Wednesday, November 08, 2017

Dirty business afoot in the Ways and Means Committee?

There was an interesting snippet in today's Ways and Means hearing on the tax legislation. The Youtube footage is here, and the action that I have in mind starts at exactly 3:38:28. It's a colloquy between Democratic Congressman Blumenauer and Republican Committee Chair Brady.

Blumenauer reveals that he has been trying to get an answer for 3 days to the question of whether pass-through business owners - Donald Trump, law firm partners, etcetera - get to deduct state and local income taxes as trade or business (or investment) expenses that are allowable as itemized deductions, even though employees cannot do so, and whether the Joint Committee on Taxation revenue estimate was based on the correct and intended view of this.

He notes that JCT chief of staff Tom Barthold told him one thing - which, as I've pointed out in earlier blog posts, was in at least one respect (and probably more than that) unambiguously mistaken - while the Ways and Means majority staff was simultaneously suggesting something very different (namely that yes, Trump and the law firm partner CAN deduct all of their state and local income taxes under the bill, whereas their employees can't).

Despite the old-style Congressional politesse that both Blumenauer and Brady resolutely stick to, there appears to be some anger under the surface about this. Brady won't let Blumenauer ask Barthold a simple question, and promises only to provide some sort of answer to something or other in writing at some unspecified time or other (and while the clock is running out on committee consideration).

Here is what I strongly suspect is happening:

(1) While the Committee leadership knows that the answer is yes - the likes of Trump and the law firm partner can deduct their state and local income taxes under the bill, whereas employees can't - it does not want this to be generally understood at present.  So they are trying to stonewall.

And very possibly also:

(2) The Committee leadership knows that the JCT revenue estimate is wrong because it didn't account properly for the widespread "business owner" deductibility of state and local taxes. This could either have been an honest blunder amid the high-speed train wreck of the rapid-fire drafting, or it could have reflected diffidence about fully explaining things to the JCT - it doesn't matter now. But if they know that the revenue estimate is wrong, and that it would be higher if done right, and that this is at risk of coming out, then they may feel they are trapped and have to push aggressively forward, in the hope of completing this stage of the process before their actions are exposed.

Again, I don't know that #2 is so,  but stonewalling has a way of broadening one's suspicions. It would also help to explain why they appear to be so set on stonewalling, when the bill's substantive effect is bound to come out well before enactment anyway.

I'm also quite confident that the bill as it stands, is best interpreted as allowing state and local income tax deductions to business owners, including those who don't qualify for the 25% plutocrat rate. This is the clearly expressed intent of the committee report. It is also the best (and, as things stand, only convincing) reading of the bill's statutory language. But it could very easily be changed if they wanted to change it - except, I gather that they don't want to change it.

Something should be out on this tomorrow morning, possibly with my name among the co-authors but not on this blog (although I'll link to it when I get the chance - busy day as I'll be traveling to Philadelphia for the National Tax Association's Annual Meeting). But now, for the tax geeks in the audience (all others can skip the next three paragraphs), I'll just say:

Take a look at section 164(a) of present law, including the first sentence of the flush language at the end of it. See what is removed from the scope of that flush language ("not described in the preceding sentence") by section 164(a)(3). Then look at section 1303 of the bill, which would amend section 164(b)(5) of present law. The new section 164(b)(5) would make changes to how section 164(a)(3) would now read with respect to individuals. Finally, ask yourself how that change to section 164(a)(3) for individuals affects the scope of the first sentence of the flush language at the end of section 164(a).

I think the answer you will come up with, if you are practiced at reading tax statutes, is that the flush language now newly authorizes the likes of Donald Trump and the law firm partner to take state and local income taxes as an itemized deduction because they were "paid or accrued ... in carrying on a trade or business" and are no longer removed from the scope of the flush language by reason of section 164(a)(3).

This would retain the deduction for employees too (since they are in a trade or business as such), except that elsewhere the bill denies employees all itemized deductions with respect to this trade or business. So it's just for the business owners and passive investors, not for the employees.

It's been elegantly done, and all the more so if they managed to keep it out of the revenue estimate (or did so accidentally but now don't want to fess up). But are we only judging style here, or morality too?

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