The voices of Tax Policy Center's researchers and staff
When Congress passed the Tax Cuts and Jobs Act (TCJA) last December, it may have seemed like the end of a major policy initiative. But, in reality, it was only the first step in a long, complex process of turning a new statute into a law that taxpayers can use.
Yes, I’m about to talk about tax regulations. About now you are thinking that there can’t be anything more tedious. But hang in there, this is important stuff. And it is even interesting.
Writing guidance for a new tax law is never easy. The revenue code is complicated and despite lawmakers’ promises, seems to get more complex with every rewrite.
The TCJA comes with many special challenges: It created entirely new tax regimes for multinational corporations and pass-through businesses such as partnerships. It was enacted quickly and many provisions did not go through the normal careful review process. As a result, the statute is filled with mistakes and inconsistencies. On top of all that, Congress passed the bill on Dec. 20 and chose to make nearly all of its provisions effective on Jan. 1, 2018, just 12 days later.
All that means that taxpayers and tax practitioners are living with the law without really understanding how it works. And Treasury must try to keep up. It is the classic case of building the plane as you fly it—seldom a good idea.
Filling in the blanks
At an April 9 Tax Policy Center Don Lubick symposium, tax experts--including several with long experience writing regulations--discussed how Treasury and the IRS will fill in the blanks of the TCJA. And the consensus was that it will not be easy.
I moderated a discussion with Barbara Angus, the chief Republican tax counsel of the House Ways and Means Committee; Lily Batchelder, former Democratic chief tax counsel of the Senate Finance Committee; Marty Sullivan, chief economist of Tax Analysts; and Dana Trier, who served as deputy assistant secretary for tax policy at the Treasury Dept. during the debate over the TCJA.
Our panel was followed by a discussion between TPC director Mark Mazur, who was Assistant Treasury Secretary for Tax Policy during the Obama Administration and Eric Solomon, who served in the same role during the George W. Bush Administration.
While the panelists disagreed over some key issues, they agreed on two key matters: In writing most tax guidance, Treasury must respond to conflicting goals and widely different taxpayer interests. And in the case of the TCJA, it must interpret an extremely complex law that is sometimes internally inconsistent and resistant to easy interpretation.
But what does that mean? For example, Lily argued that Treasury must act quickly but should also should be transparent, which can slow the process. Marty and Lily warned that while Treasury needs to respond to the legitimate concerns of taxpayers it must also protect the fisc.
Treasury and the IRS must fill in blanks left by Congress but without creating rules than are not supported by the statute. But even that is an ongoing process. Barbara and Dana said that Treasury and IRS will continue to consult informally with congressional staff through the reg-writing process. At the same time, the congressional Joint Committee on Taxation is preparing a “blue book” that will attempt to clarify the intent of lawmakers on matters where the legislation is unclear.
Racing to the bottom or frozen by uncertainty?
Lily suggested that Treasury could address some contentious issues by first issuing broad guidance aimed at blocking potential abuse, then coming back with a second or third round of rules as times goes on.
Then, there is the matter of how taxpayers respond to the absence of clear rules and other guidance. There, the panelists had very different perspectives.
As I wrote the other day, some taxpayers will seek the most aggressive interpretations of the law in an effort to minimize their tax liability. Lily warned that some will “comply with the letter or the law but not its intention.”
But Barbara said an important purpose of regulations is to help taxpayers comply with the law and not necessarily to prevent all tax planning. And Dana, who is counsel at the law firm of Davis Polk said that lack of clarity about the law is hurting taxpayers who cannot make major business decisions given the uncertainty of the post-TCJA environment.
For instance, large public companies may put off investments until they better understand the law. For them, long-term reputational risk may exceed potential short-term tax savings: What public company wants to be labeled at tax cheat?
While the participants at last week’s event had somewhat different views on the future, I suspect they all agreed with one prediction Eric made about the TCJA: “The guidance process will go on for years.”
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