05 09 2016

Get a Head Start on Tax Reform

Washington leaders can help tax reform succeed in 2017 by planning now.

Overhauling the nation's tax system is an imperative that our leaders recognize, ranging from President Barack Obama to Rep. Kevin Brady, the Republican chairman of the House Ways and Means Committee. Yet, with the post-Labor Day campaign push on our doorstep, it's tempting for Washington to allow the candidates to keep talking about tax reform and postpone any real action until some point in 2017. Doing so would be a grave mistake.

Realistically, the chances for tax reform's enactment in 2016 are quite slim, but that doesn't mean important planning can't begin right now to ensure success next year. Here are some starting points that will prove helpful to whomever occupies the White House and controls Congress this coming January.

Avoid big mistakes. In a matter of days, the Treasury Department is expected to release a finalized version of a terribly misguided rule designed to crack down on corporate "inversions." Partly a reaction to a burdensome and uncompetitive tax system, inversions are best addressed by comprehensive changes to the law rather than regulatory edicts. Furthermore, if the rule in its present form is any guide, businesses that have no intention of inverting will be caught up in a maze of compliance problems affecting normal cash management practices. The result could be additional overhead costs of tens or even hundreds of millions of dollars per business.

Democrats as well as Republicans have already voiced concerns about the rule, which could disrupt the climate for reform in 2017. The Treasury should shelve this rule to avoid disrupting 2017's tax reform efforts. Failing that, Congress should explore every available means to call a "time-out".

Embrace opportunities to start small. For instance, recent legislation intended to address Puerto Rico's precarious financial situation contained language stating that a "durable solution" for the island's "fiscal and economic crisis should include permanent, pro-growth fiscal reforms that feature, among other elements, a free flow of capital between possessions of the United States and the rest of the United States."

Although Puerto Rico's residents are U.S. citizens, for tax purposes the IRS treats large businesses there as if they were foreign corporations. This means that Puerto Rico's situation is familiar to tax reformers on a larger scale, who are crafting policy toward how income should be treated when it flows between the U.S. and other countries. Several plans have been developed to revise corporate tax policy toward Puerto Rico that involve repatriation of earnings and treatment of "foreign" sourced income. Current House and Senate Members could consider these well-vetted proposals before the year is out, and give the next Congress a frame of reference for broader discussions.

Reform should be habitual, not haphazard. Recent testimony from IRS National Taxpayer Advocate Nina Olson noted that since 1998 the IRS has been required to report to Congress annually on "sources and ways to reduce complexity in tax administration." The agency has failed to follow that law for 15 years, and with it has missed opportunities for incremental simplification. Resurrecting this process is just one way to provide Congressional staff members who will write the next tax reform bill the collaborative framework they'll need to wrestle with complex issues systematically.

Meanwhile, this year the legislative and executive branches could still work out an agreement to renominate members of the IRS Oversight Board, which is dormant for lack of a quorum. This body of public and private-sector leaders, created by reform legislation in 1998, was supposed to provide strategic guidance on improving the customer service, IT, and other business practices of the tax agency. Getting the board up and running now will be of great use later, as lawmakers ponder the administrative feasibility of their proposals and seek expert consultation.

Look outside government for cooperation too. Other private-sector professionals – from tax lawyers to accountants – could be tapped to form working groups on how the machinery of the tax system can be fixed. (They have volunteered to do so in the past.) Their focus would be non-political and highly specialized, furnishing guidance on how forms could be improved, audits could be made more efficient and reporting requirements made clearer. These findings, along with those of existing entities like Taxpayer Advocacy Panels, could provide meaningful input to those drafting the next tax reform law – and help them avoid pitfalls that most likely require numerous "technical corrections" in the future.

The non-profit sector can also assist. In 2006, under the guidance of Oregon Sen. Ron Wyden (currently the Finance Committee's ranking Democrat), 15 organizations on the political left and right formed a "Cleanse the Code" coalition around fundamental tax reform principles such as simplification and transparency, the opportunity for all Americans to get ahead, and fiscal responsibility. These tenets remain relevant, and the groups that founded the coalition (including National Taxpayers Union) are ready to help build bipartisan bridges.

In both thoughts and deeds, Washington needs to get a head start on creating the most hospitable climate possible for tax reform. Otherwise, January's cold air won't be the only chilly reception awaiting leaders who hope to revise the tax code next year.