[Senate Hearing 115-244]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-244

                        FISCAL YEAR 2018 BUDGET
                      PROPOSALS FOR THE DEPARTMENT
                     OF THE TREASURY AND TAX REFORM

=======================================================================

                                HEARING

                               BEFORE THE

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 25, 2017

                               __________



[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
                                     
                                     

            Printed for the use of the Committee on Finance
            
            
                               __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
30-208 PDF                  WASHINGTON : 2018                     
          
----------------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, 
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). 
E-mail, [email protected].             


                          COMMITTEE ON FINANCE

                     ORRIN G. HATCH, Utah, Chairman

CHUCK GRASSLEY, Iowa                 RON WYDEN, Oregon
MIKE CRAPO, Idaho                    DEBBIE STABENOW, Michigan
PAT ROBERTS, Kansas                  MARIA CANTWELL, Washington
MICHAEL B. ENZI, Wyoming             BILL NELSON, Florida
JOHN CORNYN, Texas                   ROBERT MENENDEZ, New Jersey
JOHN THUNE, South Dakota             THOMAS R. CARPER, Delaware
RICHARD BURR, North Carolina         BENJAMIN L. CARDIN, Maryland
JOHNNY ISAKSON, Georgia              SHERROD BROWN, Ohio
ROB PORTMAN, Ohio                    MICHAEL F. BENNET, Colorado
PATRICK J. TOOMEY, Pennsylvania      ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            CLAIRE McCASKILL, Missouri
BILL CASSIDY, Louisiana

                     Chris Campbell, Staff Director

              Joshua Sheinkman, Democratic Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, 
  Committee on Finance...........................................     1
Wyden, Hon. Ron, a U.S. Senator from Oregon......................     4

                         ADMINISTRATION WITNESS

Mnuchin, Hon. Steven T., Secretary, Department of the Treasury, 
  Washington, DC.................................................     6

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Hatch, Hon. Orrin G.:
    Opening statement............................................     1
    Prepared statement with attachment...........................    39
Mnuchin, Hon. Steven T.:
    Testimony....................................................     6
    Prepared statement...........................................    43
    Responses to questions from committee members................    43
Wyden, Hon. Ron:
    Opening statement............................................     4
    Prepared statement with attachments..........................    67

                             Communications

The Advertising Coalition........................................    71
Computing Technology Industry Association (CompTIA)..............    76
Federation of Exchange Accommodators (FEA).......................    77
National Multifamily Housing Council (NMHC) and National 
  Apartment Association (NAA)....................................    81
Puerto Rico Manufacturers Association (PRMA).....................    90
Reforming America's Taxes Equitably (RATE) Coalition.............    95
Real Estate Roundtable...........................................    97
Sports and Fitness Industry Association (SFIA)...................   104

                                 (iii)

 
                        FISCAL YEAR 2018 BUDGET
                      PROPOSALS FOR THE DEPARTMENT
                      OF THE TREASURY AND TAX REFORM

                              ----------                              


                         THURSDAY, MAY 25, 2017

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:05 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. 
Orrin G. Hatch (chairman of the committee) presiding.
    Present: Senators Grassley, Crapo, Thune, Isakson, Heller, 
Scott, Cassidy, Wyden, Stabenow, Nelson, Menendez, Cardin, 
Brown, Bennet, Casey, Warner, and McCaskill.
    Also present: Republican Staff: Chris Campbell, Staff 
Director; Mark Prater, Deputy Staff Director and Chief Tax 
Counsel; Chris Armstrong, Deputy Chief Oversight Counsel; and 
Jeff Wrase, Chief Economist. Democratic Staff: Joshua 
Sheinkman, Staff Director; Adam Carasso, Senior Tax and 
Economic Advisor; Michael Evans, Chief General Counsel; 
Elizabeth Jurinka, Chief Health Counsel; and Tiffany Smith, 
Senior Tax Counsel.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
              UTAH, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. Senator Wyden and members of the committee, I 
want to briefly comment on the horrific terrorist attack in 
Manchester. Americans are bound to our British friends by a 
common language, culture, and many other things such as the 
common law.
    As a boy I remember the strength it brought to us Americans 
to witness the courage of the British people as they stood 
strong in the battle of Britain. We know the resolve of the 
British people will once again vanquish a common foe.
    Today I think I can speak for all members of the committee 
when I say, ``God save the Queen, and God save Great Britain.'' 
We care a great deal for our friends overseas, and we wish them 
the best.
    Today's hearing has a dual focus. We will discuss the 
President's budget for fiscal year 2018 as well as ongoing 
efforts to reform our Nation's tax code.
    We are pleased to be joined here today by Treasury 
Secretary Steven Mnuchin, who will provide the administration's 
perspective on these important issues. We welcome you back to 
the committee, Mr. Secretary. As this is your first budget 
hearing before this committee, let me warn you, these hearings 
tend to be pretty grueling, but that is a necessary part not 
only of the budget process but also of the committee's 
oversight function. But not to worry; I think you are up to the 
challenge.
    Let me begin by saying a few words about the President's 
budget. Obviously, we are all still absorbing the finer details 
of this proposed budget. But at this point, I can say 
definitively I applaud the President for his focus on advancing 
pro-growth policies to get our economy moving, and I share the 
administration's concerns about our debt, which ballooned by 
nearly doubling under the previous administration.
    The President's budget envisions increased economic growth 
that eventually reaches 3 percent. As I understand it, that 
vision relies on implementation of a number of policies, 
including pro-growth tax reform, cutting unnecessary 
regulation, building infrastructure, and some other approaches 
as well.
    I think reforming health care is part of that, boosting 
energy production, reducing deficits. That would significantly 
improve the supply side of the economy. Of course, it is not 
unheard of that an administration places belief in the efficacy 
of its policy proposals.
    For example, in former President Obama's fiscal year 2010 
budget, growth was assumed to get to as high as 4.6 percent and 
was assumed to average 3.8 percent over an extended 8-year 
period. And that was premised on the administration's belief in 
its policy prescriptions.
    So while critics may want to criticize the optimistic 
nature of the budget's growth projections, it is, I believe, 
more realistic than a number of budget proposals that we have 
seen in the past, particularly some that came from the previous 
administration.
    I also share the overall goal in the budget to reduce 
deficits without raising taxes, keeping in mind that our 
Nation's debt nearly doubled during the previous 
administration. We have a number of difficult choices ahead of 
us as we work to address inefficiencies and reform wasteful 
programs and agencies. That difficulty is reflected in the 
budget.
    I look forward to continuing to examine the various 
proposals and to hearing Secretary Mnuchin's insights about the 
items in the budget that we are going to discuss today.
    I would like to spend just a few minutes discussing the 
other element of today's hearing, and that is tax reform.
    For 6 years now, I have been beating the drum on tax 
reform. I sought to make the case for reform here in the 
committee, on the Senate floor, in public forums and events, 
and in private conversations.
    I have not been alone. There has been a bipartisan 
recognition--one that I think is growing more by the day--that 
our current tax system does not work. Throughout this endeavor, 
I have stated numerous times that if we are going to be 
successful, we will need to see engagement from the President.
    Before anyone writes that off as a political statement, let 
me make it clear that I was not simply advocating for the 
election of a Republican President. On the contrary, I 
repeatedly implored President Obama to engage with Congress on 
tax reform, but to no avail.
    The current administration put out a tax reform framework 
earlier this month, one that I think can serve as an outline as 
this effort moves forward, keeping in mind that, as with any 
major undertaking, we will need to be realistic and commit to 
practicing the art of the doable.
    I expect that you will get a number of questions about the 
tax plan here today, Secretary Mnuchin. In addition, I expect 
we will hear a lot about the process by which tax reform will 
move through Congress.
    On that point, we have already heard a few demands from my 
friends on the other side of the aisle, stated as if they were 
