United States: Tax Legislative Outlook

Last Updated: June 17 2019
Article by Mel Schwarz, CPA

The consensus in Washington, D.C. is that major tax legislation is unlikely to be enacted this year. The political situation, both between and within the Republican and Democratic parties, creates a formidable barrier to the type of compromise that is necessary for the successful completion of such legislation.

This does not mean that there will be no tax legislation. Initiatives related to IRS and pension reform enjoy broad support, as does the extension of expired provisions and the passage of technical corrections addressing inadvertent errors in the 2017 Tax Cuts and Jobs Act (TCJA). However, timing is uncertain and enactment of extender and technical corrections legislation could easily be delayed until the fall, possibly after the extended due date for calendar year 2018 tax returns.

Extenders/Expired Provisions
What's included?[1]

The Joint Committee on Taxation lists 29 separate provisions that expired at the end of 2017. This includes a number of energy efficiency incentives, biofuel incentives, special depreciation rules, the treatment of mortgage insurance premiums as potentially deductible interest, exclusion from income of debt forgiveness on a principal residence and the deduction for qualified tuition and related expenses. Most of these provisions are expected to be included in extender legislation.

Typically, expired provisions move together as a package with a retroactive effective date that avoids any gap in availability of the provision. Extension for two years, through the end of 2019, is considered the most likely approach. However, it should be noted that certain provisions have attracted political attention, and others would result in a significant revenue loss to the U.S. Treasury, which could affect their inclusion in the final version of any legislation.

Provisions that expired at the end of 2018 include the 7.5% AGI floor on the medical expense deduction (increasing to 10% in 2019 in the absence of new legislation), the increased excise tax on coal to fund the Black Lung Disability Trust Fund (reduced to less than half of the 2018 rate in 2019) and the funding of the Oil Spill Liability Trust Fund. There are special considerations regarding each of these provisions, and it is not clear whether they will be included in any extender legislation.

Provisions that will expire during or at the end of 2019 include the new markets tax credit, the employer credit for paid family and medical leave and several provisions related to the Affordable Care Act (Obamacare). At this time, it is not known whether any of these provisions will be included in any extender legislation.

What does it cost?

Extension through 2019 of the provisions that expired at the end of 2017 would be expected to reduce government receipts by approximately $20 billion. Permanent extension would be expected to reduce government receipts by over $90 billion. Biofuel initiatives represent approximately $6 billon of the two-year amount, while provisions excluding debt forgiveness on a principal residence and treating mortgage insurance premiums as interest have a two-year cost of approximately $5 billion.[2]

Republican members of the House Ways and Means Committee have made it clear that they expect the biofuel initiatives to be included, and Senate Finance Committee Chairman Grassley (R-IA) can be expected to insist on its inclusion. The two residential provisions are highly popular and unlikely to be left out.

It is not clear if revenue offsets will be required to reduce or eliminate the effect of extension of these provisions on the federal budget. With the 2019 federal deficit projected to be $896 billion and the federal debt held by the public projected to grow from 78% of gross domestic product [3], revenue offsets may be required. However, the choice of which offsets to include will be highly political and could delay or even prevent the timely enactment of extender legislation.

Technical Corrections
Legislation that would correct a number of unintended errors in the TCJA was circulated as a discussion draft by then Ways and Means Chairman Brady (R-TX) at the beginning of 2019, prior to the seating of the current Congress. Included are provisions that would allow bonus depreciation to apply to qualified improvement property, correct the treatment of REITs eligible for the up to 20% deduction for pass-through businesses and other clerical and technical corrections. As these changes are considered clerical in nature, they do not have a revenue effect.

It is our understanding that general agreement had been reached between Democratic and Republican leadership regarding the provisions to be included in technical corrections at the time the discussion draft was circulated. We are not aware of any change in that status. Should disagreement arise in the future, the ability to pass technical corrections legislation could be compromised.

It appears that both extenders and technical corrections are likely to have to wait until the fall, and potentially will not be addressed prior to the extended due date for calendar year returns. The need for taxpayers to know what law will apply to their return has not moved Congress to accelerate consideration in the past, and there is no indication that either party is in a hurry to move the legislation this year.

[1] Joint Committee on Taxation, List of Expiring Federal Tax Provisions 2017-2027 (JCX-2-19), January 18, 2019.

[2]Two-year estimates were prepared by Eide Bailly, LLP based on revenue estimates published by the Joint Committee on Taxation applicable to earlier legislation. These estimates and are not official.

[3] Congressional Budget Office, Updated Budget Projections, 2019 – 2029. May 2, 2019. https://www.cbo.gov/system/files/2019-05/55151-budget_update_0.pdf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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