2020 on the horizon.
In this episode of Tax Notes Talk, Tax Notes’s Jeremy Scott, Stephanie Cumings, and Andrew Velarde review what happened with tax legislation and guidance in 2019 and what lies ahead in 2020.
Read the podcast transcript below. This post has been edited for length and clarity.
David Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: 2020 foresight.
We’ll continue our New Year’s tradition of looking back on what happened in U.S. tax policy in the past year, and we’ll look ahead at what we can expect in the coming year.
We’ll review the biggest pieces of tax legislation on Capitol Hill in 2019 and what’s in store for 2020. Joining me in the studio to look at what we can expect or not in legislation and tax policy this year is Tax Analysts’ Chief Content Officer Jeremy Scott. Jeremy, Welcome back.
Jeremy Scott: Thank you. Glad to be here.
David Stewart: What sort of legislative developments have we seen during 2019?
Jeremy Scott: 2019 was not a banner year for tax legislation. Congress obviously had its focus elsewhere and a lot of the vehicles for moving tax law did not materialize until the very end of the year. Basically, we spent a lot of the year talking about tax extenders, tax returns, retirement legislation, and presidential-type campaign tax plans. Nothing really happened until the very end.
In December, there was a deal struck to move the extenders package through Congress. It was a very small extenders package — mostly biodiesel energy credits, a little bit of stuff involving railroads, a bunch of things that had expired the previous year and did not have another opportunity to be extended. Nothing too unexpected was in it.
The spending bill had a couple of other tax provisions at the end of the year. A lot of it was cleaning up old business. Obamacare taxes got the final stake in the heart. No more Cadillac plan taxes, so no more taxes on high-value insurance plans. That tax had never taken effect, but now it’s finally gone. The medical device excise tax, which had been controversial for a long time, was killed in the spending legislation. A retirement package called the SECURE Act, which started as a bigger and broader reform of the retirement industry but then got narrowed as the year went on, passed as part of the spending act.
Some things that didn’t happen that people thought were going to happen were fixes to the Tax Cuts and Jobs Act. We did not get too many TCJA fixes. One small one that did get included in the extenders package was a fix to nonprofits being taxed on fringe benefits. That was very unpopular when it came into effect. It’s gone.
The big glitch that the Republicans pushed all year to get fixed — the retail glitch — didn’t happen. Democrats said the only way we’ll fix that is if you expand the earned income tax credit. Republicans said no. They could not work out a deal in December, so it did not happen.
Basically, 2019 was about very small scale tax legislation. Extenders was the word of the year when it happened. There was not a lot of tax movement in 2019. There was a lot of talk about taxes on the campaign trail and talk about broad policy changes, but it did not make its way to Congress.
David Stewart: What can we expect this year in legislation?
Jeremy Scott: I think you’re expecting an election year. When you have an election year, what you see is big plans talked about — sometimes large bills are introduced — but nothing happens. I think there’s a good chance we won’t even see a repeat of this type of tax extender stuff at the end of next year just because of the nature of how a lame-duck Congress works after an election.
If there’s a change in administration or even a continuation of an administration, you won’t have the push to do a lot of end-of-the-year stuff that has a long-term effect. I don’t know that 2020 is going to be any more active than 2019.
One thing you might see in 2020 that might get a lot more press: If the president’s tax returns do make their way into the public, expect that to reinvigorate efforts to pass legislation to require the disclosure of presidential tax returns to avoid kind of the rancor and the court fights that this involved. Will that move through Congress in 2020? Probably not.
But you could start to see legislation like that introduced by Sen. Ron Wyden, D-Ore., develop more along the lines of what might actually be acceptable to a bipartisan group— and what it might actually clear the Senate. Not in 2020, but maybe in 2021 or 2022.
UNITED STATES – DECEMBER 11: Sen. Ron Wyden, D-Ore., speaks with reporters as he boards an elevator … [+]
CQ-Roll Call, Inc via Getty Images
I just think in an election year and in particular in election year that might feature a change in administration or could see some upheaval in the House or even in the Senate, there’s not going to be a lot of incentive to get things done. You’re going to see a lot of plans taking shape, but you’re not going to see a lot of hardcore legislation.
