Tax Reform Unlikely: Here’s Why

Bill Leary is a Director in Doeren Mayhew’s Houston office, specializing in international tax accounting.

by Bill Leary, International Tax Director, Doeren Mayhew

House Speaker John Boehner said that a long-sought overhaul of U.S. corporate tax law hardly has a chance of being enacted by Congress this year, though both chambers are under Republican control. The Ohio Republican cited a “50-50 chance at best” during a recent interview with Bloomberg.

As we begin to move toward a presidential election year, reform seems as unlikely as a record rainfall in California.

“The challenge there,” according to Boehner, “is how you deal with 70 percent of American businesses that don’t pay corporate tax rates,” referring to partnerships and S corporations, also called “flow-throughs” because taxes are paid on owners’ individual tax returns. The difficulty is that millions of U.S businesses pay taxes through individual returns instead of through the corporate tax system. A targeted corporate tax change would not benefit them.

Looking at a breakdown of business entities shows how flow-through entities dominate. The reason is obvious: owner-operated businesses want to avoid the double tax burden placed on C corporations.

President Obama and many Democrats and Republicans, including House Ways and Means Chairman Paul Ryan, agree that they want to lower the corporate tax rate from 35 percent and curb business tax breaks to help pay for it, leaving individual rates alone.

The revenue generated from C corporations is dwarfed by taxes paid by individuals. As a result, corporate rate reductions are less costly for the federal tax coffer.

Tax Extenders

Closing corporate tax breaks to lower rates hasn’t impacted Congress’ desire to extend the “extenders,” despite their cost.

Tax extenders are a set of temporary tax breaks that have typically been continued for a year or two at a time. Most recently, about 55 extenders expired at the beginning of 2014 and were renewed retroactively for one year last December, before expiring a few weeks later at the end of 2014. The lame duck 113th Congress adopted legislation (H.R.5771) in December 2014 to extend the package of expired provisions, retroactively for the 2014 tax year. The provisions expired again on Jan. 1, 2015.

Early in 2015, the House considered whether to revive several tax extenders and add their cost to the deficit. The bills under consideration, which include extensions of previously renewed tax breaks in addition to new and expanded tax breaks, would cost nearly $320 billion, or nearly $385 billion with interest. Although controversial, the House has taken steps to make tax extenders permanent.

Bill Leary is an international tax accountant in Doeren Mayhew’s Houston CPA Firm and can be reached at 713.789.7077.