Tax Insights
from Washington National Tax Services
2014 elections provide direction for
tax legislation
November 7, 2014
In brief
The 2014 midterm Congressional elections will change the balance of power in Washington and could
increase the prospects for significant tax legislation. When the 114th Congress convenes on January 3,
2015, Republicans will control both the House and Senate for the first time in eight years as President
Obama completes his last two years in office.
With voter exit surveys showing public frustration with political gridlock and continuing concerns over
the US economy and income growth, some in Congress are indicating that the election results have
increased interest in advancing tax reform legislation in 2015. President Obama on November 5
identified tax reform legislation that “closes loopholes and makes it more attractive to create jobs in the
United States” as one of many issues on which he hopes to work with a Republican-controlled Congress
next year. House Speaker John Boehner (R-OH) and current Senate Minority Leader Mitch McConnell
(R-KY) in a November 6 Wall Street Journal op-ed identified reform of an “insanely complex tax code
that is driving jobs overseas” as a priority for the 114th Congress.
Meanwhile, the current Congress returns November 12 for a ‘lame-duck’ session that will focus on
completing work on several pieces of legislation, including differing proposals in the House and Senate to
extend certain expired business and individual tax provisions. At this time, Congress is expected before
the end of the year to approve a temporary retroactive extension of expired tax provisions, but there is a
possibility that certain broadly supported provisions like the research credit and small business
expensing could be made permanent.
The current Congress also needs to act on legislation to fund the government and a bill to renew the
Internet Tax Freedom Act beyond December 11, when temporary measures expire. Legislation dealing
with national security, terrorism risk reinsurance, and defense programs, as well as nominations could
also occupy the attention of the House and Senate in the remaining weeks of this Congress.
Finally, there will be new leadership and new members for both the House Ways and Means Committee
and the Senate Finance Committee when the new Congress convenes next year.
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In detail
Priority tax issues for the lame-duck session
Tax extenders
The top tax policy priority for the lame-duck session is expected to be action on legislation addressing more than 50
business and individual tax provisions that expired at the end of 2013. With the House and Senate in November
conducting leadership elections and orientation sessions for newly elected members in advance of a Thanksgiving holiday
recess, the most likely time for action on tax extenders appears to be early December.
The Senate Finance Committee in early April approved an $85 billion tax extenders bill that would extend temporarily
nearly all expired or expiring tax provisions on a retroactive basis covering 2014 and running through the end of 2015.
Expired provisions that would be renewed as part of the Finance Committee bill include the research credit, CFC lookthrough, Subpart F active financing exceptions, and 50-percent bonus depreciation.
The House of Representatives has approved separate bills to extend permanently certain expired tax provisions, including
the research credit, 50-percent bonus depreciation, and section 179 small business expensing. The Ways and Means
Committee also has approved additional bills permanently extending CFC look-through and the Subpart F active financing
exceptions, but these bills have not been voted on by the House.
Congress is likely during the lame-duck session to approve a temporary retroactive extension of expired tax provisions. In
addition, Republican campaign victories increase the prospects for certain broadly supported provisions like the research
credit and small business expensing to be made permanent. In any scenario, Congress is not expected to offset the revenue
cost of tax extender legislation.
Observation: Interested parties should continue to reach out to legislators to indicate the importance of relevant
provisions. Publicly traded companies also will need to continue to monitor extenders due to the financial statement
impacts (i.e., the inability to record the benefits of the research credit and other expired provisions until tax extender
legislation has been signed into law).
Note: A year-end tax extenders bill could also include a package of technical corrections to previously enacted tax laws.
The Senate Finance Committee approved a technical corrections bill in April along with tax extenders legislation. House
Ways and Means Committee Chairman Dave Camp (R-MI) and Ranking Member Sander Levin (D-MI) introduced a
similar technical corrections bill in September.
Internet Tax Freedom Act
Congress is expected to renew the Internet Tax Freedom Act (ITFA), which was extended until December 11 as part of the
short-term FY 2015 spending bill. Some in the House and Senate have called for a long-term extension of ITFA to be tied
to legislative action on the Marketplace Fairness Act, which establishes a framework allowing states to require remote
sales tax collection. The Senate version of the Marketplace Fairness Act (S. 743) passed in May 2013, but differences on
the issue remain unresolved in both the House and Senate.
Tax treaties
The Senate is not expected to ratify pending tax treaties with Switzerland, Hungary, Chile, Spain, and other countries
during the lame-duck session. Tax treaties currently pending in the Senate will be returned to the Senate Committee on
Foreign Relations for reconsideration in January when the 114th Congress convenes. The prospect for Senate ratification
of tax treaties next year remains unclear due to procedural objections by Senator Rand Paul (R-KY).
Outlook for 2015
Tax reform would require compromise from both parties
The challenges faced by Congress in enacting tax reform – divided government and competing legislative goals – will
remain as significant in 2015 as was the case in 2014.
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Policy differences between President Obama and Congressional Republicans will continue to make it difficult to agree on
