for bill writing to begin in earnest. James Miller, a former Treasury Department tax official, sees 2016 as a critical year, stating, "Any entity with a stake in tax policy – and that should mean virtually every business operating today – cannot afford to put off preparations for tax reform until next year."
John J. McKechnie, III is senior partner for Total Spectrum. He can be reached at 202-544-9601 or [email protected]
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