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Annette Nellen
Annette Nellen

What’s missing from Camp’s tax reform proposal?

At 979 pages long, it’s hard to believe it does not cover everything. Here’s a brief look at what it includes and a longer look at what’s missing.

May 15, 2014
by Annette Nellen, Esq., CPA

On Feb. 26, Rep. David Camp, R.-Mich., chair of the House Ways and Means Committee, released a “discussion draft” of a proposed Tax Reform Act of 2014. Accompanying the draft was a 194-page section-by-section summary and 11 reports from the Joint Committee on Taxation (JCT). Camp’s press release announcing this tremendous drafting feat stated that the proposal would “fix America’s broken tax code by lowering tax rates while making the code simpler and fairer for families and job creators.”

Camp’s proposal consists of at least 400 changes in eight broad areas as follows (in parentheses are the numbers of changes proposed):

  • Individuals (78);
  • Alternative minimum tax repeal (2);
  • Businesses (169);
  • International taxation (16);
  • Tax-exempt entities (20);
  • Tax administration and compliance (25);
  • Excise taxes (5); and
  • Deadwood and technical provisions (85).

One obvious way to evaluate the proposal is to review all of the details (see the reference list at the end of this article for links to Camp’s documentation). This article takes a different approach and focuses on possible reforms that are not included in Camp’s proposal.

Helpful sources of ideas for reform

The list of reforms missing from the Camp proposal can be derived in at least two ways. First, consider the stated goals for the bill—simplification, equity, and global competitiveness—and then identify reforms that meet one or more of these goals. If the reform also generates revenue, it may help in attaining a lower tax rate or increasing Camp’s proposed standard deduction. Lists of “tax expenditures” prepared by the JCT and the Office of Management and Budget (OMB) can also be used to generate new ideas.

Second, tax reform proposals from the past decade can also provide reform ideas. President George W. Bush in 2005 created an Advisory Panel on Federal Tax Reform, and, in 2007, the Treasury Department issued reports on tax reform and international competitiveness. More recently, the congressional tax committees have generated lots of ideas from hearings, option papers, working groups, and more. In addition, President Barack Obama’s annual budgets have included tax proposals, and the Congressional Budget Office (CBO) periodically publishes a list of revenue options.

What’s missing?

The suggestions offered here are not intended to be a complete list or ones that everyone will agree with. This exercise provides additional ideas for evaluating and improving the Camp proposal and helps to identify more suggested reforms. Suggestions are categorized using some of Camp’s eight categories noted above, as well as one missing from his list.

Key:
  • S – Simplification
  • E – Equity
  • R – Revenue (to allow for a lower tax rate or change other items in the Camp proposal)
  • C – Competitiveness
Suggestion Benefit Rationale

S

E

R

C

Individuals

Phase out deduction for mortgage interest on home equity indebtedness (HEI).

X

X

X

 

Too complex.

Increase equity among all individual borrowers and between those with HEI incurred before and after the effective date of the Camp proposal.

Unlikely to affect housing market as it leaves the $1 million acquisition debt limit in place for existing mortgages, and the deduction is phased out.

Phase out deduction for mortgage interest on second home.

X

X

X

 

The tax law should not subsidize financing a second home.

Reduce exclusion for employer-provided health insurance. For example, require 15% of the premium to be included in income.

 

X

X

 

This exclusion is the largest tax expenditure, but it does not benefit all taxpayers. It can be modified to benefit more moderate-income taxpayers by including the benefit in income based on tax rate (10% or 25%). Should be evaluated along with the Sec. 36B premium tax credit and the tax treatment of health insurance for self-employed individuals to provide more fairness for all individual taxpayers.

Amount of the exclusion is already reported on Form W-2.

Repeal the net investment income tax (Sec. 1411)

X

 

 

 

Much too complex, even though it affects less than 5% of individuals. Lost revenue can be replaced through the normal rate structure, also allowing for greater transparency.

Businesses

Review all fringe benefit provisions to determine how greater equity and simplification can be achieved.

X

X

X

 

Fringe benefit rules, such as those for employer-provided meals, are complex. Fringe benefits not widely offered by employers create inequity among employees. Revenues generated can be used to further lower income tax rates and help support Social Security and Medicare.

Include all tangible and intangible business assets in Sec. 179 expensing.

