03 June 2016

ACR News 06.03.2016 – Dynamic Scoring to Play Key Role in Tax Reform

>> Federal: Washington Roundup
>> Federal: Corporate Integration
>> Federal: Charitable Legislation
>> Federal: Election Update
>> Consider This: Dynamic Scoring
>> Top Reads: World Crises, Medical Research Drive Charity, Fidelity Report Says

Washington Roundup

The Senate and House of Representatives are on Memorial Day recess this week and will return June 7 for another three-week work period. On Wednesday, May 25, the House Ways and Means Tax Policy Subcommittee held a hearing to discuss tax reform. The panel emphasized the need to focus on growth, international competitiveness, and to restore confidence in our tax system. Scott Hodge, President of the Tax Foundation, expressed interest in getting rid of individual breaks in favor of a lower rate across the board. When asked by Rep. Lloyd Doggett (D-TX) if he opposes the charitable deduction, Hodge said he would trade the charitable deduction for a lower tax rate. As you may know, Hodge has held this position for a number of years.

Also on May 25, House Speaker Paul Ryan (R-WI) told reporters that each of the six task forces he created in February are on track to release detailed policy papers over the course of June. As you may recall, the task forces aim to address national security, tax reform, regulatory burdens, health care reform, constitutional authority, and poverty, opportunity, and upward mobility. We will be watching closely for language that touches on the sector’s priorities.

Corporate Integration

On Tuesday, May 24, Senate Finance Committee Chairman Orrin Hatch (R-UT) held the second in a series of hearings on corporate integration, and focused on debt versus equity financing. Corporate integration involves treating corporations like other pass-through entities, such as partnerships or LLCs, where only the shareholders pay taxes. Under current law, U.S. businesses pay an effective tax rate of about 37 percent on equity financing, while businesses receive a tax deduction on debt financing through interest payment deductions, which incentivizes debt financing over equity. Chairman Hatch’s corporate integration proposal would attempt to neutralize this distortion by implementing a dividends paid deduction, which would allow corporations to take a deduction on the dividends paid to shareholders, who would then pay tax on that income. Tax exempt entities, like pension plans and other retirement assets, were briefly mentioned, but nonprofits and charities were not discussed. Reports suggest Chairman Hatch could release his plan this month.

Both Chairman Hatch’s and Ways and Means Chairman Kevin Brady’s (R-TX) tax-reform proposals will rely on the help of the Joint Committee on Taxation’s dynamic scoring, which is the cost of a proposal developed by taking into account effects such as jobs, economic growth, and investment, to name a few. According to Politico, the scoring method is a “transparent attempt to make it easier to cut taxes by reducing their budget costs.” We are continuing to monitor and will provide an update when these proposals and subsequent scores are released.

Charitable Legislation

With colleagues in the sector, we are continuing to seek cosponsors for bipartisan bills in the both the House and Senate. On the Senate side, the Charities Helping Americans Regularly Throughout the Year (CHARITY) Act, sponsored by Senators John Thune (R-SD) and Finance Committee Ranking Member Ron Wyden (D-OR), has nine additional cosponsors. This legislation would streamline the private foundation excise tax to a flat one percent, expand the IRA charitable rollover to include distributions to donor-advised funds, and express the sense of the Senate that the scope and value of the charitable deduction should not be diminished in tax reform, among other provisions.

On the House side, the Grow Philanthropy Act (GPA) sponsored by Rep. George Holding (R-NC) expands the IRA charitable rollover to include distributions to donor-advised funds. As of today, the bill has 18 cosponsors and we are working with colleagues in the sector to gain more support. As you may recall, the Private Foundation Excise Tax Simplification Act sponsored by Rep. Erik Paulsen (R-MN), which streamlines the PF excise tax to a flat one percent, also remains active but more cosponsors cannot be added due to a procedural rule.

Election Update

On Thursday, May 26, presumptive Republican nominee Donald Trump reached the number of delegates required to secure the nomination before the convention. On the Democratic side, Hillary Clinton holds her lead over Senator Bernie Sanders (I-VT) with 2,312 delegates to his 1,545. The next Democratic and Republican primaries take place on June 7 in California, Montana, New Jersey, New Mexico and South Dakota, along with the North Dakota Democratic Caucus. The Democratic nominee needs 2,383 delegates to win the nomination.

Consider This: Dynamic Scoring

If you are familiar with “dynamic scoring,” mark yourself down as a tax geek of the highest order. Dynamic scoring is an obscure but important concept inside the world of taxes.

If you want learn about dynamic scoring, Wikipedia isn’t much help – that explanation is clear as mud:

Dynamic scoring predicts the impact of fiscal policy changes by forecasting the effects of economic agents’ reactions to incentives created by policy. It is an adaptation of static scoring, the traditional method for analyzing policy changes.”


The Tax Foundation actually does a pretty good job explaining the concept in a video it created advocating for the use of dynamic scoring.

A year or so ago, Republicans in Congress made dynamic scoring official. However, the devil is in the details. As one reporter noted, “They didn’t tell anyone how to implement it. They just said to do it…”

That task of figuring out how to do it is left up to the Joint Committee on Taxation (JCT). We reiterate, if you’ve heard of them, you’re probably a tax nerd. But, while not widely little known, the committee’s judgments on how much revenue tax proposals will raise or lose are the final say that lawmakers must use in considering tax legislation.

The next Congress is likely to pursue major tax reform. Just how the costs of those proposals will be impacted by dynamic scoring is an important factor that we are watching closely.

Top Reads

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