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Domestic production tax deduction may be changed in House tax planDomestic production tax deduction may be changed in House tax plan

Members of the tax-writing committee work behind closed doors on proposals to raise revenue that would help offset the deep tax-rate cuts.


October 31, 2017

4 Min Read
President Trump speaks during a meeting with members of the House Ways and Means Committee as committee chairman Rep. Kevin Brady (R-TX) listens.Alex Wong/GettyImages

by John Voskuhl

House tax writers have completed about 90% of the tax bill they plan to release this week, Ways and Means Chairman Kevin Brady said Monday -- but the last part may be the hardest.

Members of the tax-writing committee were working behind closed doors on proposals to raise revenue that would help offset the deep tax-rate cuts that President Donald Trump and congressional leaders have proposed, said Representative Vern Buchanan, a Florida Republican. 

“I can’t say too much. It’s going to be another day and a half before the bill is out,” Buchanan said Monday afternoon.

Republicans on the Ways and Means panel were discussing the legislation -- and the revenue effects that would stem from various proposals. Members said they’d discussed a proposal to phase in a corporate tax rate cut gradually over as many as five years. The White House wants an immediate rate cut to 20% from the current 35% to stimulate economic growth -- a position that Brady echoed Monday.

Asked whether a phase-in was under consideration, he said only: “We want to get the growth up front.”

Difficult mathematics will force difficult decisions for the tax panel. Already, Brady has agreed to preserve an individual tax break that congressional leaders and Trump had proposed abolishing: a federal deduction for state and local property taxes. Brady said he was trying to address concerns from GOP House members in high-tax states.

Monday’s session “was more of a math experiment, saying, OK, if you do this on state and local, here’s what it costs you -- where do you backfill?” said Representative David Schweikert, an Arizona Republican.

Amid the uncertainty, business representatives are trying to learn which existing corporate tax breaks the committee might decide to repeal or limit. A proposal that would target businesses’ advertising spending had lobbyists hurrying to respond before House tax writers release their bill Wednesday, three lobbyists familiar with the matter said.

Currently, corporations can write off their advertising expenses immediately -- but lawmakers are said to be considering changing that by requiring that such deductions be spread out over years, the lobbyists said. The situation is fluid, and it’s unclear whether the provision will show up in the bill text, they said. 

In 2014, then-Ways and Means Chairman Dave Camp proposed requiring businesses to deduct advertising expenses over a 10-year period. That measure -- part of an extensive tax-code overhaul attempt that gained no traction -- was estimated at the time to raise as much as $169 billion over 10 years.

Details of lawmakers’ plans are scarce. The one-page tax outline the White House released in April contained a one-sentence suggestion: “Eliminate tax breaks for special interests.” Since then, the GOP framework released Sept. 27 targeted only one specific business deduction for repeal: a domestic-production deduction that would be obviated by the proposed rate cut.

Still, as they decide their plans, the House tax writers have a well-thumbed menu to choose from -- Camp’s 2014 tax bill draft. While it went nowhere then, many of its provisions are getting fresh discussion. Here are some examples:

Research and experimentation 

Current law: Businesses can choose to deduct certain R&E spending from their taxable income immediately. 

Proposed change: Require all such spending to be written off over a five-year schedule. The change would be phased in.

Affected industries: Manufacturers would bear about two-thirds of the brunt, one independent analysis found.

Revenue effect: Estimated to raise $192.6 billion under the 2014 bill.

Domestic production activities

Current law: Businesses can claim deductions for domestic production of as much as 9% of their taxable income, subject to certain limits.

Proposed change: Phase out the deduction over three years’ time.

Affected industries: Manufacturers; agriculture, mining and construction; transportation, information, and utilities.

Revenue effect: Estimated to raise $115.8 billion under the 2014 bill. 

Note: The GOP tax framework singled out this deduction. “Because of the framework’s substantial rate reduction for all businesses, the current-law domestic production deduction will no longer be necessary,” it said. “Domestic manufacturers will see the lowest marginal rates in almost 80 years.”

Last-in, first-out inventory accounting 

Current law: Companies can choose to use so-called LIFO accounting. That means their “cost of goods sold” reflects more recent values than it would if they used first-in, first-out accounting. Such companies are required to calculate and track their “LIFO reserves,” which represent the deferred taxable income that results from using the more recent cost.

Proposed change: The LIFO method would no longer be allowed -- effectively triggering the deferred tax liability that LIFO companies had accumulated. The provision would probably allow for paying that liability over several years.

Affected industries: Oil and gas, retailers, auto dealers.

Revenue effect: Estimated to raise $79.1 billion.

Note: Retailers and oil refiners were among the industries that led the successful opposition to House Speaker Paul Ryan’s border-adjusted tax proposal over the summer. LIFO may well be a different story.

--With assistance from Laura Davison, Anna Edgerton, Matt Townsend and Erik Wasson.

To contact the reporter on this story: John Voskuhl in Washington at [email protected]

To contact the editors responsible for this story: Alexis Leondis at [email protected]

John Voskuhl, C. Thompson

© 2017 Bloomberg L.P

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