preconditions for any serious engagement on tax reform. My hope 
is that these are not really preconditions, but still I do want 
to address one of them briefly here today.
    One of the demands we have heard is that Republicans 
abandon the use of budget reconciliation for tax reform. This, 
in my view, is an odd demand. Historically speaking, most major 
tax bills that have moved through reconciliation have had 
bipartisan support.
    In fact, in the past, when Republicans have controlled the 
House and Senate along with the White House, all of our tax 
reconciliation bills have enjoyed some Senate Democrat support.
    If we can reach agreements on policy, there is absolutely 
no reason why Democrats could not agree to support a tax reform 
package moved through the reconciliation process. I cannot 
image a scenario in which my Democratic colleagues would be 
more amenable to compromising on tax reform policy if 
reconciliation is taken off the table.
    In fact, the only thing we would accomplish by foreclosing 
the use of reconciliation would be to ensure that the minority 
would be able to more easily block any bill from passing, which 
is a strange demand to make before beginning a good faith 
negotiation.
    In any event, whether this is truly a precondition or 
simply a rhetorical point on the part of my colleagues, let me 
be clear: my strong preference is that our tax reform efforts 
be bipartisan. I have reached out to my colleagues on both 
sides of the aisle and sincerely hope that both parties can be 
at the table together.
    I think I have more than adequately demonstrated my 
willingness to work with my Democratic colleagues on this 
committee and elsewhere. My intention is to continue working 
with my Democratic colleagues on tax reform so long as they are 
willing to engage.
    I do not want to speak for Secretary Mnuchin today, but I 
think it is safe to say that he shares this desire and is 
similarly committed. And I think he is committed to working 
with our Democratic colleagues on this effort.
    With that, let me once again thank the Secretary for being 
here today. I look forward to a rigorous and thoughtful 
discussion of these and other issues.
    With that, I will turn to my colleague and friend, Senator 
Wyden, for his opening remarks.
    [The prepared statement of Chairman Hatch appears in the 
appendix.]
             OPENING STATEMENT OF HON. RON WYDEN, 
                   A U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you very much, Mr. Chairman.
    Let me say, also, that on our side, we very much share your 
view with respect to these despicable acts in Manchester. A 
number of us serve also on the Intelligence Committee: Chairman 
Burr, Vice Chairman Warner, and myself. So we understand that 
your points are very well-taken, and we share them.
    The Chairman. Thank you.
    Senator Wyden. Mr. Chairman and colleagues, what the 
American people demand of us is bipartisan cooperation on 
taxes, health care, and the many other issues that affect their 
daily lives. Yet, what the new administration has offered is a 
one-page tax cut proposal that is shorter than the typical 
drugstore receipt, and a budget that looks like it was written 
by people who believe working families and seniors--who are 
walking on an economic tightrope--have life too easy.
    The one-pager puts forward numbers that do not come close 
to adding up. The math behind this plan would make Bernie 
Madoff blush. So without realistic tax numbers to analyze, I am 
going to focus my remarks in two areas.
    First, the administration's economic team says that the 
President's focus is on a middle-class tax cut. If this Trump 
plan was built for a middle-class tax cut, then Trump Tower was 
built for middle-class housing.
    On one side of the ledger, there is not a lot of detail on 
how the Trump tax plan would help working families or the 
middle class, just vague open-ended promises.
    Contrast that with how it treats the very fortunate, very 
few. Eliminating the estate tax and opening a new mile-wide 
loophole for the wealthy to exploit pass-through status is a 
prescription for more inequality in America.
    Right here in this room, Mr. Mnuchin and I agreed on the 
now-legendary Mnuchin Rule of ``no absolute tax cut for the 
rich.'' But after what we have seen in the tax plan and the 
budget, I guess we have to throw that in the waste bin 
alongside the Trump plan not to cut Medicare.
    Their health plan makes it harder for us to keep the trust 
fund solvent. There is the trillion dollars in Medicaid cuts, 
and there is the $70 billion in cuts to Social Security 
Disability.
    So the promise not to cut Medicare, not to cut Medicaid, 
and not to cut Social Security Disability also has not rung 
true.
    Now, to the second point. The Trump economic team is 
dusting off the old disproven idea that tax cuts completely pay 
for themselves. There is not a reputable economist out there 
who agrees with that.
    But you do not have to take my word for it. Look back at 
history. Just in the last few years, Governor Brownback of 
Kansas slashed rates for the wealthy and businesses, zeroing 
them out in some cases. He sold the plan by saying it would 
launch the State's economy into the stratosphere. Instead its 
revenues have cratered. Kansas is struggling to keep schools 
open and basic services running.
    Go back a little further to the early 2000s and the Bush 
tax cuts. Those tax cuts did not pay for themselves either. And 
then look back to the late President Reagan. He passed a big 
regressive tax cut in 1981. But lo and behold, in 1982 and 
1984, he had to raise revenue to make up for the deficits that 
were caused.
    Bottom line, the pay-for-itself argument behind this tax 
plan holds up as well as the flat-Earth theory, except people 
still try to defend it.
    Now I want to respond briefly to my friend, the chairman's 
point with respect to the process going forward, because I 
think he knows that I very much share his view that to pass 
lasting, job-creating tax reform that is more than an economic 
sugar high, it has to be bipartisan. It is not a haphazard 
exercise, just throwing a bunch of bullet points together 
because you have an op-ed article written by some campaign 
advisors.
    It takes a lot of careful consideration to write a 
bipartisan tax reform bill, and I know something about it, 
because I wrote two of them: one with our former colleague, 
Senator Coats, and one with one of our colleagues that all of 
you remember, Senator Gregg.
    The focus has to be on writing an economically responsible 
proposal that will create good-paying red, white, and blue jobs 
without heaping a new burden on the middle class. That is the 
kind of reform that will win the support of both sides and will 
last.
    But the point with respect to reconciliation, and I think--
this is not a debate about the desire of my friend, the 
chairman, Orrin Hatch, wanting to work in a bipartisan way, 
because he and I have done that on a lot of occasions. This is 
not a question of the chairman's intent, but the fact is, as 
the chairman himself noted, reconciliation is inherently a 
partisan process. That is what it is all about.
    It is a process that, in effect, puts a gun to the head of 
one side. So that is why there is such strong feeling on our 
side about not using reconciliation. And I want, in making that 
comment, to not diminish (a) my affection for the chairman, and 
(b) my desire to have a bipartisan bill, having written two of 
them. I would very much like, in accord with some of these 
principles that I have outlined--and I know some of my 
colleagues have said that too: they do not think the tax system 
works. It is a dysfunctional, rotting economic carcass. We 
understand that.
    But we have to ensure that we have a bipartisan process, 
and for that reason I just wanted to comment briefly on my 
friend's remarks.
    The Chairman. Well thank you, Senator.
    [The prepared statement of Senator Wyden appears in the 
appendix.]
    The Chairman. Today, I would like to extend a warm welcome 
to Secretary Steven Mnuchin. We are really grateful to have you 
here.
    Secretary Mnuchin was sworn in as the 77th Secretary of the 
United States Treasury on February 13, 2017. Prior to his 
confirmation, Secretary Mnuchin was the finance chairman for 
Donald J. Trump for President. In addition to traveling with 
the President around the country in that role, Secretary 
Mnuchin also served as a senior economic advisor to the 
President in crafting the President's economic positions and 
economic speeches.
    Before those activities, though, Secretary Mnuchin served 
as founder, chairman, and chief executive officer of Dune 
Capital Management. He also founded OneWest Bank Group LLC and 
served as its chairman and chief executive officer until its 
sale to CIT Group Inc.
    Earlier in his career, Secretary Mnuchin worked at the 
Goldman Sachs Group, Inc. where he was a partner and served as 
chief information officer. He has extensive experience in 
global financial markets and oversaw training in U.S. 
Government securities, mortgages, money markets, and municipal 
bonds.
    Secretary Mnuchin is committed to philanthropic activities 
and previously served as a member of the boards of the Museum 
of Contemporary Art Los Angeles, the Whitney Museum of Art, the 
Hirshhorn Museum and Sculpture Garden on the Mall, the UCLA 
Health Systems board, the New York Presbyterian Hospital board, 
and the Los Angeles Police Foundation.
    He was born and raised in New York City and earned a 
bachelor's degree from Yale University.
    Secretary Mnuchin, we are grateful to have you here. I 
appreciate your willingness to serve your country, and please 
proceed with your opening statement.

