Far fewer US business tax executives believe that tax reform will happen this year compared to those surveyed in January, according to a new report from the Tax Council and Ernst & Young LLP.
The May Tax Reform Business Barometer is based on online survey responses from 108 business tax professionals. In addition to questions on tax reform, respondents also answered questions about the impact of the House Republican tax reform blueprint and a possible plan to merge individual and corporate taxes that has been considered by the Senate Finance Committee.
Back in January, 48 percent of the tax professionals surveyed indicated that tax reform was likely to be enacted by the end of 2017. Four months later, that dropped to 26 percent.
As for tax reform in 2018, results were about identical: 36 percent of respondents in May expect enactment next year, up slightly from 35 percent in January.
Most respondents (75 percent) think tax reform will be comprehensive, with half believing that legislation has at least a 50 percent chance of passage in the House and a 23 percent chance in the Senate.
That makes any early preparations tough to gauge. But organizations are beginning to model various tax plans, with 80 percent calculating the impacts on their federal tax liability, 58 percent modeling the effect on their competitive standing in their industry, and 54 percent considering the impacts on their specific markets.
But, overall, 77 percent of respondents are mainly focusing on the potential impact of the House tax reform blueprint on their company’s tax liability and market positions.
Here are the key issues regarding the House and Senate plans.
House plan. Despite expectations since 2014 that this year would be the target year for tax reform with a new president in office, most business tax executives aren’t as optimistic that statutory language for the House Republican blueprint will be released soon.
Thirty-six percent of May respondents believe statutory language will be released in September or October, and 29 percent still think it will be released in July or August. In January, half of respondents thought there was a 40 percent chance that statutory language would be released before the end of April.
Still, the majority of respondents (75 percent) believe tax reform will be comprehensive, while only 12 percent believe it will be business-specific for C corporations and pass-throughs.
More than a third (39 percent) expect a higher corporate income tax rate if the border-adjustment provision is omitted from the legislation. And most respondents believe tax reform will be deficit-financed, and 69 percent said it will probably reduce revenues to the federal government.
According to the survey report, the House GOP blueprint would shift the current income tax system to a consumption-based tax system, with significant reductions in the tax on savings and investment by allowing companies to expense all new investments. The top effective tax rate on returns received by individual investors as interest, dividends, and capital gains would be lowered to 16.5 percent.
In addition, the House blueprint would:
- Limit the deduction for interest expenses to a taxpayer’s interest income.
- Eliminate special business provisions except for the research and experimentation tax credit and last-in, first-out inventory accounting.
- Reduce the corporate tax rate to 20 percent.
- Cut the tax rate for certain income received by owners of pass-through businesses to 25 percent.
The blueprint also proposes border adjustments that would exclude exports from the tax base but include imports. That changes the current origin-based tax on US-produced goods to a destination-based tax on domestic consumption.
“Border adjustments and their revenue implications are an important part of the discussion happening in Congress and the administration around tax reform,” Robert Carroll, national director of quantitative economics and statistics for EY, said in a prepared statement. “Many businesses have already modeled the blueprint. They can get a head start on the next phase of the debate by looking closely at potential changes in some of the key aspects of the blueprint and modeling its effects on their company, industry, and markets.”
Senate plan. While most business tax professionals expect to see a tax reform proposal from the Senate Finance Committee this year, they don’t agree on how it’ll work. More than a third (38 percent) believe it’ll be similar to a committee proposal in 2014, but 29 percent think the committee will want to merge individual and corporate taxes.
The 2014 proposal, Comprehensive Tax Reform for 2015 and Beyond, addressed issues that arise when corporate earnings are taxed at the corporate level and again when they are distributed to investors. Addressing that includes the merger of individual and corporate income taxes, the survey report states.