The morning after Karen Handel’s victory in the GA-06 special election, the CFO Forum of Atlanta gathered for our quarterly event to discuss the extremely timely topic of the new presidential administration’s impact on business. Mel Schwarz and Mary Moore Hamrick, both from CFO Forum Atlanta’s partner Grant Thornton, led a business-minded assessment of the current state of politics, as well as what the financial world can expect from new congressional bills such as healthcare reform and tax policy reform.
To kick off the meeting, panel host Jason Perry engaged the audience in a new interactive form of participation for our members. We asked four poll questions and received responses via text for immediate reactions, with results as follows:
Would the current health care reform proposals benefit your business?
38% – Yes, they would directly benefit my business
35% – No, they would likely not benefit my business
12% – Yes, they would indirectly benefit my business
12% – No, they would hurt my business
4% – I do not know how they will impact my business
Would investments in public infrastructure benefit your business?
33% – No, it would likely not benefit my business
30% – Yes, it would directly benefit my business
30% – Yes, it would indirectly benefit my business
3% – I do not know how it will impact my business
3% – Not applicable
What aspect of tax reform would benefit your business most?
83% – Lower corporate tax rate
10% – Rate parity for pass-throughs
7% – A territorial tax system
What concrete steps, if any, are you taking in anticipation of tax reform?
57% – Waiting and preparing
23% – Nothing
17% – Accelerating deductions
3% – Assessing whether to repatriate now
With input from our members, the stage was set to dive in on Hamrick’s and Schwarz’s analyses of the current state of affairs in Washington and how businesses in our community will be impacted.
What’s Going On In Washington
“How do we cut through the noisy clutter of media and figure out what the impact of the new administration for businesses will be?” – Mary Moore Hamrick
Mary Moore Hamrick, a self-proclaimed “creature of the swamp” (i.e. Washington, D.C. resident), took on the first question of the morning: What is the impact of the Georgia special election on Washington politics?
Essentially, Hamrick shared, Washington looked at the election as a barometer of how President Trump is performing thus far into his presidency. GA-06 is a traditionally Republican stronghold, and if Democrats could overtake this district, what would that say about the president and his party? Though a sigh of relief could be let out with Handel’s victory, her winning percentages are not enough to say that things are going great.
After speaking to the point of Georgia’s special election and what it means on a national scale, Hamrick then honed in more specifically on the president’s actions so far. She observed that one of the biggest things he’s already doing right for businesses is bringing tons of CEOs, from companies of all sizes, into the boardroom to discuss what’s going right and what economical pain points there are. Larry Fink, BlackRock CEO and known Democrat party supporter, has shared that these boardroom meetings are a place where the president is shining, holding conversations and really listening to what business owners are saying.
Outside of the boardroom, the president’s national approval ratings are lagging, but that’s not to say they give a great picture of how he’s doing. His party’s ratings are still in the 80% range, and independents are trending more his way.
Hamrick attributed these mixed ratings to the struggle of getting White House positions approved and filled. The president has received the highest vote count of “no” for cabinet nominees in the history of the office. On top of that, of the 4,000 employees who come and go during an administration change (1,100 of those being top positions), there are still 1,154 vacancies, with 558 of those being in the top position category.
The tumultuous atmosphere in Washington politics (as well as all over the country) begs the question, how do we get back to a middle ground, less polarized government? To answer this, Hamrick shared a recent study’s statistic that 2/3 of Americans believe we live in a more uncivil world today than in the past. Until we can become more civil, meaning each person takes responsibility to work towards it, we will have to work with the current state of polarized affairs.
As Washington figures out how to find more middleground, Hamrick pointed to six factors we can look at in determining how things are moving forward from a policy perspective:
- Regulatory reform
- Repeal and replacement of ACA
- Tax reform
- Border security
- Dodd-Frank repeal and replace
None have been given a greenlight, though some progress has been made on all save for infrastructure and border security. To give a better view of how things are moving forward, Hamrick shared the following timeline:
Currently, the healthcare bill is clogging the pipeline for tax reform. Though Washington insiders, particularly Senate Republicans, are hopeful the new healthcare bill will pass, only time will tell. Even when looking beyond that towards tax reform, there’s a long road ahead
All About Tax Reform
The conversation shifted to Mel Schwarz, director of tax legislative affairs in Grant Thornton’s Washington National Tax Office, as he dove deeper into the question on everyone’s mind: What’s currently on the table for tax reform, and what does it mean for businesses?
As Hamrick referenced in her timeline above, tax reform is all about timing and when the discussions on tax reform can take a front seat. Despite the slow roll of getting a healthcare bill through so Congress can focus on tax reform, statements from the GOP indicate the conversation about tax reform is under control and a bill will be coming by the end of this year.