 STATEMENT OF HON. STEVEN T. MNUCHIN, SECRETARY, DEPARTMENT OF 
                  THE TREASURY, WASHINGTON, DC

    Secretary Mnuchin. Thank you. It is a pleasure to be here.
    Chairman Hatch, Ranking Member Wyden, and members of the 
committee, it is an honor to be here today. I am looking 
forward to working with members of Congress and this committee 
on passing important legislation for the American people.
    My number-one priority as Treasury Secretary is creating 
sustainable economic growth for all Americans. The best way to 
achieve this is through a combination of tax reform, regulatory 
relief, and protecting taxpayers. This also includes making 
some difficult decisions with respect to our budget.
    We are currently bearing the costs of excessive government 
commitments of previous years, and this has forced us into 
making hard choices. But the remarkable thing about economic 
growth is, it builds on itself.
    If we develop the right policies today, our children and 
grandchildren will reap the benefits of an ever-growing 
economy. Indeed, in the next 10 years, if we return to the 
modern historic average of above 3 percent annual GDP growth, 
our economy will grow by trillions of dollars. This will be 
meaningful to every man, woman, and child in this country and 
future generations.
    Tax reform will play a major role in our campaign for 
growth. It has been more than 30 years since we have had 
comprehensive tax reform in this country. This administration 
is committed to changing that.
    We have over 100 people working at Treasury on this issue. 
We are working diligently to bring tax relief to lower- and 
middle-
income Americans, as well as make American business competitive 
again. All this comes as we simplify the tax code and make it 
easier for hardworking Americans to file their returns.
    Finally, I would like to speak about the importance of free 
and fair international trade. Few doubt that free trade is a 
crucial component of economic growth, but trade deals that 
disadvantage American workers and businesses can hardly be 
considered either free or fair.
    In meetings with my international counterparts, I have 
stressed this dual importance. Just 2 weeks ago, I had 
productive meetings with the finance ministers of the G7, and 
earlier I met with the members of the IMF and World Bank. They 
understood our concerns, and we have approached our 
international dialogue with a renewed spirit of mutual 
understanding.
    In the President's address to the joint session of 
Congress, he spoke about the marvels this country is capable of 
when its citizens are set free to pursue their visions. 
Fundamental to that freedom is removing imprudent regulation 
and uncompetitive taxes from blocking their way.
    This has been a significant few months at Treasury. We have 
been studying, developing, and implementing policies that will 
put this country on the path towards sustained economic growth. 
In the coming months, we will work with this committee and the 
Congress in what we will look back on as an important time for 
this Nation's economy and our history.
    Thank you, and I look forward to answering your questions 
today.
    The Chairman. Thank you so much.
    [The prepared statement of Secretary Mnuchin appears in the 
appendix.]
    The Chairman. We are glad to have you here, and I 
appreciate the way you have taken over and are doing your work.
    Mr. Secretary, an op-ed was written by then-Senator Obama's 
senior economic advisors, Drs. Furman and Goolsbee, in the 
August 14, 2008, edition of the The Wall Street Journal. I will 
put that op-ed in the record here at this point.
    [The article appears in the appendix on p. 40.]
    The Chairman. In that op-ed, Drs. Goolsbee and Furman 
stated that then-Senator Obama's tax proposal would reduce 
revenues to less than 18.2 percent of GDP. That would be a 
revenue-to-GDP target that they apparently thought was 
desirable.
    That target certainly exceeded the Nation's long-run 
average for revenue to GDP, which the non-partisan CBO tells us 
has been about 17 percent over the last 50 years. 
Interestingly, the current administration's budget has revenues 
averaging 18.2 percent of GDP over a 10-year budget window, 
exactly what then-Senator Obama was advocating.
    Secretary Mnuchin, considering that taxes as a share of our 
economy are already heading higher and are projected to 
continue to rise above the historic average, and considering 
that the President's budget projects an average of 18.2 percent 
in revenues as a share of the economy, how do you respond to 
the critics who have argued that the President's budget does 
not raise enough revenues?
    Secretary Mnuchin. Mr. Chairman, thank you for pointing 
that out, and I look forward to reading that op-ed that you are 
putting in the record.
    I believe that, as you have pointed out, we have a 
significant amount of revenues relative to GDP, and 
particularly with economic growth, we think the critical issue 
is that we have tax reform that simplifies personal taxes, 
provides a middle-income tax cut, and makes our businesses 
competitive again.
    The Chairman. Well, some of my friends on the other side 
have argued that Congress should not pass tax reform under the 
budget reconciliation process. In fact, some have stated that 
the administration and leaders in the House and Senate should 
categorically take that option off the table before beginning 
any bipartisan talks on tax reform.
    Yet 4 years ago, the Democratic Senate had adopted a budget 
that included a reconciled tax increase of almost $1 trillion. 
That tax increase instructions' purpose was tax reform.
    Despite my objections to increasing taxes at that time, I 
agreed to work with then-Chairman Baucus on an intense 
bipartisan tax reform process. There were no preconditions or 
demands made that the Democrats abandon their reconciled tax 
instruction.
    There are other relevant examples from recent history that 
played out the same way. In fact, I think it is fairly safe to 
say that requiring that type of precondition, the categorical 
abandonment of reconciliation prior to negotiating, is without 
any substantive precedent.
    What are your thoughts on that, Mr. Secretary? Are there 
any process-related demands that you would like to make before 
you will be willing to work with both sides up here on Capitol 
Hill on bipartisan tax legislation?
    Secretary Mnuchin. Mr. Chairman, I have no process demands 
from my standpoint. I am hopeful that we can work with both 
Republicans and Democrats.
    I know we have had the opportunity to work with your staff. 
I know that my staff is going to be sitting down with Senator 
Wyden's staff and your staff later in the week, and we are 
hopeful that we can find common ground, particularly on the 
issue of making our business taxes competitive.
    We have a system that is highly uncompetitive. We need to 
put our workers back to work.
    The Chairman. Well, Mr. Secretary, the President's budget 
envisions increased economic growth that eventually reaches 3 
percent. As I understand it, that vision relies on an 
implementation of a number of policies, including pro-growth 
tax reform, cutting unnecessary regulations, building 
infrastructure, reforming health care, boosting energy 
production, and reducing deficits that would significantly 
improve the supply side of the economy.
    Of course, it is not unheard of that an administration 
places belief in the efficacy of its policy proposals. For 
example, in former President Obama's fiscal year 2010 budget, 
growth was assumed to get to as high as 4.6 percent, and it was 
assumed to average 3.8 percent over an extended 8-year period. 
And that was premised on the administration's belief in its 
policy prescriptions, particularly the impact of a so-called 
``stimulus.''
    Now, Mr. Secretary, could you spend a little bit of time 
explaining why the administration believes that its policy 
proposals, including but not limited to tax reform, can 
generate sustained higher economic growth?
    Secretary Mnuchin. Mr. Chairman, we firmly believe that a 
combination of tax reform, regulatory relief, and trade 
policies will return us to levels of 3-percent sustained 
economic growth with GDP. And I believe our long-term 
projection is actually 2.9 percent in the budget. It takes 
several years to get to 3 percent.
    I have heard lots of economists tell us why that is not 
going to be the case, but we are committed to have policies to 
get us back to what are appropriate growth rates in this 
country.
    The Chairman. Well, thank you.
    Senator Wyden?
    Senator Wyden. Thank you very much, and welcome, Mr. 
Secretary.
    Secretary Mnuchin. Thank you.
    Senator Wyden. Mr. Secretary, nothing shows tax unfairness 
more clearly than your proposal to let the fortunate few 
convert their ordinary income into business income without 
strings attached, pay the lowest 15-percent tax rate, and also 
avoid Social Security and Medicare payroll taxes. In my view, 
it is a prescription for more inequality in America.
    So you are creating a massive new tax loophole. My reason 
for asking the question is especially because you cannot 
enforce the tax laws on the books now. Your current budget 
proposal asks for even deeper cuts to tax enforcement. How do 
you expect the American people to believe you can prevent the 
fortunate few from exploiting this new loophole when you cannot 
even stop the current tax cheats?
    Secretary Mnuchin. Senator Wyden, thank you. That is a very 
good question. And first, let me assure you that I have said 
repeatedly--I said this the other day at the Banking 
Committee--that we are absolutely committed to making sure that 
pass-throughs, that small and medium-sized businesses have the 
benefit of the business rate, that this is not just something 
for large corporations.
    Small and medium-sized businesses are the engine of growth 
in this economy, but we will absolutely make sure that rich 
people cannot use this as a loophole where they should be 
paying 35-
percent taxes on wages, and that they pay 15 percent instead. I 
assure you that will be in the code, and we will have very 
clear ways to enforce that.
    Senator Wyden. Mr. Secretary, respectfully, I just do not 
think that cuts it. I mean, I do not doubt that you believe 
that you can absolutely make it happen, you are absolutely sure 
it is only going to go for the little guy, the small business.
    But the reality is the tax cheats thrive, they thrive in 
the absence of clear, tough enforcement principles. And I just 
did not hear that now. What you said was you are interested, 
you are absolutely going to assure it, but this proposal has 
been out there, and we have not gotten any specifics about how 
this is actually going to be done. And if anything, since we 
talked about it last, the problem is even more serious because 
the budget proposal, again, cuts the enforcement budget. So I 
think the sooner you get that to us, the better.
    Now, your budget assumes 3-percent growth, which you claim 
adds $2 trillion to revenues. That is kind of a dubious 
proposition to me.
    You told us last week that this economic growth is what 
pays for tax reform, but the Trump budget does not include tax 
reform. So unless you make this clear to us, are you not 
double-counting the same $2 trillion to pay down deficits that 
you claim will pay for tax reform? I mean, this is kind of 
Bernie Madoff math, but maybe I am missing something. Tell me 
how it works.
    Secretary Mnuchin. No, we are absolutely not double-
counting. When the President's budget was done, we were not 
ready to have a full-blown tax reform plan that we could model 
into the budget. So we have not put that in.
    We have put in the economic impact, as you have pointed 
out. There are other areas that are extremely conservative, but 
I assure you, when we present a tax plan, we will not be 
double-counting the growth.
    Senator Wyden. So again, we are told that sometime down the 
road, you will not double-count. I would surely like to see, as 
we have talked about, more specifics, because I do not see how 
your plan does not blow a multi-trillion-dollar hole in the 
deficit. And that is going to harm the ability to generate more 
high-skill, high-wage jobs and the innovation we want to see.
    I will have more questions on the second round, Mr. 
Chairman.
    The Chairman. Well, thank you, Senator.
    Senator Grassley?
    Senator Grassley. Secretary Mnuchin, mine are more of a 
rifled type of questions that I have, not so general.
    I would like to bring your attention to a proposal that I 
have introduced with Senator Cantwell that is very much aligned 
with the President's ``America first'' agenda. The American 