comprehensive business and individual tax reform, particularly with Democrats and Republicans sharply divided on how
to reduce federal budget deficits. While leaders in both parties have expressed support for lowering the US corporate tax
rate, President Obama has continued to call for increased revenues from upper-income individuals for deficit reduction,
while Congressional Republicans have called for lowering both corporate and individual tax rates in a revenue-neutral
manner. Also, Congressional Republicans in general have called for more fundamental changes in federal mandatory
spending on Social Security, Medicare, and Medicaid than President Obama and Congressional Democrats have been
willing to support.
Some Republicans and Democrats on Capitol Hill have expressed hope that there may be more common ground on
business tax reform issues. That could result in an agreement to advance a more targeted business tax reform focused on
reducing the US corporate tax rate – now the highest in the world among advanced economies – and providing tax relief
to businesses operating as pass-through entities.
There is some overlap in the approaches advanced by the two parties for lowering the corporate tax rate, but significant
differences exist, particularly with respect to proposals to bring US international tax rules more in line with the rest of the
world. The United States is the only G7 country that taxes the foreign earnings of its companies on a worldwide basis.
Meanwhile, G20 nations and the Organisation for Economic Co-operation and Development (OECD) continue to move
forward with an action plan to address base erosion and profit shifting (BEPS), and the European Commission has
launched several investigations of whether certain countries are providing prohibited ‘state aid’ in tax agreements with
certain companies.
A business tax reform bill also could include simplification of certain individual tax provisions, even if the current
individual income tax rate structure remains generally unchanged. For example, there has been bipartisan interest in a
proposal to consolidate individual education tax provisions offered by Ways and Means Committee members Diane Black
(R-TN) and Danny Davis (D-IL).
Several key tax policymakers in the House and Senate have said that the window for action on tax reform in the next
Congress will begin to close in late 2015, in advance of the 2016 presidential elections. For example, both current Finance
Chairman Ron Wyden (D-OR) and House Budget Committee Chairman Paul Ryan (R-WI) – who is seeking along with
Rep. Kevin Brady (R-TX) to succeed retiring Ways and Means Chairman Camp – have commented that tax reform will
either happen in 2015 or will have to wait until after the next president takes office in 2017.
Recent reform proposals
While House Ways and Means Chairman Camp is retiring at the end of the current Congress, the nearly 1,000-page
comprehensive tax reform draft bill that he released in early 2014 is seen as a potential roadmap for future tax reform
legislation. For more on Chairman Camp’s tax reform draft, see our February 28, 2014 WNTS Insight.
Senate Finance Committee staff under former Chairman Max Baucus (D-MT) issued a series of tax reform discussion
drafts in late 2013. See our WNTS Insights for details on these discussion drafts. Click here for the Finance staff discussion
draft on cost recovery, click here for the Finance staff discussion draft on international reform, click here for the Finance
staff discussion draft on tax administration, and click here for the Finance staff discussion draft on energy.
White House officials continue to point to President Obama’s 2012 ‘framework for business tax reform’ as a signal of the
Administration’s interest in tax reform. President Obama is expected to again call for action on tax reform in the FY 2016
budget that he will propose to Congress early next year. For more on the President’s framework, see our February 22, 2012
WNTS Insight. For more on tax proposals in the President’s most recent budget, see our March 4, 2014 WNTS Insight.
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Budget reconciliation and tax reform
Under Senate rules, most legislation generally needs 60 votes to advance. A key exception to this requirement is legislation
considered pursuant to budget reconciliation rules, under which a bill can be passed with only a simple majority. Some
Republicans have suggested that Congress next year could use the budget reconciliation process to pass tax reform
legislation or a bill repealing the Affordable Care Act. Any bill passed by budget reconciliation still would be subject to veto
by President Obama. In addition, budget reconciliation rules impose significant limitations, including a requirement that
legislation enacted under reconciliation may not be permanent if it would result in a revenue loss beyond the period
covered under a budget resolution.
Gridlock or cooperation
Although Republicans have gained majority control of both the House and the Senate for the next two years, they do not
have the 60 votes required in the Senate to end a filibuster nor the tw0-thirds majority required in each chamber to
override a presidential veto. As a result, significant legislation generally will require bipartisan support to be signed into
law by President Obama. While President Obama will have an opportunity to define his second-term legacy by how he
works with a Republican-controlled Congress, House Majority Leader Kevin McCarthy (R-CA) recently noted that
Republicans in charge of both the House and Senate would need to demonstrate that they can govern in advance of the
2016 presidential elections.
One test of how well President Obama and a Republican-controlled Congress can work together next year will come when
Congress will need to act on legislation increasing the national debt limit. A temporary debt limit provision expires on
March 15, but the Treasury Department can use ‘extraordinary measures’ to meet the government’s debt obligations for a
period of time. Some economists have projected that the ‘X date’ – when Treasury extraordinary measures would be
exhausted and Congress would need to enact a new debt limit bill to avoid default – might not be reached until August or
later.