You might see more pushes to get corrections to the TCJA through on a bipartisan basis, but I don’t know that either party will be willing to make the concessions necessary to get those actually through both houses.
It’s possible that retail fix — the retail glitch — might come up. It is a big deal to a lot of businesses and there is a major lobbying effort behind it. Does that mean Democrats will soften their demands for an EITC expansion? Does that mean Republicans will throw up their arms and say, ‘Who cares about an EITC expansion?’ That remains to be seen. If they couldn’t do it as part of end-of-the-year, crunch-time, keep-the-government-open spending legislation, the incentive to do it prior to an election is pretty slim. Maybe it resurfaces in a potential lame-duck session. It’s hard to speculate on this far out, so we’ll see.
I would be shocked if any major tax bill passes Congress in 2020 prior to the election.
David Stewart: Let’s turn to the election itself. As we’re sitting here, there is an active Democratic primary going on. What sort of tax plans are we seeing out of the presidential candidates for 2020?
Jeremy Scott: We’re seeing a lot of tax plans being talked about on the Democratic side, primarily to pay for social spending that they’d like to see. It’s also to kind of correct some of the injustices that some Democratic candidates alleged were brought on our tax system, particularly in the wake of the passage of the TCJA.
You’re seeing a lot of talk about wealth taxes and talk about higher taxes on the wealthy. I think, again, these are difficult plans to put in legislative terms when they’re just campaign rhetoric. Sen. Elizabeth Warren, D-Mass., one of the Democratic frontrunners, has tried to do that and has come under some criticism for the gaps in her plan. Wealth taxes dominated a lot of the discussion in the middle part of 2019 and that’s even before the primaries. I think now you’re going to hear even more details about them.
DETROIT, MI – JULY 24: Democratic presidential candidate U.S. Sen. Elizabeth Warren (D-MA) … [+]
You’re going to see candidates, particularly the last few that start to survive the Democratic process, have to reduce their plans into more tangible terms — the way Warren tried to do in the fall.
I think there’s going to be a lot of the discussion on the Republican side. Assuming the president is waging a reelection campaign, there’s going to be a lot of talk about expanding the tax cuts that were in the TCJA, particularly for individuals. I think 2020 is going to be the year of individual taxation from a policy standpoint, particularly because the TCJA has those built-in expirations.
Republicans are going to be talking about extending the current cuts and making them deeper. That’s going to be a major part of the president’s reelection tax plans. It’s going to be a major part of House GOP candidates’ plans to sort of try to retake the House and appeal to suburban districts.
The corporate rate may get a little bit of discussion from the Democratic campaign primarily as a way to pay for some of these plans that they have, like free college tuition or debt forgiveness. Plus, expanded health care has to be paid for, so you’re going to see some things like a higher bracket for top earners.
You’re going to see talk about raising the corporate rate, but it is not going to be feasible to return the corporate rate to 35%. You could hear a lot of plans that talk about a 28% or 29% corporate rate. Again, these are pay-fors for other priorities that Democrats have and how that influences a legislative calendar is going to depend on the outcome of the election.
David Stewart: On the feasibility question of some of these tax plans, the wealth tax is a very popular talking point on the campaign trail. Is that even possible in the U.S. to implement a wealth tax?
Jeremy Scott: It’s possible. The question is: Is it constitutional? As people have looked at it more seriously, there’s a lot of talk about what does that constitutional language even mean? What kind of plans would it prevent? How could we write a wealth tax in a way that gets around that? The question of constitutionality becomes a little more nuanced.
I think a wealth tax faces a lot of hurdles before becoming law. Primarily because in the back of a lot of people’s minds — and in the back of a lot of lawmakers’ minds — why are we bothering to go through this exercise with something that could be scrapped by a court?
There are impediments to a wealth tax. It’s a very nice talking point and it makes a lot of sense when you’re talking about wealth distribution, but it’s a very complicated issue.
A close-up of U.S. dollars (Getty)
They are not really in vogue in Western tax systems anymore. Few European countries have them and a few European countries have gotten rid of them in the last few years.