Schwarz points out there’s no clear evidence that this promised timeline will be met, but the House is at a point where they can focus on tax reform, and the Senate may or may not be depending on how the healthcare reform vote goes. Adding to the Senate’s problems of getting to tax reform is the issue of the Russian interference investigation. The Senate Intelligence Committee, involved in the investigation, is chaired by Richard Burr and Mark Warner, both of whom also chair the Senate Finance Committee.
Some good news is the Senate Finance Committee has a long history of bipartisanship. There’s expectation the tax reform bill will be Republican-led, but Democrats are expected to influence the final outcome. Once time is freed up from the Russian investigations and talks on the healthcare bill, we should see movement in the Senate on tax reform.
In terms of what is already out there for tax reform, Schwarz discussed the blueprint that the House Republicans have constructed, which includes 40 pages of theoretical changes. The blueprint, currently called “A Better Way”, includes the following major points:
- Rate cut (20% Corporate Rate)/repeal of targeted incentives
- Full expensing of domestic acquisitions/interest disallowance
- Border adjustability – taxation limited to domestic activities
- Territorial system – taxation of only domestic revenue
- One-time tax of 3.5% or 8.75% on unrepatriated earnings
Schwarz spent some time talking through full expensing of domestic acquisitions/interest disallowance and the potential harm it might do, warning that the more results you get short term, the more problems you might get in the long term. One example he threw out was an acceleration of acquisitions in the context of bonus depreciation a few years ago. While this gave the economy a boost it needed as we were pulling out of the recession, there’s things businesses would have put in service now but they did so two years ago.
The key point from the blueprint plan Schwarz spent the most time discussing was the border adjustability. Border adjustability is worth 1.1 trillion dollars in additional revenue, equivalent to a 10 point reduction in corporate tax, so obviously something of interest to business owners. The key to border adjustability involves taxing only domestic activities, meaning anything imported or exported does not count as a cost—it’s a 0 for tax purposes.
To further illustrate how border adjustability could be a massive win for businesses, Schwarz outlined a simplified example:
Because of the enormity of the repercussions for border adjustability, Schwarz called it the linchpin of the blueprint. However, as it stands right now, he estimated a 100:1 chance of it passing. If the given proposal is significantly reduced, he moved his estimation to a 50/50 chance.
During the discussion and towards the end, Hamrick and Schwarz answered a few questions from the attendees about tax reform.
Q: If republicans go through reconciliation, could they achieve meaningful tax reform?
Schwarz reminded the forum that the problem with budget reconciliation is it cannot increase deficit outside of the 10 year budget window. Whatever the reform is, you have to turn it off and start again after 10 years. That’s what happened with the 2001 Bush tax cuts. Extensions can come, and they did in 2011, but expirations will happen.
Hamrick spoke to this point and explained for permanent tax reform to take place, rather than budget reconciliation, the Senate would need 60 votes. Right now they have 52 Republicans, so they would need eight Democrat votes. Alternatively, Democrats might get even fewer seats during midterm elections, giving a boost to more permanent tax reform. Even if permanent reform does go through, there’s always going to be loose ends. If reconciliation does in fact turn out to be the only way, there’s a chance the Senate could up the budget window from 10 to 25 years, but that would be up to the Senate Parliamentarian.
Q: Would the territory adjustment change be applicable to expats and individual income?
The best answer Schwarz could give was simply, we don’t know. These are details that haven’t been included in the blueprint, but hopefully we’ll see legislative language this fall, and that’s where we’ll see answers to nitty-gritty questions like that.
However, this does bring up the interesting point about imports and exports of brainpower. The U.S. does export brainpower, so the export of expats should be encouraged, but what do we do about imports of brainpower? The answer here seems to be that the deduction of human cost is going to be determined by where human is. For example, if software engineers come to the U.S. and work and live here, those are deductible; on the flipside, if a service center in another country is owned by the U.S. and their people are trained here but they sit and work in another country, those will not be deductible.
Q: What does the timeline of a tax reform bill look like?
Schwarz laid out a timeline as follows:
- The House will complete a tax reform bill in time for Columbus Day recess of 2017
- The House will have minimal amendments and the bill will go to the Senate by the Thanksgiving recess of 2017
- The Senate will start discussing the bill in spring 2018
- The Senate will pass the bill by the Memorial Day recess (it is likely this bill will be different from the House’s, and they will need to reconcile the two versions)
- A bill will be ready for ultimate passage and presidential signature by Columbus Day 2018—this final version might be tax reform or a rearrangement of tax code on the deck
To wrap up the discussion, Mary Moore and Mel both left us with final remarks:
“If tax reform gets done sooner it will be because Republicans realize they are in power across the board, and they feel they have to pass something so their constituents will feel it before 2018 election.” – Mary Moore Hamrick
“Remember: Congress is like a group of 4th graders—until you tell the children they cannot go out for recess, the work does not get done. Once you threaten no recess, a lot of work can happen very fast.” – Mel Schwarz