Other ‘must-pass’ bills to be addressed next year include Medicare physician pay levels, which are set to be cut by more
than 20 percent after March 31 when a temporary ‘doc fix’ bill expires, and a reauthorization of federal highway programs
also set to expire at the end of next March. A temporary reauthorization of the Export-Import Bank also expires on June
30, 2015.
In addition to tax reform, some in the House and Senate have pointed to international trade agreements and immigration
reform as areas of potential compromise next year. However, key Republican supporters of immigration reform have
cautioned that prospects for legislative action on that issue would be set back if President Obama issues an executive order
on immigration.
The risk of continued gridlock remains high. For example, some House and Senate Republicans are insisting that Congress
next year pass legislation to repeal the Affordable Care Act, revise the Dodd-Frank Wall Street Reform and Consumer
Protection Act, and make significant changes to other legislation from President Obama’s first term, notwithstanding
expected presidential vetoes. How much time may be spent on veto battles next year could affect the prospects for
significant legislation being enacted. At the same time, Senate Minority Leader McConnell on November 5 said that there
would be no government shutdown and no default on the federal debt under a Republican-controlled Congress.
Observation: Some believe that there may be more than 60 votes next year in the Senate for legislation to repeal the
Affordable Care Act’s medical device excise tax and to clear the path for construction of the Keystone XL oil pipeline
between Canada and the United States. Votes on these issues generally have been blocked in the current Senate, but such
legislation has attracted bipartisan support in the past. A Republican-controlled Congress may succeed in modifying
recently enacted legislation even if repeal efforts are seen as likely to fall short given President Obama’s veto power.
IRS oversight to increase
A Republican-controlled Senate is expected to increase government oversight hearings and investigations, in line with
recent efforts by Republican leaders in the House. The House Ways and Means Committee and the Senate Finance
Committee are likely to continue investigations of the Internal Revenue Service’s handling of applications for tax-exempt
status by certain conservative groups as well as IRS implementation of the Affordable Care Act.
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Tax Insights
Summary of election results
House Republicans currently are expected to increase their current 233-seat majority to at least 243 seats. The last time
House Republicans had a larger majority was after the 1946 elections, when they won 245 seats. While some races remain
undecided, Republicans remain firmly in control of House, since House rules allow the majority to control legislation with
a simple 218-seat majority.
Senate Republicans currently are on track to hold a majority of at least 52 seats in the 114th Congress, having achieved a
net gain of seven seats based on preliminary election results. A run-off election is expected in Louisiana, where none of the
candidates achieved the required 50-percent majority of votes, and ballots are still being counted in Alaska and Virginia.
Democrats in the current 113th Congress hold a 55 - 45 seat majority.
Many on Capitol Hill are already looking to 2016, when control of the White House will be determined and all 435 House
seats and one-third of Senate seats will be up for election. While Democrats in 2014 lost several Senate seats in states that
had been won in 2012 by Republican Presidential nominee Mitt Romney, 2016 Senate elections will be held in states that
could be more favorable to Democrats. Currently, 10 Senate seats held by Democrats up for re-election in 2016 are in
states that were won by President Obama in both 2008 and 2012. Republicans will have 23 seats up for election in 2016;
seven are in states won twice by President Obama and two are in states won by the President in 2008.
Current Composition of the 113th Congress, on November 4, 2014
Republicans
Democrats
Vacancies
House
233
199
3
Senate
45
55*
Projected Composition of the 114th Congress, as of November 6, 2014
Republicans
Democrats
Undecided races
House
243
179
13
Senate
52
45*
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* Includes two Independents: Senators Bernie Sanders (I-VT) and Angus King (I-ME).
Tax committee changes
House Ways and Means Committee: House Republicans are expected to decide later this month whether Rep. Paul
Ryan or Rep. Kevin Brady will succeed retiring Chairman Camp. There also will be three open Republican seats to fill on
the Ways and Means Committee, as a result of the retirements of Chairman Camp and Reps. Jim Gerlach (R-PA) and Tim
Griffin (R-AR). Leading candidates for these GOP Ways and Means seats are reported to include Rep. Kristi Noem (R-SD)
and Patrick Meehan (R-PA). The Democratic Ways and Means seat currently held by Rep. Allyson Schwartz (D-PA) – who
ran unsuccessfully in the Democratic primary for governor of Pennsylvania – currently is expected to be filled by House
Budget Committee Ranking Member Chris Van Hollen (D-MD), who previously served on the House tax committee.
Senate Finance Committee: Ranking Member Orrin Hatch (R-UT) is expected to become Finance Committee
chairman next year, with current Chairman Wyden taking the position of Ranking Member. In the current Congress, there
are 13 Democrats and 11 Republicans on the Finance Committee. The Senate will need to agree on an organizing
resolution to set the ratio of Republicans and Democrats on committees before it is clear how many seats will be open to
new members. Assuming the current ratio is maintained, Republicans would have two seats to fill, with leading candidates
believed to include Senators Roy Blunt (R-MO), Dan Coats (R-IN), and Dean Heller (R-NV). Democrats would not need to
fill the seat of retiring Senator John D. Rockefeller IV (D-WV), and the newest member, Senator Mark Warner (D-VA),
could have to vacate the seat he gained when former Chairman Baucus resigned to become US ambassador to China.
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Tax Insights
Key dates affecting tax legislation
2014 – 113th Congress

