Daily Tax Update - November 5, 2014: Election Recap


Summary of Results   Republicans won a majority of seats in the Senate on Election Day, expanded their majority in the House to the largest they’ve held since Harry Truman was President, and won some of the most closely contested governors’ races across the country.  Republicans took a strategic chance during this election cycle.  Rather than laying out a blueprint of policy goals they would collectively push if elected, they ran against President Barack Obama’s record and turned local races into a national referendum on his presidency.  In spite of conventional wisdom that campaigns need a competing positive agenda, this underlying strategy won the day resoundingly.  But it is not clear voters favor Republican policies.  That could be the case, but it may turn out that the strategy of running against the President was a good strategic match with the nation’s foul mood.  The Republican gains will substantially alter the President’s final two years in office, while also setting the stage for the 2016 presidential election.   In recent weeks, the election transformed from a series of tight races in which Republicans were favored because Democrats had more Senate seats to defend (particularly in states where Republicans were strong) to a transformative race in which nearly every race broke in favor of Republicans.  Most races that were expected to be close went to Republicans, and many Republicans won by greater margins than anticipated.    President Obama has invited a bipartisan group of lawmakers to the White House on Friday to talk about how to move forward governing the country following the election results.  Though the invitations were made before the extent of Republican victories was apparent, the President will now need to use the opportunity to build working relationships with Republican leaders of the House and Senate.  The vote made clear that Americans disfavor partisan Washington fights and want policy solutions to deal with their concerns – and they laid responsibility for recent gridlock in Washington at Democrats’ doorstep.  Whether their newly elected leaders are able to fulfill those hopes remains to be seen.

Tax-Writing Committee Expectations

House Ways and Means Committee:  In the short-term, the committee is expected to pass extensions of expiring tax provisions (through legislation known as “tax extenders”) during the lame-duck Congress in 2014; moving forward, the committee will try to develop comprehensive tax reform legislation.  Widespread concern over corporate inversions may provide momentum for such an overhaul, though the prospects for a broad rewrite of the tax code are slim.  The committee will also need to develop a mechanism for funding the Highway Trust Fund beyond May 2015 when current funding expires.     Current Budget Committee Chairman Paul Ryan (R-WI) is expected to give up his Budget Committee post in order to succeed retiring Chairman Dave Camp (R-MI) as chairman of Ways and Means, and Rep. Sander Levin (D-MI) is expected to remain the committee’s ranking member.

Senate Finance Committee:  The committee will address expiring tax provisions (through “tax extenders”) in the lame-duck or early in the next Congressional session.  Comprehensive tax reform is also likely to be on the agenda in the next Congress.  Concern over corporate inversions may provide momentum for such an overhaul, though the prospects for a broad rewrite of the tax code are slim.  In addition, the committee will need to develop a mechanism for funding the Highway Trust Fund beyond May 2015 when current funding expires.    Sen. Orrin Hatch (R-UT) is expected to chair the committee and Sen. Ron Wyden (D-OR) is expected be ranking member. 

Tax-Related Legislative Expectations for the Lame-Duck Session of Congress

Congress is expected to reconvene on November 12 and stay in Washington until the 20th before recessing again for Thanksgiving break.  Then, the schedule is for Congress to return to session for the first two weeks of December to finish its business for the year.  What transpires during that limited time will have substantial implications for what business must occur in the next Congress. 

Tax Extenders:  IRS Commissioner John Koskinen recently said that a decision regarding tax extenders should be made no later than the end of November in order to prevent disruptions and delays to the tax filing season.  He further noted that the uncertainty related to the provisions “raises serious operational and compliance risks.”  Such warnings have become commonplace in recent years as decisions about tax extenders have been pushed until the end of legislative sessions, and beyond.  Current Democratic Senate Finance Committee Chairman Ron Wyden has made his preference clear:  Extend all expired tax provisions for two years, thus allowing Congress to negotiate comprehensive tax reform in the interim.  Sen. Wyden’s counterpart in the House, Ways and Means Committee Chairman Dave Camp, prefers to permanently extend certain credits (such as the Research and Development tax credit) while allowing the rest to expire.  Chairmen Wyden and Camp have reportedly held discussions about how to address tax extenders.  A one-year extension, perhaps making one or two of the credits permanent, may be a potential compromise.  Both chairmen share the goal of passing comprehensive tax reform; the lame-duck work surrounding extenders will foreshadow how broader tax reform negotiations may proceed next year.

Internet Tax Issues:  The House in July approved legislation to make permanent the ban on state and local taxation of internet access and on multiple or discriminatory taxes on e-commerce (the Internet Tax Freedom Act).  A companion bill in the Senate has been introduced but has not been approved by the Finance Committee.  Before adjourning in September, Congress extended through December 11 the current ban as part of the FY2015 CR.  There may be a push during the lame-duck to combine the Internet Tax Freedom Act with the Marketplace Fairness Act (which deals with sales taxes for online purchases).  Outgoing Majority Leader Harry Reid (D-NV) has publicly committed to combining the two even though the top Democrat on the Finance Committee, Ron Wyden, opposes the Marketplace Fairness Act.

