MWC Tax Policy Update Team

As some of our readers may already know, McGuireWoods’ Tax Policy Group distributes a weekly tax policy update (TPU) for clients. Below is an archive of our 2018 publications to date.

2018 TPU Archive

If you  have any questions regarding the updates, please contact the TPU editors below:

Lai King Lam, llam@mwcllc.com

Radha Mohan, rmohan@mwcllc.com

The Bipartisan Budget Act of 2018 provided a one-year extension (through 2017) of 32 tax provisions at a cost of $15 billion. The list of extensions includes the following:

Renewable Energy

  • Credit for nonbusiness energy
  • Credit for residential energy property
  • Credit for new qualified fuel cell motor vehicles
  • Credit for alternative fuel vehicle refueling property
  • Credit for 2-wheeled plug-in electric vehicles
  • Second generation biofuel producer credit
  • Biodiesel and renewable diesel incentives
  • Production credit for Indian coal facilities
  • Credits with respect to facilities producing energy from certain renewable resources.
  • Credit for energy-efficient new homes
  • Extension and phase-out of energy credit
  • Special allowance for second generation biofuel plant property
  • Energy efficient commercial buildings deduction
  • Special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities
  • Excise tax credits relating to alternative fuels
  • Extension of Oil Spill Liability Trust Fund financing rate
  • Modifications of credit for production from advanced nuclear power facilities

Individual

  • Exclusion from gross income of discharge of qualified principal residence indebtedness
  • Mortgage insurance premiums treated as qualified residence interest
  • Above-the-line deduction for qualified tuition and related expenses

Miscellaneous

  • Indian employment tax credit
  • Railroad track maintenance credit
  • Mine rescue team training credit
  • Classification of certain race horses as 3-year property
  • 7-year recovery period for motorsports entertainment complexes
  • Accelerated depreciation for business property on an Indian reservation
  • Election to expense mine safety equipment
  • Special expensing rules for certain productions
  • Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico
  • Special rule relating to qualified timber gain
  • Empowerment zone tax incentives
  • American Samoa economic development credit

This extenders package does not cover everything that’s in Senate Finance Chairman Orrin Hatch’s (R-UT) extenders bill (S. 2256), but another package might be in play this year. The topic will come up again before lawmakers finalize the FY 2018 omnibus spending bill, which is one of the legislative vehicles targeted by Senate tax writers.

In the wee morning of Feb. 9, the president signed the Bipartisan Budget Act of 2018 (H.R. 1892) into law, putting an end to the overnight government shutdown. The surprise budget deal between Republicans and Democrats will keep the federal government funded through March 23 — this should give lawmakers just enough time to produce an omnibus spending bill to fund the remainder of fiscal year 2018.

The two-year bipartisan budget deal increases the statutory caps on discretionary spending for defense and domestic programs:

  • Defense caps: from $549 billion to $629 billion for FY 2018; from $562 billion to $647 billion for FY 2019.
  • Domestic caps: from $516 billion to $579 billion for FY 2018; from $529 billion to $597 billion for FY 2019.

In addition, the budget deal includes:

  • One-year extension of tax provisions that expired in 2016.
  • Suspension of the debt ceiling through March 1, 2019.
  • Extension of CHIP for an additional 4 years, bringing the total to 10 years.
  • Disaster assistance totaling $89 billion.
  • Increased funding for community health centers.
  • Two-year delay to Medicaid Disproportionate Share Hospital payments.
  • Repeal of the Independent Payment Advisory Board.

On Feb. 12, the White House rolled out its long-anticipated infrastructure proposal, Legislative Outline for Rebuilding Infrastructure in America. The president’s infrastructure plan is broken into four sections:

  1. Funding and Financing Infrastructure Improvements: This section provides details on new financing and incentive programs.
  2. Additional Provisions for Infrastructure Improvements: This section covers modernization efforts for highways, transit, rail, airports, waterways, and land revitalization (superfund reform).
  3. Infrastructure Permitting Improvement: This section calls for streamlining and shortening the approval process for projects to two years or less.
  4. Workforce Development: This section focuses on expanding access to workforce education and development programs.

The proposal aims to generate $1.5 trillion in new investments over a 10-year period. The federal government, however, would only provide $200 billion in direct spending — a sum that has left congressional Democrats unimpressed. The proposed $200 billion in federal spending is as follows:

  • Infrastructure spending program – $100 billion
  • Rural infrastructure program – $ 50 billion
  • Transformative projects program – $20 billion
  • Infrastructure financing programs – $20 billion
  • Federal capital financial fund – $10 billion

It is unclear where the $200 billion would come from in the government coffer. Proposals to raise the federal gas tax have been floating around for years, but White House Legislative Affairs Director Marc Short said that the administration is not going to raise taxes to pay for its infrastructure plan. There’s no doubt that the administration will rely heavily on public-private partnerships as well as individual states to help finance the country’s infrastructure upgrades.

The president will welcome a bipartisan group of lawmakers to the White House on Feb. 14 to discuss the proposal.