It faces a long road to becoming implemented. Even if you could clear the constitutional challenge and be assured that it’s constitutional, I still think it’s so different from anything that has been done before.
It would be a struggle for Congress to build it, and it makes me think back to when Republicans were talking about tax reform. This idea of, ‘Oh, the destination based cash flow tax. Here’s an easy way to raise revenue that doesn’t harm growth and will allow us to do all these different things.’ But when it actually came to building it, it made a ton of people uncomfortable. It made a ton of lobbying groups uncomfortable [and] made a ton of constituents uncomfortable, and it ultimately fell apart.
A wealth tax is sort of the Democratic equivalent in some ways. It’s a very innovative idea that sounds very progressive. It could solve a lot of our problems and fix a number of issues at once, but to actually construct it is incredibly complicated and will make a lot of people very uncomfortable.
David Stewart: The takeaway we have here is that there’s not much to look forward to in tax legislation in 2020, but we could be looking at an active 2021, however the election comes out.
Jeremy Scott: Certainly 2021 depends a lot on the election. It is guaranteed to be incredibly active if one party controls both houses of Congress and the presidency.
What the TCJA has done is revived tax as a live area of reform. If Republicans take control of government again, you expect them at the minimum to pass a number of fixes when they could take their time doing so.
If Democrats take control of the presidency and Congress, you can definitely expect them to look at the TCJA and put forward their own version of tax reform.
I think 2021 could be very, very active depending on how the election comes out. It will certainly be more active than 2020, which I think is going to be a lot of policy talk, a lot of campaign type talk, but not a lot of legislative movement.
David Stewart: Jeremy, thank you for being here.
Jeremy Scott: Thank you.
David Stewart: Now joining me in the studio are Tax Notes senior legal reporters Stephanie Cumings and Andrew Velarde. Stephanie, Andrew, welcome back to the podcast.
Stephanie Cumings: Thanks for having us, Dave.
Andrew Velarde: Good to be here, Dave. Thank you.
David Stewart: Stephanie, can you tell us about some of the regulatory trends that we’ve seen in 2019?
Stephanie Cumings: We had lots of guidance this year, and unsurprisingly, most of the important projects were related to the TCJA. But we still had a lot of non-TCJA guidance as well. We actually had significantly more guidance this year than last year. We had about 79 projects in total in 2019 that’s posed in final regulations. Last year, we only had about 49. In 2018 there were only about 13 TCJA projects, which surprised me because we thought it seemed like such a big deal at the time. This year there was a big spike in the number of TCJA projects. There were 36 this year in total. But there were also 43 projects that weren’t related to tax reform this year. Those were sort of smaller projects.
Regulations book. Law, rules and regulations concept. 3d illustration
David Stewart: What were some of the most notable regulations on the federal tax side?
Stephanie Cumings: We had a ton of them. We had proposed and final regs on the 199A passthrough deduction. We had a second set of proposed regs on the Opportunity Zone program. Also:
- proposed regs on the 1446(f) partnership withholding,
- proposed regs on 451(c) advanced payments,
- proposed 451(b) revenue recognition,
- proposed 382(h) regs on building gains and losses; and
- final regs on 168(k) bonus depreciation, along with another set of proposed regs on 168(k).
In December, we had a lot more guidance. We had proposed regs on the state and local tax deduction cap. We had final regs on computing unrelated business income tax for voluntary employees beneficiary associations.
On December 16, we had three reg packages, which I don’t know if I’ve ever seen before. We had final rules on spinoffs under 355(e). We had my long awaited proposed regs on 162(m) and the executive compensation deduction limitation. And then we had a short final rules package on 871(m). But more importantly, that came with a notice delaying with 871(m) rules for another year.
David Stewart: Andrew, what major regulations have we seen in 2019 on the international side?
Andrew Velarde: The TCJA gave us a lot of new international provisions, and guidance was still needed in 2019 to flesh these out. We got a lot of notable projects throughout the year.
