It’s no secret in Washington that politics often get in the way of good policy. One needs to look no further than last month’s Department of Homeland Security (DHS) funding fight to find evidence of that in the 114th Congress. Tax policy too is constantly a victim of political kerfuffles. Last year, Congress managed to bring certainty on tax extender provisions for a whopping 12 days – not exactly a banner accomplishment that brings the certainty businesses crave, but a clear example of politics hampering policy.
Bigger tax issues, like tax reform, are made infinitely more complicated by politics. Reforming the tax code involves hard choices. Since tax reform generally is discussed as being done in the confines of revenue neutrality, there, by definition, will be both winners and losers. Choices will have to be made; sacred cows will be slayed. If proposed legislation curtails the mortgage interest deduction, limits expensing, or eliminates the employer health care exclusion, you can imagine the 2016 election cycle attack ads running already – Senator X voted to take make owning your home more expensive; Senator Y wants your health insurance to cost more. With all members of the House, nine Senate Finance Republicans and three Senate Finance Democrats up for re-election, votes on proposed tax legislation unquestionably will have real political consequences.
So, should we all throw up our arms and start picking out tax reform’s tombstone in the 114th? Absolutely not. We simply can’t give up. The regulatory action taken by the Treasury on inversions late last year, one of the few tax law changes outside of tax extenders we have seen in recent years, actually made our incredibly uncompetitive tax system worse. Those restrictions on inversions have actually triggered foreign takeovers of American companies. As Sen. Rob Portman (R-Ohio) noted, “the jump in foreign takeovers underscore[s] the need for comprehensive tax reforms,” and “shows that one-off solutions instead of tax reform simply won’t work. . . . The need for reform is urgent, and it’s not a Republican or Democrat thing, it’s non-partisan.”
And while the Treasury Department makes our tax system worse, other countries are doing the exact opposite – lowering rates and employing knowledge, innovation, or patent boxes that allow companies to separate out income from intellectual property and pay a lower tax rate on it. As Bloomberg recently noted, Ireland may be saying goodbye to the double Dutch, but it’s saying hello to a knowledge box regime. “By standing still, we are falling behind” is undoubtedly one of the most played out phrases inside the Beltway but it undeniably rings true.
Other outside forces also suggest we need tax reform. The Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) and European taxing authorities are aggressively going after American companies doing business in Europe. Companies are being forced to make decisions now about things such as where to do research and development (R&D) and where the resulting intellectual property should be located, without the benefit of knowing what a reformed U.S. tax system will look like. These present day decisions have long term consequences about where companies will invest, grow, and create jobs; Congress and the administration do an incredible disservice by continuing to punt on tax reform and not providing certainty to these companies who simply cannot wait to make decisions.
We all know the congressional calendar is largely dictated by crisis governing right now – DHS in February, the upcoming doc fix, the highway trust fund, Ex-Im Bank reauthorization, a debt ceiling/end of sequestration caps/government shutdown trifecta in September, and a potential legislative response to King v. Burwell. Taken together, these critical issues seem to suggest that Congress’ legislative dance card is full, but that must not prevent Congress and the president from doing what needs to be done. Now is the time for comprehensive tax reform. Long live tax reform!