On Feb. 13, the IRS and Treasury announced a notice of proposed rulemaking that would eliminate 298 tax regulations. The move to scrap hundreds of regulations is a response to Executive Orders 13789, 13771, and 13777, which seek to identify regulations that are unnecessary, create undue complexity, impose undue burdens, and/or fail to provide clarity and useful guidance.

The regulations identified by Treasury for elimination fall into three categories:

  1. they refer to parts of the tax code that have been repealed;
  2. they have been substantially modified since enactment and the regulations do not currently account for the changes; and
  3. they represent expired temporary provisions that are no longer applicable.

As the Treasury prepares to write regulatory guidance for the 2017 Tax Act, the elimination of these regulations may provide some cushion as the agency must simultaneously comply with an Executive Order mandating that two regulations be identified for removal for every new rule.

On Feb. 13, the IRS released Rev. Proc. 2018-17, which contains guidance on changes in accounting periods related to the transition tax. Specifically, the revenue procedure prevents changes to the annual accounting periods of certain foreign corporations in 2017 under existing automatic or general procedures if the change could result in the avoidance, reduction, or delay of the transition tax. The Treasury provided initial guidance on computing the transition tax in Notices 2018-07 and 2018-13.

President Trump proposed a new “reciprocal tax” on imports from high-tariff countries, reviving a proposal previously considered by the administration. On Feb. 12, at a White House infrastructure event, the president said that the U.S. cannot continue to let other countries “rob us blind” and charge the U.S. tariffs and taxes, while the U.S. charges nothing.

What is a reciprocal tax? It’s a tax imposed on imports from countries that slap higher tariffs on U.S. exports. The average U.S. tariff is about 3.5 percent and the average trade-weighted tariff is about 2.4 percent, according to the WTO. In comparison, other countries have much higher tariffs. For example, China’s average tariff is 9.9 percent and its trade-weighted tariff is 4.4 percent; Mexico’s average tariff is 7 percent and its trade-weighted tariff is 4.5 percent.

The White House offered no specifics on the mechanics of a reciprocal tax on imports, instead noting that nothing formal is currently in the works.

Implementing a reciprocal tax would be no small feat – raising U.S. tariffs to equal that of other nations would require the administration to renege or renegotiate on most of the nation’s trade agreements that have been place for over 70 years. Additionally, economists have long cautioned against such retaliatory tax measures, noting that tariffs generally hit consumers the hardest and make American companies less competitive.

On Feb. 12, President Donald Trump submitted his FY 2019 budget request (“Budget”) to Congress. Even though congressional appropriators will simply toss the Budget aside when they start working on their own FY 2019 budget blueprint and spending bills, there are still some key figures and policy proposals worth mentioning.

Here is a quick sketch of the Budget:

Key Numbers
(figures may not be exact due to rounding)

FY 2019 Total Receipts: $3.42 trillion

FY 2019 Total Spending: $4.41 trillion

FY 2019 Deficit: $984 billion

FY 2019 Federal Debt: $16.9 trillion

The Budget would reduce the deficit by $4.45 trillion in 10 years. Most of the reduction comes from the administration’s projected economic growth and cuts to both mandatory and discretionary spending ($1.8 trillion and $1.5 trillion over 10 years, respectively). Unlike previous Republican budget requests, the FY 2019 proposal does not attempt to balance the budget, which has invited the ire of House Budget Chairman Steve Womack (R-AR).

Interestingly, the Budget also assumes that the individual tax provisions in the new tax law, which are set to expire after 2025, would be extended at a cost of $600 billion.

At the departmental level, the administration requests $12.3 billion for the Treasury Department (a 3-percent decrease from 2017 ). The Internal Revenue Service (IRS) would receive $11.1 billion — much of the money would be put towards IT upgrades. Tucked away in the appendix, the Budget proposes to provide an additional $362 million for program integrity activities. Overall, the IRS request reflects a 6 percent decrease from 2017.

Select Policy Highlights

Below is a list of top 10 policy proposals in the Budget that may be of interest to our tax policy clients across various industries. McGuireWoods Consulting’s Tax Policy Update team will distribute a separate write-up later this week with a more comprehensive review.

  • Private/public infrastructure investment (increases deficit by $199 billion)
  • Reform Air Traffic Control (increases deficit by $125 billion)
  • Repeal and replace Obamacare (reduces deficit by $675 billion)
  • Eliminate wasteful spending in Medicare and improve drug pricing and payment policies (reduces deficit by $236 billion)
  • Increase and extend guarantee fees charged by GSEs (reduces deficit by $25 billion)
  • Require SSN for CTC and EITC (reduces deficit by $10 billion)
  • Restructure CFPB (reduces deficit by $6 billion)
  • Increase Medicare Part D plan formulary flexibility (reduces deficit by $5 billion)
  • Reauthorize the Oil Spill Liability Trust Fund excise tax (reduces deficit by $5 billion)
  • Increase oversight of paid tax return preparers (reduces deficit by $457 million)