Renewable Fuel and Job Creation Act is what it is called.
    It would convert the current biodiesel blender's credit to 
a producer's credit. The switch ensures that the tax credit 
incentivizes domestic production and taxpayers are not 
subsidizing imported fuel like we are doing now.
    With biofuel imports nearly doubling from 510 million 
gallons to almost 1 billion gallons in 2016, this change is 
critical to ensure the credit is supporting the domestic 
industry rather than subsidizing foreign imports that often 
already receive favorable treatment from their home country. So 
it is not really a question, but for you to understand that 
from Argentina, we are getting all this biofuel, and the 
taxpayers of the United States are subsidizing that import just 
like we are attempting to incentivize domestic production.
    So we want to change it so we do not subsidize that import. 
I would like to hear if you, kind of--I would like to hear you 
say you agree with me.
    Secretary Mnuchin. It sounds like a good plan, and I look 
forward to working with you on the details of that.
    Senator Grassley. Okay. Question number two--I appreciate 
your and the President's dedication to pro-growth tax reform.
    A key aspect of that is jumpstarting by reducing corporate 
tax rates 35 percent to 15 percent. This makes sense given 
that, according to the OECD, the corporate tax is the most 
harmful form of taxation to economic growth. However, the devil 
is in the details.
    For instance, the Camp tax reform proposal sought to lower 
the tax rate to 25 percent, in part, by slowing depreciation. 
However, as evidenced by the Joint Committee on Taxation's 
dynamic revenue estimate of the Camp proposal, the slowing of 
depreciation undid much, if not all, of the positive growth 
effects of the lower rate.
    So, question: the President's tax reform outline is silent 
on depreciation. Could you shed some light on where the 
administration stands on depreciation? Would the administration 
favor slowing depreciation, accelerating depreciation, or fully 
expensing it?
    Secretary Mnuchin. Thank you, Senator. That is a very good 
question, and we fully support the idea that capital goods and 
investment in capital are what fuel the growth of this economy. 
So no, we do not support slowing depreciation, and we are 
looking at various different alternatives as we build the tax 
plan.
    Senator Grassley. Okay. I am not going along the lines of 
the same question that Senator Wyden asked about the 15 percent 
for small business. It is a little more directed to how wide of 
a coverage that would be. Will the 15-percent rate on pass-
through business income be applicable whether we are talking 
about a simple family farmer sole proprietorship, a small 
family partnership, a subchapter S corporation, or any other 
pass-through entity?
    Secretary Mnuchin. It will be, but as I said, we want to 
make sure that we put rules around this that can be easily 
managed by the IRS with technology, so that wages are not 
abused in that system, and that large private companies cannot 
abuse this system and use it for getting around the personal 
tax system.
    Senator Grassley. Yes, and I appreciate that, and that is 
what you should try to do. My question is more related--would 
there be any part of small business that would be treated 
differently than another part of the small business----
    Secretary Mnuchin. No; they will all have the benefit of 
that.
    Senator Grassley. Okay.
    This will be my last question.
    While the Camp tax reform approach slowed depreciable 
lives, the House tax reform blueprint takes the opposite 
approach and goes for full expensing. However, part of the 
tradeoff for full expensing is that the House plan would 
generally eliminate interest as a deductible business expense.
    Do you view this as an acceptable tradeoff, and do you 
support any limitation on the deductibility of interest?
    Secretary Mnuchin. Again, I think that is a very good 
question, and something we are looking at carefully. We are 
also reaching out to lots of different groups.
    I have heard some very strong concerns from small and 
medium-sized businesses that interest is an important part of 
what they need to be able to deduct, and our preference is to 
keep the interest deductibility, but that is one of the issues 
we are looking at.
    Senator Grassley. Thank you.
    The Chairman. Thank you.
    Senator Nelson?
    Senator Nelson. Thank you, Mr. Chairman.
    Mr. Secretary, good morning. This is very encouraging to 
hear the commentary about wanting to make things fair for small 
business. Were your commentary not to become a part of the 
overall agreement at the end of the day--in which you would get 
the small business tax way down--I would like for you to look 
at a bill that Senator Collins and I filed which makes sure 
small businesses do not have a higher tax rate than 
corporations; in other words, if you just changed the existing 
tax code, instead of them paying a rate much higher at an 
individual rate, that they would pay a rate no higher than the 
corporate rate.
    I hope you will take a look at that as a backstop. But you 
are proposing something even further. Is that correct?
    Secretary Mnuchin. That is. I hope we do not need your 
backstop, but we do look forward to working with you.
    Senator Nelson. All right. Well there is one bipartisan 
suggestion----
    Secretary Mnuchin. Thank you.
    Senator Nelson [continuing]. From Senator Collins and me.
    Now, in the President's budget, there are large cuts to the 
Children's Health Insurance Program, Medicaid, food stamps, 
medical research at NIH, housing assistance for the low-income, 
especially with disabilities, and you eliminate subsidized 
student loans. You eliminate the Community Development Block 
Grant program, and of course, for example, the city of Miami 
uses that to serve poor seniors on Meals on Wheels.
    And there is not a full offset for tax reform, the overall 
tax reform. I am afraid that what is going to happen is, you 
are going to starve these programs of their resources. So 
without a full offset, how can we have confidence in the 
President's tax reform plan, that it is not just what looks 
like: a veiled attempt to transfer wealth from the least 
privileged to the most privileged?
    Secretary Mnuchin. Senator, first of all, we look forward 
to working with you as we develop more details of the tax plan. 
We are not ready to release more details. We are working on--
obviously, there are lots of different issues for base 
broadeners that are critical to pay for the tax reforms, and we 
look forward to working with you.
    On the President's overall budget, I think as you know, the 
President's priority in the budget reflects a large increase in 
military spending, because the President believes that we have 
underinvested in the military, and national security is 
incredibly important. And across the board there were very 
difficult decisions on many good programs, and I know that we 
look forward to working with Congress on the budget as it moves 
forward.
    Senator Nelson. Well, I appreciate your attitude. You know, 
I support a big increase in defense spending too. But what are 
we to think when we see these programs--NIH being savaged--
there has to be balance in the budget. And that is what I want 
you to consider.
    Now, I would just point out that Florida is the State that 
has on its license tag the orange. The citrus industry is under 
threat of extinction because of an imported bacteria from Asia 
that gets into the tree's phloem or sap and kills the tree in 5 
years.
    We have the research. Senator Cornyn has a lot of citrus as 
well. They are making progress, but as we make this progress, 
we have not found the magic cure yet. But what we have done is 
to hold off the effect of the killing of the tree for a couple 
of years. But there are a lot of groves that are dead.
    What we need, if we are going to have a citrus industry--
and the production of oranges is way down. It is less than half 
what it was 7 years ago. That is how dramatic the decline is. 
And what we need is the ability for the grower to go in there 
and plow the abandoned grove and replant, since we now can 
extend the life of these trees until we find the magic cure.
    They need expensing all in the first year, instead of the 
expenses over a number of years because of the tremendous 
threat to the industry. I wish you would put that in your 
calculations.
    Secretary Mnuchin. Senator, I assure you that I love 
Florida orange juice, and as we look at the tax code, we will 
look at various different things that promote economic growth 
there and in other places.
    The Chairman. Okay.
    Senator Crapo?
    Senator Crapo. Thanks.
    Now I want to know if you love Idaho potatoes.
    Secretary Mnuchin. I do, indeed.
    Senator Wyden. Almost as much as Oregon potatoes. 
[Laughter.]
    Secretary Mnuchin. I love them both equally. Well said.
    The Chairman. Now, now.
    Senator Crapo. Secretary Mnuchin, first I want to thank you 
for being here. You have made yourself very available to this 
Senate in many different contexts as we work through some of 
the important proposals that the administration is pursuing, 
and I appreciate that.
    I want to use the first part of my time not so much to ask 
a question but to set the record straight on several items that 
have come up during the times that you have been here.
    When you were here at this committee previously and then 
last week at the Banking Committee, you and the President were 
attacked by some who said that your efforts to repeal Obamacare 
were a tax cut for the wealthy. I just want to set the record 
straight here about what the Obamacare tax policies are.
    When we debated the Affordable Care Act, President Obama 
made a pledge that there would be no tax increases in the bill 
on the middle class. I brought an amendment to simply achieve 
that objective in this committee, and on the floor, and each 
time we considered Obamacare. It was rejected by the other side 
each time, even after the Joint Tax Committee clearly explained 
that the Affordable Care Act contains a number of tax increases 
on the middle class.
    And so I just want to, for you--because you may hear this 
again in some of your contact with the members of the other 
side, be hit with that argument--I just want to set the record 
straight. It is very clear that the Affordable Care Act has 
multiple taxes on the middle class and its repeal will, in 
fact, bring significant tax relief to the middle class.
    Now, I am going to go on to talk with you about the budget 
projections. You have already indicated here today that there 
have been criticisms of the growth rate that has been assumed 
in the budget by the administration. Could you tell us what the 
growth rate is that is assumed in the budget?
    Secretary Mnuchin. I believe it is an average of 2.9 
percent. It gets up to 3 percent, but I believe over the 10-
year period, it is slightly lower.
    Senator Crapo. The information I have in front of me is 
that President Obama's first budget assumed a 4-percent growth 
rate, and in fact, that his first 4 budget years assumed at 
least 4-percent growth rate. Would you be aware of whether that 
is correct?
    Secretary Mnuchin. I believe that is correct.
    Senator Crapo. And if you look at the 10-year proposal, the 
10-year budget that President Obama put forward, they assumed a 
3.2-percent growth rate for the entire decade, the previous 
decade that we have just been through. What is the average rate 
for the decade that is in the budget? Did you just indicate 
that it is 2.9 percent?
    Secretary Mnuchin. I believe it is 2.9 percent, yes; below 
what their projection was.
    Senator Crapo. So the Trump budget proposals are even 
below, and significantly below, the same types of projections 
that the Obama administration projected in presenting their 
budgets?
    Secretary Mnuchin. That is correct.
    Senator Crapo. Now, let us talk about 3-percent growth 
rate. Is it unreasonable to expect that the United States of 
America could grow at a rate of 3 percent?
    Secretary Mnuchin. Senator, I know there are lots of 
economists who will give us reasons why structurally we cannot 
grow at that rate, but we firmly believe that with the right 
policies, that the economy can get back to what is more 
normalized growth rates of 3 percent or higher, and we are 
committed to do that.
    Senator Crapo. And when you talk about ``normal growth 
rates,'' what is the average growth rate of the United States 
for, say, the last 50 years?
    Secretary Mnuchin. It is over 3 percent.
    Senator Crapo. And currently, I think over the last 8 or 9 
