Camp tax reform plan hits middle market, private equity, high-tax states
TAX ALERT |
Congressman Dave Camp of Michigan, Republican Chairman of the House Ways and Means Committee, this week unveiled his blueprint for massive, fundamental tax reform. As always, such plans have winners and losers. With this plan, the winners are America’s largest and richest corporations (except a few “too big to fail” financial institutions), particularly those in industries with relatively low fixed investments in machinery and other depreciable equipment and those with large offshore operations. The losers are small and medium-sized businesses structured as pass-through entities (partnerships, limited liability companies and S corporations), high-income taxpayers living in high-tax states and localities, and managers of private equity groups.
In theory, the plan cuts back business tax preferences (like accelerated depreciation, LIFO inventory, amortization of research expenditures, and the full current deduction of advertising expenses) in exchange for lower tax rates on business income. But while corporate and pass-through businesses both pay the full cost of losing these tax benefits on their respective tax returns, C corporations get much larger tax-rate reductions than owners of pass-through businesses. The overall corporate tax rate (including the tax on dividends) is reduced by 7.25 percentage points, while the top individual tax rate paid by pass-through owners in non-manufacturing businesses is reduced by only 4.6 percentage points. In addition, more self-employment taxes will be imposed on active participants in pass-throughs. In effect, tax hikes from the base-broadening imposed on pass-through owners are being used to provide significant tax cuts to America’s largest corporations—all in the name of promoting U.S. economic growth and more U.S. jobs.
U.S. corporations with overseas operations also appear to be big winners, getting a break on the repatriation of untaxed offshore earnings and obtaining a permanent, low rate on future offshore earnings whether or not repatriated.
The Camp plan departs from prior proposals on “carried interest” by focusing just on private equity groups, although there will undoubtedly be some disputes as to whether he has properly defined that universe. The key point is that real estate ventures are not intended to be hit.
On the individual side, New York Democratic Senator Chuck Schumer has already declared the Camp plan “dead on arrival” because it eliminates deductions for some state and local taxes. The mortgage interest deduction for new home purchases would also be cut back, allowing interest deductions only on the first $500,000 of principal. Both of these provisions will disproportionately affect states where taxes and housing costs are higher than average.
The supposed simplification or fairness benefits of the Camp plan are not overwhelming. Reducing the number of tax brackets will be meaningless to most individuals. Reducing the number of itemizers may or may not be a benefit. Some individuals actually like the idea of itemizing deductions, rather than being relegated to the standard deduction. While the minimum tax will be eliminated, there will be a new surtax with a different tax base than the ordinary income tax. That might just as well have been called an add-on minimum tax.
While few expect this plan to be enacted, or even marked-up in Committee, it very well might provide a blueprint for lobbyists and trade associations to organize opposition to this version of tax reform. At the same time, there will be every reason for the corporate beneficiaries of the plan to encourage PAC contributions to their supporters. However, after almost a year of intensive lobbying against all of the base-broadening in this plan—leading up to a Congressional election this year—it will be interesting to see whether there is still much of an appetite for tax reform in the new Congress that takes office in January 2015.
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