After a year of draft tax reform proposals from the House and the Senate covering specific areas of tax law, Ways and Means Committee Chair Camp has put forth a comprehensive tax reform draft. The Senate tax reform effort has been stalled since Finance Committee Chair Baucus was appointed as Ambassador to China. The House draft consists of eight titles: Tax Reform for Individuals, Alternative Minimum Tax Repeal, Business Tax Reform, Participation Exemption System for the Taxation of Foreign Income, Tax Exempt Entities, Tax Administration and Compliance, Excise Taxes, and Deadwood and Technical Provisions. The overall proposal is projected to be revenue neutral and distributionally neutral among household income categories.
Individual tax reform includes a simplified rate structure with 10 and 25 percent tax rates. However, the draft also includes a 10 percent surtax on higher income taxpayers. Capital gains taxation would revert to an older system of exempting part of the gains rather than a separate rate structure. The standard deduction and child tax credit would be increased and personal exemptions eliminated. Tax breaks for education would be simplified with a focus on the American Opportunity Credit and repeal of other provisions including the exclusion for savings bonds used for education, the tuition and fees deduction, and the deduction for student loan interest. Coverdell education savings accounts would be frozen. Many credits would be repealed including the dependent care credit, the adoption credit, the first-time homebuyer credit and the energy-related credits. Significant modifications would be made to itemized deductions, including mortgage interest and charitable contributions, and deductions for state and local taxes, casualty losses, medical expenses, and employee business expenses would be among those slated for repeal. In the pension and retirement area, further contributions to traditional IRAs would be eliminated, along with new SEPs and SIMPLE 401(k)s, with the focus shifting to Roth IRAs, including eliminating income restrictions on Roth contributions. Several employment tax modifications are also proposed.
Business tax reform takes a similar form with a 25 perent corporate tax rate and the repeal of many tax breaks. Depreciation, net operating loss deductions, and the amortization of advertising expenses would be revised. The research and development credit would be revised but made permanent. A long list of provisions are slated for repeal with the domestic production activities deduction, amortization of pollution control facilities, and repeal of like-kind exchanges being among those involving the most projected revenue increases. Included in accounting method changes is the repeal of LIFO. Included in financial instrument changes is the termination of private activity bonds. There are also significant changes involving the insurance industry, pass-thorugh entities, REITs, interactions with foreign peresons and entities, and compensation.
The new peoposed foreign exemption system would involve a deduction for dividends received by domestic corporations from certain foreign corporations, a limitation on losses from foreign corporations, and a transition rule for current deferred foreign income. The move to an exemption system would also involve changes to the foreign tax credit system and the treatment of passive and mobile income.
Similar to the more specific prior tax reform drafts, the Ways and Means Committee is soliciting input and feedback on this comprehensive draft. Most commentators express doubt that there will be any significant tax reform legislation passed in 2014; however, as the tax reform proposals get increasingly detailed, this draft may be moving us closer to an eventual serious attempt at passing comprehensive tax reform.