years, we have seen roughly, well, under 2 percent--1.8 percent 
or 1.9 percent. Is that correct?
    Secretary Mnuchin. That is correct.
    Senator Crapo. So it seems to me that those who are saying 
that we cannot get above that threshold are saying that we need 
to be stuck in a, basically, plodding-along economy that cannot 
even get back to grow at its historic average. Would that be an 
accurate perception?
    Secretary Mnuchin. That would be accurate.
    Senator Crapo. Well, I appreciate your unwillingness to 
accept that, and I want to work with you to develop pro-growth 
policies for this country, whether it is tax reform, health-
care reform, housing and finance reform, regulatory reform, and 
I want to also thank you for the work you are doing at FSOC and 
at the Treasury Department.
    I look forward to your report coming out on regulatory 
improvements and statutory improvements that can be made to 
help reduce the drag on our economy that the Federal Government 
presents. And so, again, I just want to thank you for working 
for and fighting for these policies and assure you that I will 
assist and work with you to try to achieve the growth rates 
that you hope to see America achieve.
    The Chairman. Thank you, Senator.
    Senator Brown?
    Senator Brown. Thank you, Mr. Chairman.
    Secretary Mnuchin, welcome again.
    Your party has a history of, let us say, less than 
enthusiastic support for social insurance, for Medicare, or for 
Social Security, for unemployment insurance.
    Let me illustrate with a story. I was in Youngstown one 
day, and a woman stood up and said, I am 63 years old, I hold 
two jobs, I don't have insurance, I just want to--my goal is to 
live until I am 65 until I have Medicare. That was her goal; 
not to see her grandchildren, not to see the world. I mean, 
that is what this system has done to her.
    I hear your Secretary of HHS, your Cabinet colleague, talk 
about raising the eligibility age for Medicare to 67--but let 
me go to tax reform.
    The day you came out, the day your administration came out 
with its very short, not very descriptive tax reform bill, the 
next day, on the front page of the Wall Street Journal was the 
story about tax reform, but on page A-17, on the op-ed page, 
was an article by Martin Feldstein who was, by and large, the 
Godfather, the real thinker behind the Arthur Laffer kind of 
``tax cuts pay for themselves.''
    Well, what he said is--I will just read the pullout. 
``Gradually increasing the Social Security eligibility age can 
offset revenue loss from Trump's tax cuts.'' So, in spite of 
what the administration is saying, that you will grow out of 
these deficits from tax cuts, Martin Feldstein, the Godfather 
of thought of supply-side economics, has said, ``Well, it 
really will not work that way, and we should pay for it with 
Social Security cuts and raising the eligibility age.''
    And so I want to ask you a series of questions about that 
to clear it up. I am worried about how you will pay for this 
tax cut, because no economic theories really say we will grow 
our economy to the point that we will remake all the revenue, 
make it all back. But I want to ask--I want to clear this up, 
because I am worried about cuts to Social Security, Medicare, 
and Medicaid. It is clear you are going to do it for Medicaid, 
but here is my series of questions, if you would answer ``yes'' 
or ``no.''
    Can you give us your word that the administration will live 
up to the President's promise that he will not cut, alter, or 
privatize Social Security and Medicare?
    Secretary Mnuchin. I believe that is the President's 
intent, yes.
    Senator Brown. Even though, already in your plan, you are 
cutting $72 billion from disability insurance, which is, in 
fact, part of Social Security?
    Secretary Mnuchin. Yes, let me just assure you that the 
President wants to be absolutely clear that anybody who is 
eligible for disability will get their disability payments. 
There are some assumed savings in there as a result of, 
perhaps, people who can get off of disability, but the 
President absolutely intends to make sure that people who have 
disability and are on that get their benefits.
    Senator Brown. Well, I do not really believe the President 
when he also said he would not go after Medicaid and you have 
two different big hits to Medicaid: the HCA and the budget.
    But let me ask the next question. Would you commit to not 
raising the Social Security retirement age in order to pay for 
these tax cuts?
    Secretary Mnuchin. Yes.
    Senator Brown. Okay. Thank you.
    The administration has been very specific about what, in 
fact, you want to do on your budget cuts, but much less 
specific when it comes to tax reform. I mean, you have said you 
are going to go after children's health care, disability, 
infrastructure, Medicaid, Meals on Wheels, food stamps, 
economic aid for Appalachia, legal aid, Lake Superior, 
Americorps pensions--there is a whole host of things you said 
you would cut, but you are not at all specific on taxes yet, 
and it is a single page of bullet points. And I will, in my 
last couple of minutes, ask some very specific questions, and I 
want to ask if certain provisions are under consideration in 
tax reform.
    Are you considering changing the Earned Income Tax Credit 
and the Child Tax Credit?
    Secretary Mnuchin. It is not a focus of ours at the moment.
    Senator Brown. That is a ``no''?
    Secretary Mnuchin. Correct.
    Senator Brown. Are you considering changing the 
deductibility of interest?
    Secretary Mnuchin. Deductibility of mortgage interest?
    Senator Brown. Mortgage interest first.
    Secretary Mnuchin. No, we are not considering that.
    Senator Brown. Are you considering changing like-kind 
exchanges?
    Secretary Mnuchin. That is one of the many different things 
that could be looked at, but we have made no decision on it.
    Senator Brown. Are you considering changing the New Markets 
Tax Credit?
    Secretary Mnuchin. At the current time, we are not.
    Senator Brown. Are you considering changing the treatment 
of cash accounting?
    Secretary Mnuchin. Again, I would just say we are in the 
process of developing the overall plan, so we have not gone 
through all of these.
    Senator Brown. Are you considering changing LIFO--last-in, 
first-out accounting?
    Secretary Mnuchin. Again, it is not something we are 
considering at the moment.
    Senator Brown. Are you considering changing the treatment 
of life insurance companies?
    Secretary Mnuchin. Again, as I have said, we are developing 
the overall plan. So we are looking at many, many different 
ways of broadening the base. So, that specific one, I have not 
seen, but again, I just want to emphasize we are looking at 
things across the board.
    Senator Brown. Are you considering changing the treatment 
of State and local bonds?
    Secretary Mnuchin. Again, I have said our preference is 
strongly to keep the interest deductibility of State and local 
bonds.
    Senator Brown. Are you considering changing the Low-Income 
Housing Tax Credit, considering the sharp, deep cuts to housing 
programs generally. Are you considering changing the Low-Income 
Housing Tax Credit?
    Secretary Mnuchin. Again, at the moment, that is not 
something that I have seen.
    Senator Brown. Okay.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Casey?
    Senator Casey. Mr. Secretary, thank you for being here.
    Secretary Mnuchin. Thank you.
    Senator Casey. I have a couple of questions on tax cuts, or 
at least the proposal that we would anticipate.
    The Census Bureau tells us that the average American salary 
is just about $52,000 a year. And I know that both in previous 
testimony, but also in our conversation last week with members 
of the Finance Committee, you were careful about what you could 
guarantee in the final outcome versus what you would be 
proposing or the administration would be proposing. So in light 
of that average American salary of $52,000, can you guarantee, 
in terms of the administration's proposals, that millionaires 
and up will not receive a tax cut greater than that average 
American salary of $52,000 a year?
    Secretary Mnuchin. Again, we are going through a process 
across the House, the Senate, the administration, taking in 
lots of input. I have said that our intent is to have a middle-
income tax cut.
    I want to be careful in not guaranteeing anything, since I 
am not the ultimate--this is a----
    Senator Casey. But all I----
    Secretary Mnuchin [continuing]. This is a process that goes 
through multiple, different areas.
    Senator Casey. Mr. Secretary, all I am asking for is what 
will be the proposal of the administration. I realize the House 
and Senate could change things down the road.
    I am just asking, in your tax reform proposal, when it is 
finalized and presented, will that be the case that 
millionaires and up will not receive a greater tax cut than 
that $52,000?
    Secretary Mnuchin. Our intent is that, as opposed to the 
administration coming out with its own proposal, our intent is 
we are working with the House and Senate, that we will come up 
with a combined proposal that can pass the House and Senate and 
be signed by the President. And I have said before, when we 
come out with all the details, we will obviously have all the 
distribution, and people will be able to make whatever comments 
and whatever changes as it goes through the legislative 
process.
    Senator Casey. I will take that as a ``no,'' that there is 
not a guarantee.
    Secretary Mnuchin. Again, I am not personally guaranteeing 
anything at the moment.
    Senator Casey. Well, you ought to be able to guarantee what 
you can propose, what the administration can propose.
    Secretary Mnuchin. Again, I can guarantee you our proposal 
has been and will be a middle-income tax cut, and that is our 
priority.
    Senator Casey. I understand that, but that is not what we 
are looking for here, so I will take that as a ``no.''
    Also, we have in Pennsylvania almost 2 million people who 
earn less than $23,000 a year. So, if--let me ask a similar 
question. For someone making $1 million a year or more, they 
would get--or at $1 million, they would be getting a tax cut of 
about $23,000 based upon what we have heard so far. So what is 
your answer to those Pennsylvanians?
    Secretary Mnuchin. I am sorry, those Pennsylvanians who 
make $23,000? Is that your question?
    Senator Casey. Right.
    Secretary Mnuchin. I believe with the standard deductions, 
they will not be paying taxes.
    Senator Casey. Well, but that is what some of them make in 
a year. What I am asking you is, if the President's priority, 
as has been stated, has been not cutting taxes for the high 
end, then why would you include a tax cut for people at the 
high end of the income scale in terms of the proposal released 
in April? Because that is what we have read in that proposal.
    Secretary Mnuchin. Again, in that proposal, the idea was to 
eliminate almost all deductions with the exception of mortgage 
interest and charitable donations, which we think are 
important, and offset almost all those deductions with a 
reduction in taxes that is pro-growth, will grow the economy, 
and will create jobs. And we look forward to working with you 
and others as we work through the details.
    Senator Casey. Well, let us go through those deductions. 
Does the administration, in the tax plan that will be 
presented, plan to repeal the deduction for student loan 
interest?
    Secretary Mnuchin. Again, let me just state that we are 
looking at everything----
    Senator Casey. I understand that, but----
    Secretary Mnuchin [continuing]. So I do not have all the 
details, and I am not prepared to go through them on a line 
item.
    Senator Casey. You answered some questions before.
    Secretary Mnuchin. Yes.
    Senator Casey. Let us try it again. So you are not going to 
answer on student loan interest. How about higher education 
expenses?
    Secretary Mnuchin. Again, I do not expect those to change, 
but let me be clear. We are going through base broadening. So I 
am just not prepared--I am more than happy to come back when we 
release a plan and go through it on a line-item basis with you 
and have it marked up. So I am more than happy to do that. And 
I am also more than happy to seek input from you and your staff 
on what the priorities are, so that if we can try to do this on 
a bipartisan basis, we have your input.
    Senator Casey. That would be wonderful.
    Let me conclude with this. We have two letters that we are 
waiting on answers for. These are from January.
    The first is a letter I sent you regarding--based upon your 
