Lesser-Known ‘Zombie’ Tax Provisions Could Help Drive Overhaul Deal

(Rob Kunzig/Morning Consult)

While much of the discussion over tax reform has focused on the border adjustment provision favored by House Speaker Paul Ryan (R-Wis.), in addition to pass-through business rates, corporate rates and the elimination of most itemized deductions, the lack of consensus on a comprehensive overhaul could create an opening for lesser-known items to help broaden support for an eventual deal.

Below are key provisions to watch for, according to several tax experts.

Marijuana Taxation

The state-federal dispute over legalizing marijuana is likely to extend to the tax arena. Lawmakers on Capitol Hill will need to wrestle with how the federal government should treat sales of the drug deemed legal under state law, according to Americans for Tax Reform President Grover Norquist.

Under tax laws crafted in the 1980s, sellers of Schedule 1 illegal drugs are not allowed to claim federal deductions or tax credits. Members of Congress from both parties are now pushing an exception to that rule for sellers in states like Colorado and Washington that have legalized cannabis.

Including that kind of exception in a tax reform package could draw support from libertarian-leaning or even moderate Republicans, Norquist said in an interview last week, bringing in House Republican Conference outliers such as Reps. Thomas Massie (Ky.) and Dana Rohrabacher (Calif.). Rep. Carlos Curbelo (Fla.), a moderate who has worked with Democrats on the marijuana taxation issue, is another advocate for similar changes.

Democrats like Reps. Earl Blumenauer (Ore.) and Jared Polis (Colo.) also might be willing to make a tax code rewrite bipartisan if it includes a marijuana sales exemption, Norquist said. However, those members likely wouldn’t want to be the sole Democrats to vote for a large overall tax cut like the kind Republicans have proposed.

Spokespeople for Blumenauer and Polis did not immediately respond to requests for comment.

Blumenauer and Curbelo joined forces last month in offering legislation to make the tax code more favorable to legal marijuana businesses.

In both cases, Norquist said, supporters of the move could ask lawmakers to set aside their concerns about marijuana legalization and frame the inclusion as a question of federalism. Otherwise, he said, federal tax policy could encroach on major policy decisions states make on their own.

“If federal tax policy is going to interject itself and make those sort of decisions impossible or next to impossible, then you can use federal tax policy to destroy federalism,” he said.

Norquist joined with lawmakers on the marijuana business tax issue after Colorado and Washington voted to legalize the drug.

Transition Rules

If Congress moves forward with even a few elements from the House Republican tax reform blueprint, they’ll have to figure out what transition rules would be used to implement a comprehensive overhaul, and how an array of industries would be affected.

The financial services industry, for instance, consists of significant interest expense and interest income. Rules governing those could change under tax reform.

Transition rules would spell out the methods and lengths of implementation for key changes to the tax code, such as the elimination of interest deductions or phasing in border adjustability.

Harry Stein, a staffer for then-Sen. Herb Kohl (D-Wis.) who now analyzes tax and fiscal policy at the Washington-based Center for American Progress, said in an interview that he sees transition rules as a key issue for Democratic lawmakers.

“The more fundamental the changes, the more important transition questions are,” Stein said last week. “And, oftentimes, things that may raise a lot of revenue or look very good on a white paper end up losing a lot of those benefits when you actually think about how to transition to them.”

The concern over transition rules cuts across party lines. The leader of the conservative National Taxpayers Union, said on an April 13 call with reporters that the issue is important, especially if taxwriters opt to phase out interest deductions.

“The transition rules for many of the proposals will be key to determining not only how we build the economic case for the blueprint but the political case,” said Pete Sepp, NTU’s president.

Emily Schillinger, a spokeswoman for the House Ways and Means Committee, said Monday in an emailed statement that taxwriters “want to deliver growth and minimize complexity as quickly as possible while providing a smooth transition.”

Democratic, Regional Miscellanea

Other, smaller measures that have long been priorities for individual lawmakers also could pop up as tax reform slogs onward.

Norquist predicted that lawmakers from both parties who hail from Western states will want to preserve the ability for landowners to defer tax payments on land-related capital gains. As a general matter, deferments would be less necessary under the GOP tax plan because businesses would be able to fully expense capital investments.

The full expensing provision does not apply to land investments, however, which means the agriculture and real estate industries will likely want to preserve the “like-kind” deferment.

Ways and Means members “appreciate the role that these kind of exchanges play in the current system,” Schillinger said on Monday. “We are carefully considering what the role of these exchanges would be in our new pro-growth tax code with full and immediate expensing.”

The legal authority for states to levy sales taxes on goods and services sold online is a consistently prickly issue in Congress, creating unusual bipartisan coalitions. Sen. Dick Durbin (D-Ill.), the No. 2 Senate Democrat, joined Republican leaders like Senate Budget Committee Chairman Mike Enzi (Wyo.) and Sen. Roy Blunt (Mo.) to champion the Marketplace Fairness Act, which would allow states to tax companies that are based outside of their borders if they’re selling to customers within their state.

The proposal hasn’t been enacted, despite efforts to get the measure to ride along with a bill on customs and trade enforcement legislation that Obama signed into law in February 2016. Durbin pushed for the measure during that time because the customs bill included a provision banning a federal internet access tax.

Morning Consult