The year 2019 kicked off with finalized guidance on the transition tax. This was the tax imposed on accumulated offshore earnings and profits. A few months later, we had proposed regs on the foreign-derived intangible income provision. That was followed in the early summer by finalized guidance on the GILTI, and in December, we had finalized guidance on the base erosion and antiabuse tax as well as the foreign tax credits.
All of these final pieces of guidance reflected tweaks from what we saw in earlier proposed regs, tweaks made from comments given by the public and by practitioners. But nothing was turned on its head completely, so there were no big surprises in these final guidance projects.
David Stewart: The review process for regulations at the Office of Information and Regulatory Affairs has been a bit unpredictable this year. Can you tell me about that?
Stephanie Cumings: Right. Under the memo between the IRS and Treasury, typically it could take 10 days for a TCJA project to get through OIRA and then 45 days for a non-TCJA project. That is not what we’ve seen early on in the process. Last year, when the tax reform guidance first started coming out, it was moving through OIRA pretty quickly, but things have slowed down this year. The average review time has roughly doubled for TCJA projects. This year we had the built-in gain and loss rules and the 451(c) rules were both at OIRA or over 100 days.
Andrew Velarde: We had the BEAT and FTC regs, which came out on December 2. Both of those projects were at OIRA for a while. In fact, BEAT arrived at OIRA on September 16, so it was several months before we actually saw it. Not all of that was time at OIRA. They cleared the rules and then we just sat in anticipation, waiting for weeks for them to finally come out. What the cause of that delay is we can’t say because it’s behind the curtain, but the whole process has seemed to have slowed down this year.
David Stewart: Given this new slow process, what sort of regulations are we expecting to see in 2020?
Stephanie Cumings: There’s still plenty of TCJA guidance on the horizon. There should be:
- more proposed regs on section 163(j),
- proposed regs on the section 172 net operating loss deduction,
- proposed regs on carried interest in section 1061; and
- proposed regs on section 512.
I’m really looking forward to seeing proposed regs on section 274 dealing with parking and meals as well as the section 4960 guidance on the excise tax on executive compensation for nonprofits.
One major non-TCJA project I’m looking for is the proposed section 355 regs on spinoffs that deal with the active trader business requirement.
Andrew Velarde: In the international realm, for the third year in a row, the focus really will be on the TCJA guidance in 2020. You look at the priority guidance plan, there’s only eight non-TCJA general guidance international projects listed that were not already published before the plan’s release.
On tap for early next year, we’re expecting final rules on the GILTI high-tax exclusion. That guidance would allow domestic shareholders of a controlled foreign corporation to elect to exclude from gross tested income amounts that have been subject to foreign tax at an effective rate that exceeds 90% of the U.S. tax rate. Proposed regs were released along with the earlier final GILTI regs last summer. Practitioners are looking at this closely. They want to see retroactive application of the exclusions. Hopefully, that could change. They would like to see eligibility determined on a CFC-by-CFC basis rather than qualified business unit by qualified business unit and a shorter timeframe in which an election to take the high-tax exclusion would lock a taxpayer in.
On top of that, we’re expecting proposed regs on previously taxed earnings and profits (PTEP). We got a notice back in December 2018 promising proposed regs very shortly. In that notice, we see a lot of extreme complexity with PTEP accounts. Practitioners are looking to see what Treasury might do to reduce that complexity. We are also looking to see how the guidance will account for some basis adjustments as well as the application to partnerships.
We’re hoping to get final FDII regs. Practitioners there are very concerned with documentation rules. The documentation you need in order to take advantage of the deduction for deemed intangible income earned for the sale of property or services for foreign use.
Finally, also expected somewhat in the near future are final 245A regs restricting the participation exemption to some related party transactions. Practitioners here have accused Treasury of overstepping their authority when they issued temporary regs several months ago, so we’ll see what happens there.
Additionally in 2020, final regs on the BEAT and foreign tax credits, in addition to the final regs we already got in December at the same time they released additional proposed regs. We’re hoping that we finalized as well.
David Stewart: Well, it sounds like we’ve got a lot to watch for in the next year. Andrew, Stephanie, thank you being here.
Stephanie Cumings: Thanks for having us.
Andrew Velarde: Thank you, Dave.