statement in your testimony that you allege you sent a letter 
to HUD on reverse mortgages. So I would ask you to find that 
letter and respond to it, preferably by close of business 
tomorrow.
    And secondly, there is a letter that Senator Brown and I 
sent regarding foreclosure data for OneWest Bank, both 
nationally and State-by-State. So I would hope we could get an 
answer to both of those letters now that it is the end of May.
    Secretary Mnuchin. Let me be clear. I am no longer 
associated with CIT, which purchased OneWest Bank. I do not 
have access.
    Yes, I stand behind my comment that there was a letter to 
HUD, but I do not have access to that letter. I am sure HUD has 
it, and you could request it from HUD.
    The Chairman. Senator Warner?
    Senator Warner. Thank you, Mr. Chairman.
    Mr. Secretary, it is good to see you again.
    Secretary Mnuchin. Nice to see you, Senator.
    Senator Warner. Let me do one thing that I do not expect 
you to respond to since you do not have the budget here, but 
first of all, Director Mulvaney--I was just up at Budget--has 
said the administration's policy is to make tax reform revenue-
neutral, and that is the administration's proposal.
    Secretary Mnuchin. Again, I have repeatedly said that it 
would be paid for with economic growth and base broadening.
    Senator Warner. Well, I am going to come back to that in a 
moment, because that could mean also cooking the books.
    In your budget on page 13, one of the proposals that you 
bake into your assumptions is repeal of the estate tax, which 
would benefit folks like you and me--I am not sure anybody else 
on the panel. But then curiously enough, back on page 27 of the 
budget--and again, you do not have it here, so I do not expect 
you to respond--you have a line item here that says estate and 
gift tax revenues are still coming in.
    To me, that appears to be double-counting, and maybe we can 
get that cleared up. As you know, when we talked in your 
confirmation hearings--you know, I applaud your effort to try 
to make our tax code more rational and try to lower corporate 
rates, do repatriation. I spent a couple years in this process 
and took some arrows from my own team in terms of entitlements, 
but also looking at net new revenues.
    I just have to tell you, sir, the nonpartisan CRFB, 
Committee for a Responsible Federal Budget, has estimated that 
your tax cuts and your outline would add about $5 trillion to 
the deficit over the coming decade. And with what you have 
answered to Senator Casey and Senator Brown, when you take 
charitable, home mortgage, retirement account deduction, and 
some of these others off the table, you cannot get $5 trillion 
in savings. As a matter of fact, you would have to take on at 
least one--I am not going to go through the whole list, but the 
largest remaining tax expenditure, when you take the big ones 
off, to go where the money is, is the deductibility of employer 
health care plans. Is that on the table? That is north of $200 
billion a year. That could get you some real revenues, but that 
would dramatically disrupt the health-care system.
    Secretary Mnuchin. Let me first assure you that our plan is 
not going to add $5 trillion, and I do not understand why they 
would have scored it, since they do not have the details.
    People like the Tax Foundation and others have not scored 
it, and I assure you, when we come out with all the details, 
there will be full transparency. This will be scored by Joint 
Tax as well as lots of outside groups, and we will provide our 
own view of the scoring. We have over 100 people in the tax 
department looking at lots of different scenarios, and we are 
working hard on that. We have no intention of doing something 
that would add trillions of dollars to the debt.
    Senator Warner. Well, right now at $20 trillion, as 
interest rates go up, for 100 basis points--again, we discussed 
this before--that just adds an additional debt service, $140 
billion a year in additional payments, right off the top. So, 
you know, I would argue you balloon the debt and whatever 
benefit you get from the tax cut is going to be erased by the 
additional deficit payments.
    Secretary Mnuchin. Senator Warner, I assure you that we 
appreciate the significance of the debt having gone up to $20 
trillion.
    Senator Warner. And again, both sides bear responsibility. 
All I would say, sir, is I have spent a couple years looking 
through these numbers pretty closely.
    I think based on reasonable, normal assumptions, with 
anything close to traditional scoring, even if you do get a 
little bit of a bump on dynamic scoring, you cannot get to $5 
trillion of tax expenditures without going after the largest 
ones like employer-based health care.
    I really fear that--you know, this becomes a lot harder 
than it looks, and I am worried about the 3-percent growth rate 
assumptions. I will look more. I am worried, as well, about 
dynamic scoring that has to include the tax cut assumptions and 
yet you are then saying they are not counted in the budget, so 
there does seem to be, again, double-counting.
    I am also very worried that we are taking domestic 
discretionary spending down to 3 percent of GDP. That is the 
lowest it has ever been, and we were both business guys. You 
invest in a business--business invests in education, plant and 
equipment, and staying ahead of the competition.
    A government does that by investing in education, 
infrastructure, and research and development. And 
unfortunately, your budget slashes investments in education, 
infrastructure, and research and development.
    That is not going to lead, I believe, to the kind of growth 
that you have in your underlying assumptions. I have only 3 
seconds left.
    One of the things that you said that I applauded during 
your confirmation hearings was that you felt that the IRS, to 
do its job, needed appropriate staff and resources, yet your 
budget cuts the IRS. Do you want to address that?
    Secretary Mnuchin. Sure. Let me first say I know you have 
tremendous business expertise, and we hope we can work with you 
and your staff on suggestions for the business tax. I know you 
appreciate that the system we have is just very complicated. 
The concept of worldwide income and deferral leaves trillions 
of dollars offshore, which makes no sense, and we need to get 
that money back to build jobs, so we very much hope that you 
will work with us on ideas to move forward on that.
    On the IRS, as I did say, I have spent now a bunch of time 
with the IRS, looking at things. I will tell you one of my 
biggest focuses--and I do have a technology background--is 
upgrading the technology at the IRS.
    We are very, very focused on the fact that we have 
underinvested in technology, and I am pleased to report that 
within the budget, we will protect what are big increases in 
technology in the IRS, and we will offset them in what we hope 
are savings in other areas. And obviously, we were looking to 
cut government spending, and I am pleased that we protected the 
IRS. There were other people who wanted to cut it more, and we 
are very comfortable with the spending level and some savings 
and big technology investments there.
    The Chairman. Senator Isakson?
    Senator Isakson. Mr. Mnuchin, I want to associate myself 
with the comments that Mr. Crapo made about your willingness to 
come to this committee and testify. And the job that you have 
done so far has been a real breath of fresh air, and we 
appreciate it.
    I also want to acknowledge that Sherrod Brown is the best 
one-question, ``yes'' or ``no'' asker I have ever seen in my 
life. And one of his questions was about Social Security, and I 
just want to follow it up, not by challenging Mr. Brown but by 
making a point.
    We have a $20-trillion debt today, is that correct?
    Secretary Mnuchin. Yes.
    Senator Isakson. Under most math, which is conservative, 10 
years from now it is going to be $134 trillion, principally 
because of the growth in the obligation of Social Security and 
other measures that are benefit programs; is that not correct?
    Secretary Mnuchin. I do not have the exact numbers, but 
directionally, I understand what you are saying.
    Senator Isakson. My only point is this: none of us in here 
wants to raise the cost of Social Security to anyone. However, 
if you look at 1983, when Reagan and Tip O'Neill, a Democrat, 
raised the eligibility age for Social Security from 65 to 66, 
they raised--I lost a year of Social Security, because I was 39 
years old in 1983 and did not turn 66 until 26 years later.
    But my point is, by recalibrating the formula in the out-
years, you can recover that debt over time and amortize it 
under the time value of money, which is good for everybody. So 
I just wanted to point out, none of us wants to raise the cost 
to anyone or prevent people from being eligible, but 
recalibrating the formula at a time out in the future for those 
who will be beneficiaries in the future can go a long way 
toward beginning to lower the obligation we are going to have 
as soon as a decade from now. So, I just wanted to make that 
point.
    Second, the budget documents, the messaging instrument--I 
want to message on three things really quickly.
    One, we were disappointed that there was no inclusion in 
the Corps of Engineers for any funding for the Savannah Port. 
The State of Georgia has put $248 million of its own money into 
that port in a joint-venture partnership with the United States 
Federal Government.
    We are in the process of deepening it now, and all of a 
sudden there is no additional money in there for this year's 
budget. Without that additional money in there, it puts out a 
higher cost in future years.
    I would appreciate your working with me to look at that to 
see if there is not some way we can reprioritize capital 
apportionment for this year to see to it the Port of Savannah 
gets additional funding. That is a parochial issue, and a 
selfish one, but it is important.
    Secretary Mnuchin. I will be more than happy to follow up 
with you and your staff.
    Senator Isakson. Third, also a parochial issue for myself 
and Senator Scott--I think I am correct, Senator Scott--is 
section 45 of the tax code, Production Tax Credits for Nuclear. 
Is that not correct?
    The Southern Company is building two nuclear reactors in 
Georgia, also in South Carolina. They are the only two nuclear 
reactors in the United States under construction now.
    Because of a problem with finances at Westinghouse and a 
bankruptcy, the ability of those plants to be finished is not 
as soon as we thought it would be. The Production Tax Credit 
section 45 ends at 2020; is that not right?
    We are asking you to take a look at an extension of that 
eligibility from 2020 out a few years. It does not cost you any 
more money, but the Federal involvement gives us the ability to 
borrow and leverage in such a way that you have cheap, 
affordable energy and can finish those plants. Otherwise, we 
lose the money that has been put into them and lose the 
opportunity to do so. So I do not expect an answer.
    Secretary Mnuchin. We will be happy to look at it with you.
    Senator Isakson. I would really appreciate it, and time is 
of the essence in doing so. I would love to talk to you about 
it.
    And lastly, for low- and moderate-income people, I have 
worked on the Free File Program for a long time. Are you 
familiar with Free File?
    Secretary Mnuchin. I am.
    Senator Isakson. I think it is very important we continue 
that. I think it ends in 2020 or some out-year. I would 
appreciate your taking the time when you get the chance to look 
at that and see if we cannot make that a permanent program for 
the American taxpayer, where they get free assistance in filing 
their income taxes to the United States of America. It is a 
good program.
    IRS should always be forward, and the Secretary of Treasury 
should be forward as well.
    Secretary Mnuchin. We have looked at that, and we agree 
with you and look forward to working with you on that.
    Senator Isakson. Again, thank you very much for the job 
that you are doing, Mr. Secretary.
    The Chairman. Okay. Senator Scott, and then Senator Bennet, 
and then we are going to close this down. The Democratic leader 
will have a couple of questions.
    Senator Scott. Thank you very much.
    The Chairman. You will have to excuse me. I have to leave, 
but I think you will be treated fairly. I expect you to be 
treated fairly.
    Secretary Mnuchin. Thank you, Mr. Chairman.
    Senator Wyden. Mr. Chairman, with your indulgence, if we 
have any Finance members, either on the Democratic side or the 
Republican side, who have not had their 5 minutes, I assume it 
would be acceptable to let them ask questions.
