Last night we finally made our way through the 2014 mid-term elections. It was a very successful election for the Republican Party which will soon be in control of both houses of the US Congress. Last night’s victory speeches and today’s interviews have taken a relatively positive tone. Political pundit and former Republican US Representative Joe Scarborough recently said “most Republicans I talk to understand if all they do is obstruct in 2015, they will lose the big election, the big prize, in 2016.”
So, what does all this mean for tax policy?
First Things First: In a previous posting we discussed the “Tax Extenders”. To briefly summarize – the tax extenders are 55 temporary tax provisions that are generally extended every couple years. These provisions expired at the end of 2013 leaving a lot of unknowns for many businesses and individuals. The Republican controlled House of Representatives had been favoring a targeted approach to the extenders with the intent to make certain provisions permanent. Conversely the Democrat controlled Senate had sought a blanketed 2 year extension of all the expired tax provisions. We’ve seen inaction on these extenders because of election year politics and not necessarily because of the provisions themselves. The provisions have generally received support from both sides. These extensions are overdue by a year and need immediate attention. While some skepticism has set in about whether or not we’ll see an extension of the provisions for 2014, it is still my opinion that we will see a retroactive short-term package that will cover the majority of the provisions for 2014 and 2015. The upcoming lame duck legislative session has only 14 days in it and the IRS has to finalize tax forms and calculations. I think they’ll get it done.
Beyond 2014: Unfortunately we’ve seen this song and dance before and by the time you read this we will be full-throttled into the 2016 presidential election. However I believe there is a real possibility that comprehensive tax reform will be put back on the table. The effective tax rate of this country’s economic engine, the middle class, is still too high and the corporate tax rate is not competitive with the rest of world. Both Republicans and Democrats understand this and want to change it. The White House will want some “loopholes” closed to increase the tax base but I also believe the White House will concede on lowering the tax rates. There is real common ground in this area and with some compromise it can get done. Furthermore if the Republicans can deal on immigration and/or infrastructure there should be even more momentum for tax reform.
We should know where we stand by Friday when the Congressional leadership meets with President Obama. If you see John Boehner and Mitch McConnell dejected and sounding off outside on the White House driveway, I’d say things didn’t go well and tax reform along with everything else is dead…….again.