November 6, 2017

House Republicans Release Tax Reform Bill—How Does It Address MSCI Member Priorities?

On Thursday, Nov. 2, Republican leaders in the U.S. House of Representatives unveiled their long-awaited proposal for comprehensive federal tax reform.

How does it stack up to the priorities that Metals Service Center Institute (MSCI) members highlighted in a survey earlier this year and that MSCI outlined in its comments this past summer to leaders on the U.S. Senate Finance Committee? (The Senate Finance Committee will have to consider the tax reform bill before it’s voted on before the full Senate.) Let’s take a look:

  • Marginal Tax Rates. MSCI’s comments said the organization’s members were willing to accept certain trade-offs in exchange for “substantial” cuts to individual income tax rates (since most small businesses pay through the individual tax system) and the corporate tax rate. The House proposal calls for:
    • Reducing the number of individual tax brackets from seven to four (12 percent, 25 percent, 35 percent and 39.6 percent) and eliminating the individual Alternative Minimum Tax (AMT).
    • Lowering the corporate tax rate from 35 percent to 20 percent an eliminating the corporate AMT.
    • Separating pass-through business income from ordinary wage income and taxing business income at a maximum rate of 25 percent (instead of the maximum rate of 39.6 percent that it currently is subject to under the individual tax system). The House plan calls for strict rules to determine what income will receive the lower rates. Some small business advocacy groups, including the National Federation of Independent Business, have announced they will oppose the tax bill because they believe these rules actually will increase taxes on pass-through entities. Click here to learn more about how these pass-through rules would work.
  • Interest Deduction. A tax reform outline issued by the U.S. House earlier this year called for full elimination of the interest deduction. In its comments this summer MSCI asked that lawmakers reject that provision and maintain the interest deduction since eliminating this provision would result in a “huge permanent tax increase” for MSCI members. As Fortune explains the bill does not fully eliminate the interest deduction, but it does limit it. Specifically, while the bill would let businesses deduct interest expenses, the deduction would be capped at 30 percent of a business’s earnings before interest, taxes, depreciation, and amortization (EBITDA). Fortune noted “Capping the deduction would help pay for sharply lowering” overall marginal tax rates.
  • Current Expensing Of Equipment. While noting that preservation of the interest deduction was a higher priority, MSCI asked that lawmakers move to a system that allowed for accelerated or immediate deductions for certain capital expenditures of machinery and equipment. The House bill would allow all businesses, for a five-year period, to fully and immediately expense the cost of property and equipment that is currently eligible for bonus depreciation. This provision will apply to purchases of used property as well as new property and to property and equipment acquired and placed in service after September 27, 2017.
  • Last In, First Out (LIFO). MSCI called for the retention of LIFO, and the House bill would keep LIFO in place.
  • Territorial Tax System. MSCI recommended that lawmakers move the United States toward a territorial system and allow multinational companies to bring back profits to the United States without double taxation. The bill achieves this goal by creating a permanent territorial system that ends the double taxation on American businesses and imposing a “modest” tax on any of the more than $2 trillion in existing foreign earnings that are currently sitting offshore and are brought back to the United States.
  • Estate Tax. MSCI requested that lawmakers eliminate the estate tax. The bill achieves this goal by increasing the estate tax exemption to $10 million and fully repealing the estate tax in 2024.

MSCI also has joined letters written by the American Society for Association Executives, the Parity for Main Street Employers Coalition, and the U.S. Chamber of Commerce that have outlined broad principles that comprehensive tax reform must achieve.

The House Ways and Means Committee is scheduled to begin considering the bill on Monday, Nov. 6. House leaders’ goal is to have the tax reform legislation on the House floor during the week of Nov. 13. The Senate Finance Committee also is expected to consider the tax reform bill that week.