    The Chairman. That is right. Okay.
    Senator Wyden [presiding]. Senator Scott?
    Senator Scott. Thank you, Mr. Chairman and Ranking Member.
    Mr. Secretary, good to see you----
    Secretary Mnuchin. Nice to see you.
    Senator Scott [continuing]. So often in these chambers. God 
bless you. A couple of questions. I do want to associate myself 
with Senator Isakson's comments about the importance of 45J, 
the Nuclear Production Tax Credits.
    Really, what it comes down to is a commitment the country 
made to encourage States to look at ways to get back in the 
nuclear energy business. South Carolina and Georgia both said 
``yes.'' It seems like the Federal Government is not honoring 
its commitment to those projects, and that is what it boils 
down to, and there seems to be a suggestion that the 
administration, through Treasury and the IRS, may be able to 
provide a bridge from 2020 to 2022 or a couple of years longer 
in that process.
    But if I were an average person, and I am, sitting back at 
home, taking a look at the conversation that we are currently 
having around tax reform, it would be difficult to discern 
where that average person finds benefit in the conversation 
around tax reform, because we have done such a poor job of 
having a conversation that seems to get back home.
    The only real comment that was glossed over that I thought 
was really important was when you answered Senator Casey from 
Pennsylvania, when you answered his question. Senator Casey 
asked you a question about the impact of your tax reform 
package on that person earning about $23,000 a year, and your 
answer was, that person would essentially pay no taxes.
    There was a moment of silence there. I think it is really 
important to note that, as we have a discussion about tax 
reform, the direction we are heading in is that the person who 
is at the lowest end of the economic ladder really would have 
no tax liability in your tax reform package. Is that correct?
    Secretary Mnuchin. That is correct. By increasing the 
standard deductions, a huge chunk of people who cannot afford 
to pay taxes, will not, and 95 percent of Americans, we think, 
will be able to file their taxes on a simple large postcard 
without having to itemize.
    Senator Scott. Simplification.
    Secretary Mnuchin. Yes.
    Senator Scott. The second part of the conversation that I 
think the average person at home would really enjoy 
understanding and appreciating, because it takes a little time 
for us to get there in this committee--folks at home are a lot 
smarter than we give them credit for being, but we simply do 
not talk to them. We talk about them.
    So, when we have a conversation about the corporate tax 
rate, both Republicans and Democrats, both conservative and 
liberal economists, all come to the same conclusion, that the 
corporate tax rate is borne, essentially, by three groups of 
individuals.
    One group would be the employees who experience lower 
wages. So, if we are looking for a way to have a conversation 
with middle America about getting a raise at work, the 
corporate tax rate is one of the fastest ways for us to get to 
that higher income for the folks whom we care about. If we were 
to lower that rate, we could assume that some of the benefits, 
some of the savings, would go to employees.
    The second group that would benefit from a lower corporate 
tax rate would be the consumers who are buying that product, 
because, embedded in the actual price of it, is the tax for it.
    And then the third group are those folks who are in a 
position to make further investments so as to create more 
economic activity, or those folks who are shareholders in 
companies.
    Those three groups of individuals are the folks who 
actually bear the burden of corporate taxes. Is that about 
right?
    Secretary Mnuchin. It is. And multiple economic studies 
have shown that over 70 percent of the cost of corporate taxes 
is actually borne by the worker. So a major part of reforming 
the corporate tax system is an effort to increase wages and 
opportunities for workers.
    Senator Scott. My final point relates to the folks whom I 
care most about, folks back in South Carolina and around the 
country who are like my mother was, a hardworking single mom 
who struggled to make her ends meet, worked 16 hours a day, and 
needed more opportunities.
    And one of the things that we see in this conversation 
about reform is that, if we lower the corporate tax rate, we 
allow for repatriation. We go from a global system to a 
territorial system, and we include in that the pass-through 
entities, and we create some kind of a mechanism to make sure 
that there is not a perverse incentive to move the income in 
that pass-through entity from income to profit, which was the 
question of our ranking member. We can figure out how to have a 
mechanism to stop that.
    And then with regulatory reform, we should have a robust 
economic activity that leads to economic growth, perhaps the 
2.9 percent over 10 years.
    And the final part that would help those folks back home 
would be some emphasis on the workforce reinvestment. That gig 
economy, the technology economy, will displace a lot of 
workers, but if we have that in our sights, through the 
economic activity we could actually design a workforce 
readiness program that would marry the workers who are looking 
for work with the jobs where they lie, if we have that kind of 
synergy and are focused in our activities. Is that basically 
accurate?
    Secretary Mnuchin. That is, and we do believe that job 
training is an important part of economic growth and making 
sure workers are prepared.
    Senator Scott. My final question, which will be a question 
for the record--I appreciate you answering later--is a question 
about the FATCA. Are you familiar with the FATCA?
    Secretary Mnuchin. I am.
    Senator Scott. Those regulations, the reporting regulations 
be-
ing imposed on those property and casualty companies that have 
international exposure, doing international work--they are not 
trying to escape taxation.
    It appears that FACTA is an onerous burden on those 
companies. I would love to hear your response on how this 
administration would be in a position to follow up and see if 
there is something that we can do now.
    Secretary Mnuchin. Yes; my staff has made me aware of this 
issue, and we will follow up with you.
    Senator Scott. Thank you.
    Senator Wyden. Very good. Thank you, Senator Scott.
    My colleagues have been very patient.
    Senator McCaskill is next, and then I hope it will be 
Senator Bennet.
    Senator McCaskill. I think Senator Bennet has been here 
longer.
    Senator Wyden. Aren't you great?
    Senator McCaskill. I have been trying to make three 
hearings at one time.
    Senator Wyden. We all are.
    Senator McCaskill. I think he has been here for a while, so 
why don't we let Senator Bennet go first?
    Senator Wyden. Size seven halo.
    Senator Bennet?
    Senator Bennet. Okay, so let me just say, Claire McCaskill 
is--out of 100 Senators--my favorite Senator. [Laughter.]
    She was my favorite Senator before she did that, but the 
graciousness, I cannot tell you how much I appreciate it.
    Senator McCaskill. Thank you.
    Senator Bennet. Thank you, Claire.
    Mr. Mnuchin, thank you so much for your service. We are all 
grateful that you have taken the job that you have.
    Are you aware that we collect in revenue roughly 18 percent 
of our gross domestic product?
    Secretary Mnuchin. Yes. Chairman Hatch made that comment at 
the beginning.
    Senator Bennet. And are you also aware that we spend a 
little over 21 percent of our gross domestic product?
    Secretary Mnuchin. Yes.
    Senator Bennet. And so what you have presented is a budget 
that--and I am saying this so the tea party folks in America 
can hear it--you are presenting a budget that cuts more taxes. 
So they are now going to be lower than the 18 percent--
particularly with the economic growth that you have talked 
about--lower than 18 percent, and at the same time, we have a 
budget that actually spends more money.
    We are cutting taxes, and we are spending more money. Is 
that not correct?
    Secretary Mnuchin. Again, the budget does not model in our 
tax changes because we did not have them ready.
    Senator Bennet. Are you not cutting taxes in your budget?
    Secretary Mnuchin. We are cutting taxes.
    Senator Bennet. Thank you. So, the difference between the 
18 percent of GDP that we are collecting in revenue and the 
more than 21 percent of GDP that we are spending in this 
government, all the promises that have been made to the tea 
party about balancing the budget and all the rest, are broken 
in this budget because we are going to collect less in taxes 
and we are going to spend more money. Is that not correct?
    Secretary Mnuchin. I do not think that is correct over the 
10-year period of time.
    Senator Bennet. Well, over the 10-year period of time, one 
way you deal with that is by cutting domestic spending--not 
military, not defense, but domestic spending--by 40 percent. 
That is the proposal that you have made. Is that not correct?
    Secretary Mnuchin. The President's priority is to grow the 
military spending and offset that with less domestic spending.
    Senator Bennet. We understand the President wants to grow 
the military. He wants to cut taxes. He said he will not touch 
Medicare.
    By the way, tea party people, listen to this: for every 
Medicare dollar you pay in, $3 are taken out. So, we are going 
to continue to have a deficit in Medicare. We are going to have 
a deficit in the government. We are going to spend more in 
military spending. We are going to tax rich people less, and we 
are going to cut domestic discretionary spending by 40 percent. 
That is the plan. That is our plan.
    While the front page of the New York Times has tunnels that 
China is building through seven different countries in Asia, 
our plan is that we are going to cut our domestic discretionary 
spending by 40 percent. That is your plan, right? That is what 
the President told people in Ohio and Wisconsin and 
Pennsylvania, that he is going to cut that domestic 
discretionary spending by 40 percent so he can finance tax cuts 
for the wealthiest Americans.
    Secretary Mnuchin. That is not the case at all. As I have 
said before, the tax reform--and it is not just tax cuts, it 
will be tax reform--will pay for itself, and when we have the 
details, we are more than happy to go----
    Senator Bennet. I would love to go through the details, Mr. 
Secretary.
    Secretary Mnuchin. We are not prepared today to go through 
the details on that.
    Senator Bennet. Well, let me ask you a question about that, 
because you said you were not prepared to talk about details--
and we know you have put out a tax proposal. And I accept the 
fact that things will be modified and changed in the Congress, 
and I appreciate that.
    But will you say today that the Trump administration will 
not accept the tax reform bill that cuts taxes on average for 
high-
income taxpayers?
    Secretary Mnuchin. Again, what I said is----
    Senator Bennet. Yes, go ahead.
    Secretary Mnuchin. What I have said is, our priority is 
about a middle-income tax cut and to lower the top tax rate and 
offset it with a reduction of----
    Senator Bennet. Will you tell the American people today 
that your administration--because, at the end of the day, you 
get to sign a bill or veto a bill--your administration will not 
accept a tax reform bill from the Congress that cuts taxes on 
average for high-income taxpayers?
    Secretary Mnuchin. Again, I had some of these questions 
earlier, and I will repeat that----
    Senator Bennet. You did not answer them earlier. I am 
asking you to answer them now.
    Secretary Mnuchin. What I have said is, we are working very 
closely with the House and the Senate on an overall tax reform 
package. We are taking in lots of input, and when we have the 
details, we will be happy to go through them with you.
    Our objective is to create economic growth, to reduce 
business taxes----
    Senator Bennet. Let me ask it this way, Mr. Secretary.
    Secretary Mnuchin [continuing]. And to create a middle-
income tax----
    Senator Bennet. Will the President veto a bill, a tax 
reform bill, that cuts taxes on average for high-income 
taxpayers, that violates the Mnuchin Rule?
    Secretary Mnuchin. Again, the President will look at the 
overall package that has been----
    Senator Bennet. I just hope--Mr. Chairman, I hope the 
people who voted for this person are listening to these 
answers.
    The last question I would ask--and I know I am out of 
time--because Senator McCaskill was so kind, I just want to ask 
