The financial and economic news is filled with articles and commentary on major federal tax reform in 2017. U.S. Treasury Secretary Steve Mnuchin has called President Trump’s tax proposals the “biggest tax cuts” in U.S. history. Just when these business tax, estate tax and income tax cuts will be enacted into law remains unknown. The political process to pass major tax reform is long and difficult. It requires ongoing cooperation by various political coalitions in Congress and the members of the Trump Administration.
Without getting into the details of the line item proposals of President Trump’s tax reform agenda, what is the hypothetical pathway on how tax reform could be enacted?
Here is a hypothetical road map of that long and winding journey that could lead to the promised land of major tax changes; potentially reinvigorating the American economy and providing broad-based tax relief. Keep in mind that the contentious political climate in Washington between President Trump, the Republican majorities, and the Democratic minorities in Congress could very well delay any tax reform until 2018. Healthcare reform and the ongoing investigations may place any tax reform in 2017 on the back burner.
April 2017 - President Trump introduces major tax reform proposals. These proposals largely mirror the tax proposals from his Presidential Campaign in 2016. Trump and his economic advisors meet with Congressional leaders to review proposals and devise a strategy to enact legislation.
July- September 2017 - Bills are introduced in the U.S. House of Representatives. The House Ways and Means Committee meets to debate details of the bills and settle on its final tax reform package. The committee votes to send the final package to the full House for a vote.
Bills are also introduced in the U.S. Senate. The Senate Finance Committee meets to debate the details of the bills and settle on its final tax reform package. The committee votes to send final package to the full Senate for a vote.
August 2017 - Congress is in recess...
September-October 2017 - After lengthy floor debate, the House passes its tax reform package by a majority vote. Republicans currently hold a 238-194 majority, with three special elections yet to be decided. The House bill contains different line items than the final Senate bill.
The Senate bill contains different line items than the final House bill. The Senate is unlikely to reach the 60-vote threshold to close debate (filibuster) and send the bill to the full Senate for a vote. Republicans currently hold a 52-48 majority with Vice President Pence casting a tie-breaker vote if needed.
Instead, the Senate decides to use the Budget Reconciliation process which requires only a majority vote to send the bill to the full Senate. Under Budget Reconciliation, the Senate passes its tax reform package by a narrow majority vote.
October-November 2017 - Since the Senate and House bills will more than likely contain different line items, a Conference Committee of House and Senate representatives will be convened to merge the items of each bill into one final bill. Whether the House version or Senate version will prevail on each tax reform line item is unknown.
December 2017 - The House and Senate pass the final Conference Committee tax reform package and send the final version to President Trump for his signature.
President Trump signs the tax package into law and it becomes part of the Internal Revenue Code. More than likely, the changes will go into effect for tax year 2018. Since the new law will have been passed under the Budget Reconciliation process, the law will remain in effect for a maximum of 10 years. In 2028, the whole law will be scheduled to “sunset” and revert to the tax laws in effect in 2017. This “sunset” back to the 2017 tax laws will take place unless a future Congress and President decide to make some or all the tax changes permanent.
Note: Déjà vu all over again? Think back to 2001 and the tax reform package passed into law under President George W. Bush. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 was passed into law under the Budget Reconciliation process. The law was scheduled to “sunset” in 2011. However, various compromises between the Congress and the Obama Administration in 2011 and 2012 avoided the “sunset”. Looks like history may repeat itself in 2017 with the current tax reform process.
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