X

X

 

X

For greater simplification and to modernize the tax rules, a business should be able to expense not only tangible assets, but also, for example, an acquired patent or domain name, if within the Sec. 179 expensing dollar limits.

Repeal Sec. 263A (Unicap) rules

X

X

 

X

The rules are complex, require additional recordkeeping, and generate timing differences likely to be eliminated in one year due to modern inventory practices.

Deny deduction for punitive damages (FY 2015 Greenbook, p. 101)

 

X

X

 

A tax deduction reduces the cost and, thus, the penalty impact of those damages. Generates permanent revenue because this is not a timing item.

Consider corporate integration to avoid or limit double taxation of C corporation income. Needs to be considered along with taxation of dividends.

 

X

 

X

Corporate integration has been discussed for years, including by Treasury in 1977 and 1992. It should generate greater equity among different entity forms as well as improve competiveness with businesses outside of the United States.

Tax-exempt entities

Review the 29 types of entities provided at Sec. 501(c) to determine if the number and types can be reduced and simplified.

X

 

 

 

Simplification in terms of classification of entities and perhaps also for filing requirements.

Tax administration

Review all penalty provisions with objective of reducing the number.

X

 

 

 

Past studies of penalties by Treasury (1999) and others offer suggestions to reduce and simplify the over 100 penalties currently in the tax law.

Index penalties for inflation (FY 2015 Greenbook, p. 237)

 

X

X

 

The effect of fixed-dollar penalties diminishes without adjustments for inflation.

Modernize filing through use of technology

X

 

 

 

Technology is capable of streamlining the filing process, such as by eliminating paper and allowing taxpayers to access W-2 and 1099 information electronically for filing purposes.

Modify 31 U.S.C. Section 330 to allow the IRS to regulate all paid return preparers including to require compliance with specified ethical standards and continuing education requirements (FY 2015 Greenbook, p. 244)

 

X

X

 

Even with simplification, complex transactions can make compliance difficult. Taxpayers seeking assistance should have assurance that a paid preparer meets minimum competency and professionalism standards. Should reduce both intentional and unintentional errors.

Excise taxes

Increase the excise taxes on motor fuels and adjust them for inflation (CBO, Revenues—Option 31)

 

 

X

 

The current gasoline excise tax of 18.4 cents per gallon has remained unchanged since 1997. The Highway Trust Fund is not generating enough revenue to cover its costs (CBO, presentation (2/26/14)). Camp has proposed using some of the revenue from his international tax change to support the Highway Trust Fund (Camp Discussion Draft, pp. 813–814). Raising the excise tax would be more appropriate.

Index excise “sin” taxes for inflation

 

 

X

 

The effectiveness of a sin tax to deter behavior can diminish over time if the tax is not adjusted for inflation.

Repeal excise tax credit for distilled spirits with flavor and wine additives (FY 2015 Greenbook, p. 91)

X

X

X

X

The credit complicates the tax and provides a greater benefit to foreign producers who may be allowed to use more additives than U.S. producers.

Employment taxes

Review payroll taxes for equity and long-term sustainability of the funds they support.

 

X

X

 

The focus on equity for income tax reform overlooks taxes that are much more significant for many workers (considering the combined employer-employee rate of 15.3% for employment taxes). Tax reform should consider all significant taxes imposed on individuals and businesses.

Looking forward

In early April, Camp announced a “tax reform hearing on the benefits of permanent tax policy for America’s job creators.” On April 29, he held a markup session on six of 57 expired provisions. Apparently, Camp does not just want to renew all expired provisions, but instead evaluate them in the context of comprehensive reform. A message gleaned from the April 29 markup is that Camp will consider modifications to his tax reform proposal. For example, his proposal calls for a permanent 15% simplified research credit that excludes supplies and software from qualified research expenses (QRE). At the markup, a permanent 20% simplified credit with supplies and software included in QRE was approved (H.R. 4438 (113th Congress)).

The April markup session indicates that the “discussion draft” label on Camp’s tax reform proposal is true. Thus, there is opportunity to provide comments both on what is in the proposal and what is missing. Practitioners and clients probably have suggestions to offer.

Resources

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Annette Nellen, Esq., CPA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is a member of the AICPA Tax Executive Committee and Tax Reform Task Force. She has several reports on tax policy and reform and a blog.