Nov. 12-14, 2014
House and Senate leadership elections

Dec. 6, 2014
Louisiana Senate run-off election

Dec. 11, 2014
FY 2015 ‘Continuing Resolution’ funding bill expires; Internet Tax Freedom Act expires
2015-16 – 114th Congress

Jan. 3, 2015
114th Congress begins

Late Jan. 2015
President delivers State of the Union Address

Feb. 2, 2015
President’s FY 2016 budget submission due

Mar. 15, 2015
Debt ceiling suspension period expires

Mar. 31, 2015
Expiration of Medicare physician pay SGR extension

May 31, 2015
Federal highway programs expire

Sept. 30, 2015
End of 2015 Fiscal Year

Jan. / Feb. 2016
IA, NH, SC, and NV caucuses/primaries

Summer 2016
National Party Conventions (Republican convention set for June)

Nov. 8, 2016
Presidential Election
The takeaway
Congress is likely during the lame-duck session to approve a temporary retroactive extension of expired tax provisions,
and Republican campaign victories increase the prospects for certain broadly supported provisions like the research credit
and small business expensing to be made permanent. Interested parties should continue to reach out to legislators to
indicate the importance of relevant provisions.
Policy differences between President Obama and Congressional Republicans will continue to make it difficult to agree on
comprehensive business and individual tax reform, but there still could be action on business tax reform in 2015. Whether
to promote ‘good’ tax reform or prevent enactment of ‘bad’ legislation (including using revenue raisers for other
purposes), interested parties will need to stay engaged in the tax reform process.
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Let’s talk
For a deeper discussion of how this might affect your business, please contact:
Tax Policy Services
Pam Olson
(202) 414-1401
[email protected]
Rohit Kumar
(202) 414-1421
[email protected]
Brian Meighan
(202) 414-1790
[email protected]
Scott McCandless
(202) 312-7686
[email protected]
Ed McClellan
(202) 414-4404
[email protected]
Lindy Paull
(202) 414-1579
[email protected]
Don Carlson
(202) 414-1385
[email protected]
Andrew Prior
(202) 414-4572
[email protected]
Larry Campbell
(202) 414-1477
[email protected]
National Economics & Statistics
Peter Merrill
(202) 414-1666
[email protected]
Drew Lyon
(202) 414-3865
[email protected]
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