Tax-Related Legislative Expectations for the 114th Congress

With Republicans in charge of both chambers of Congress, the GOP will have the opportunity to set the legislative agenda for the first time in almost a decade.  This comes with advantages and disadvantages.  Party leaders will be able to set the agenda in the Senate, and force Democrats to take politically difficult votes and, potentially, force President Obama to decide whether to veto legislation.  At the same time, Republicans will no longer be able to simply “just say no” to the President’s agenda – they will be held responsible for governing.  This will create pressure to find areas of compromise with President Obama and, frequently, congressional Democrats, presenting challenges for a party that spent most of the 2014 campaign season promising to oppose the Obama Administration’s agenda.   It remains to be seen whether Republican leaders will be able to bridge the gap between their moderate and more conservative members.  A sharp turn to the right may appeal to the party’s base, but it will not help convince the electorate that Republicans are ready to take over the White House in 2016.  It would also pose challenges for several Republican senators up for re-election in Democratic and swing states in 2016.  Failure to accomplish some of the most basic governing tasks – funding the government and avoiding a default on the nation’s obligations – will be important steps to avoid self-inflicted damage to the party’s brand.   They will have to do this with a slim majority in the Senate and a heterogeneous caucus – from conservative Ted Cruz (R-TX) to moderate Susan Collins (R-ME).  House leadership, meanwhile, will have to decide how to approach dealing with the Senate – some expect the House’s role to shift a bit, waiting for the Senate to act on major bills rather than pressuring the Senate to take up House legislation.    Overall, Republican leadership in Congress will want to exert as much pressure on – and extract as many concessions from – President Obama and congressional Democrats as possible without overreaching and appearing unable to govern heading into the 2016 elections.   The last two years of a president’s second term have tended to be productive from a legislative standpoint in recent history.  Bill Clinton and Ronald Reagan both had successes during this part of their tenures.  Whether that will happen in the upcoming Congress depends upon whether the President and Congress can find a good way to compromise given their disparate political views.

Tax/Fiscal Policy:  The House and Senate will likely consider a tax extenders package during the lame-duck session of Congress, or very early in the next session.  Once extenders are done, the discussion will move to comprehensive tax reform, though the odds of actually enacting a broad-scale rewrite of the tax code in the 114th Congress are not particularly high.   With the political alignment changed and Republicans controlling both chambers in the 114th Congress, the House and Senate may work together to generate comprehensive tax reform legislation in a manner that would have been impossible if Democrats retained control of the Senate.  That effort would likely include flattening rates by moving to a three bracket system (10%, 25%, and 35%), maintaining revenue neutrality, broadening the tax base, and modifying provisions pertaining to capital gains, the personal exemption and standard deduction.  Many of those proposals are likely to come from the tax reform proposal released by retiring House Ways and Means Chairman Dave Camp earlier this year, though that proposal was widely criticized by the business community so certain key changes are to be expected.  Of course, despite Republican control in Congress, any major legislation will include a battle between the Executive and the Legislative branches.  There is a chance that the President and Congress could find common ground on some of these issues, including corporate tax reform, but tax reform is notoriously difficult to get done.

Healthcare:  Although Republicans now control both chambers, the 114th Congress will likely represent somewhat of a shift in healthcare legislative policy away from efforts to repeal the Affordable Care Act (ACA) in its entirety, and toward more targeted efforts to reform it and make it more workable.  Though there will be isolated calls – and perhaps votes – to “repeal and replace” ACA, it is anticipated that some Republicans who were previously reluctant to support measures reforming the legislation – holding out hope for eventual repeal – will sign onto measures designed to make the law more feasible for businesses and consumers.  Similarly, many Democrats who had previously been reluctant to acknowledge significant shortcomings in the law may be more willing to support narrow, targeted reforms.    Along those lines, the following issues healthcare tax issues could be in play in the 114th Congress:

  • Cadillac Tax:  Under ACA, beginning in 2018 a 40 percent excise tax will be imposed on the value of health insurance benefits exceeding a certain threshold.  A larger number of plans will likely be exposed to this tax than was anticipated when the ACA was drafted.  Legislation limiting the plans to which this tax applies is a possibility.
  • Medical Device Tax:  ACA calls for a 2.3% tax on the manufacture and importation of medical devices.  The House has passed legislation repealing the tax, and 79 senators from both parties agreed to repeal the medical device tax in a non-binding vote last year, though Senate leadership blocked efforts to consider legislation repealing the tax.  Some are targeting the tax for repeal in tax extenders legislation during the lame-duck session.  If those efforts do not succeed, it will be a top Republican priority in 2015.

Beyond these issues, a number of ACA rules and regulations are expected in the next two years, including regulations prohibiting employers from discriminating in favor of higher-paid employees in terms of health benefit offerings.  In addition, on Election Day the Obama Administration announced plans to issue a rule requiring all employer health plans to cover hospitalization and physician costs in order for the employer to avoid a penalty under the law.