one question about Medicaid, so two questions, I guess.
    The health-care bill that you have endorsed and the 
President has endorsed--it is not a health-care bill in my 
view--but the bill that has passed the House cuts Medicare by 
roughly $850 billion. This budget seems to propose--is it 
another $600 billion in Medicaid cuts? I mean, are we up to 
$1.4 trillion in Medicaid cuts?
    Secretary Mnuchin. I do not have the numbers in front of 
me.
    Senator Bennet. Okay. Then, those are the numbers as I 
understand them. That is a cut to Medicaid of over 25 percent.
    In my State, 50 percent of the people are children. So I 
hear people, politicians talk about, go to work. They need to 
go to work. Children--are the children supposed to go to work? 
Are the people in nursing homes supposed to go to work? Are the 
people who are already working at a wage that will not allow 
them to have private insurance supposed to go to work? Where is 
the quarter of Medicaid--who is going to cover these people?
    Senator Wyden. As much as I share Senator Bennet's 
concerns, this has to be the last response. Then Senator Thune 
and Senator McCaskill.
    Senator Bennet. I apologize.
    Did you want to respond, Mr. Secretary?
    Secretary Mnuchin. There is a--we are slowing the rate of 
Medicaid, and I can assure you that children will be taken care 
of. It is not our intent that they will not have coverage.
    Senator Wyden. The order is Senator Thune and Senator 
McCaskill.
    Senator Thune. Thank you, Mr. Chairman.
    Mr. Secretary, what has the economic growth rate been for 
the past 8 years under the Obama administration?
    Secretary Mnuchin. It has been between 1.5 and 2 percent.
    Senator Thune. And what is the historic average?
    Secretary Mnuchin. Over 3 percent.
    Senator Thune. So is it fair to say that the policies, the 
economic policies, of the previous administration have not been 
conducive or created conditions that are favorable to economic 
growth, at least what we would consider to be normal economic 
growth?
    Secretary Mnuchin. Yes, I believe that to be the case.
    Senator Thune. So is it also fair to say, then, that part 
of the reason for that would be the heavy tax and heavy 
regulation that have been part of those economic policies?
    Secretary Mnuchin. Yes, I agree with you.
    Senator Thune. So it seems to me, at least, that as we talk 
about where we want to go for the country, we clearly want to 
get that growth rate back up to a more normalized rate, 
hopefully north of 3 percent. Would you agree?
    Secretary Mnuchin. That is our number-one priority.
    Senator Thune. Right. So in order to do that, you know--
clearly the tax increases, the heavy regulations of the 
previous administration, have not worked. It seems to me that 
simplifying our tax code, reforming our tax code in a way that 
makes us more competitive in the global marketplace, would 
certainly be a desirable outcome and result, and something that 
we ought to be able to work on up here on a bipartisan basis.
    I would hope my colleagues on the other side would join 
with us, and hopefully with you and your team, as we design a 
tax reform plan that, with any luck, will get us back up to 
that 3 percent growth. One of the reasons I ask that is because 
the best way to solve the long-term fiscal problems the country 
has is faster economic growth.
    If we get back up to north of 3-percent growth, I assume we 
will see a significant increase in government revenues. Would 
that be the case?
    Secretary Mnuchin. Yes; it is an over $2-trillion 
difference.
    Senator Thune. So to me, growth should be the goal. And I 
appreciate the fact that, although I disagree with aspects of 
the President's budget, there is an emphasis there on growth 
and on what tax reform can do to generate a higher rate of 
growth in the economy.
    I introduced a bill last week that is geared toward small 
and medium-sized businesses that we believe are an engine for 
economic growth and job creation in this country, and with that 
sector in mind, the bill focuses on faster cost recovery. The 
budget proposal that you put forward talks about lowering 
rates, which is the other lever that we can use to get greater 
growth in the economy.
    Could you tell me how you see faster cost recovery, like 
immediate expensing, actually playing into the administration's 
tax reform ideas as well?
    Secretary Mnuchin. Thank you, Senator. That is a very good 
comment.
    So first of all, we absolutely agree with you that small 
and 
medium-sized businesses are the engine of growth in this 
economy, and we need to unleash that growth.
    We are very focused on making sure that we have the 
appropriate policies on expensing capital goods to encourage 
people to invest, and as I stated earlier, we are looking at a 
variety of ways to increase depreciation.
    Senator Thune. Okay. I think that ought to be part of any 
tax plan that we come up with here.
    Mr. Secretary, under the President's April 21st executive 
order, you are in the process of identifying regulations within 
the Treasury Department that impose undue financial burden and 
complexity. I believe there are a number of final regulations 
that were promulgated by the last administration that should be 
on that list.
    What is unclear, however, is how you plan on handling 
regulations that were proposed but not finalized, ones like the 
estate tax valuation discount regulations that the Obama 
administration proposed in August of 2016. These regulations, 
if finalized, would make it more difficult for owners of family 
farms and businesses to pass them on to future generations and 
significantly increase the estate tax burden on family 
businesses.
    Mr. Secretary, as part of your review of regulations, will 
you include proposed regulations and withdraw those that were 
not finalized? That would give taxpayers confidence that these 
proposals will not move forward without at least being 
reproposed.
    Secretary Mnuchin. I can assure you, we are looking at 
those, and in particular, I am familiar with the family 
discount issue that we are reviewing.
    Senator Thune. Final question. I was pleased to see that 
the administration's tax reform framework seeks to preserve the 
incentive for charitable giving. Stakeholders have raised 
concerns, however, that increasing the standard deduction could 
create disincentives for charitable giving. Could you talk a 
little bit about whether or not you have looked at that 
potential interaction and if there are other steps that we 
could take to encourage charitable giving so that the 
generosity of Americans can continue to be put to work in our 
communities and to help those who are most in need?
    Secretary Mnuchin. We do support the need and encouragement 
for charitable giving, and that is why we wanted to leave that 
deduction in the tax code. And we are happy to follow up with 
you and talk to you about ideas for people who use the standard 
deduction.
    Senator Thune. Thank you. Thank you, Mr. Chairman. I thank 
the Secretary.
    Senator Wyden. Very good.
    Senator McCaskill?
    Senator McCaskill. Thank you.
    Secretary Mnuchin, while I know you have repeatedly said 
that there are no specifics in the budget, the budget document 
is full of specifics, including a specific claim that it 
balances the budget. That is a very specific claim. So, I think 
it is only fair that we continue to drill down on some of the--
a kind way of putting it is ``anomalies''--that are in this 
budget document, just from a financial perspective.
    Your budget assumes 3-percent growth, which I am not going 
to argue about with you here, but I think most economists in 
the country are vociferously arguing about the notion that 3-
percent growth is going to happen.
    And you say that contributes $2 trillion in dynamic revenue 
that goes to deficit reduction, based on the tables in the 
budget. But then we are told that that $2 trillion pays for the 
tax cuts. And I see nothing in the budget where the $5 trillion 
of revenue we are going to lose from the tax cuts is calculated 
in. So, either you are double-counting and someone is not 
paying attention to how you do accounting, or you just made a 
mistake. And I need to know which one it is.
    Secretary Mnuchin. Senator, I appreciate you bringing up 
that question, and I responded to a similar question earlier. 
So, first of all, the intent was not to do double-counting. As 
I have stated earlier, we are not far enough along in tax 
reform to have modeled in the impact of that. There are other 
areas of the budget that we think are conservative in our 
calculation of revenues, but I can assure you, when we have tax 
reform, there will be full transparency of it, and there is no 
intent to double-count or anything else along those lines.
    Senator McCaskill. So it was a mistake?
    Secretary Mnuchin. No, it was not a mistake at all. The 
budget----
    Senator McCaskill. Well, you cannot say tax reform is paid 
for by growth and then count that growth as against the 
deficit. Either it is paying for the lack of revenue we are 
getting from the tax reform, or it is going against the 
deficit. You cannot do both. That is beyond fuzzy math. That is 
double-counting.
    Secretary Mnuchin. Again, just to be clear, when the budget 
came out, we overlaid the administration's plans for growth, 
which are incorporated, and that is what is shown in there. 
Okay? We do not have tax changes, so we did not model in tax 
changes. There is full transparency----
    Senator McCaskill. Is the growth coming from the tax 
changes?
    Secretary Mnuchin. One of the things is----
    Senator McCaskill. Is the growth coming from the tax 
changes?
    Secretary Mnuchin. That is one of them, but there are also 
plenty of other economic policies----
    Senator McCaskill. Well, how did you come up with----
    Secretary Mnuchin [continuing]. Our trade policies, or 
whether it is our regulatory reform policies. There are plenty 
of other things that will also impact the growth.
    Senator McCaskill. It just defies understanding that you 
are going to project what the growth is going to be based on a 
tax cut, but you cannot put anything in the budget about what 
the lack of revenue is going to be because of a tax cut. That 
does not even make sense.
    I mean, how can you say you are going to have 3-percent 
growth and you are going to have all this growth and revenue 
because of the tax cuts if you never put in the budget what the 
tax cuts cost--even a ballpark? You did not even say, well, 
maybe it is going to cost $3 trillion. You did not do any of 
that in the budget, so how can this document even be taken 
seriously?
    Secretary Mnuchin. Of course it can be taken seriously, and 
I am sorry you feel that way. It was completely transparent. 
Nobody is trying to hide anything.
    Senator McCaskill. Okay. Well, I think that you cannot say 
that the growth of $2 trillion is going to pay for tax cuts and 
say it is going to reduce the deficit at the same time. That 
just does not make sense, especially when you are not even 
counting what the tax cut is.
    Let me go to something we talked about in your confirmation 
hearing, and that is the stability of the pension funds. You 
graciously--and I was impressed, and frankly, it indicated to 
me that you were willing to listen to folks who have real-life 
problems that nobody is helping with--you graciously agreed to 
meet with some of the Missouri truck drivers in your 
confirmation hearing to hear their plight. These people who 
have driven trucks 35, 40 years are now being told that they 
are going to have a mere fraction of the pension that they were 
promised and their families were going to rely on.
    I want to let you know that they are going to be in 
Washington in a few weeks. I want to save you a trip to 
Missouri if I can, if we could figure out a time when they are 
here to have a small group of them. We do not want to overwhelm 
you. We can ask for one or two representatives to come in and 
meet with you. I would ask you today if you would be willing to 
try to make time in your schedule to see some of these truck 
drivers?
    Secretary Mnuchin. I would. I think we were reaching out to 
your office about trying to bring people in from multiple 
states, but if you have people in, we will definitely----
    Senator McCaskill. We will try to coordinate with you, and 
maybe we can get multiple States in, because I think the 
problem is the same--their problem is the same no matter where 
they drove a truck. Basically, the promises made to them are 
going to be broken.
    Secretary Mnuchin. And I am much more familiar with this 
issue than I was at my confirmation. We have spent a lot of 
time looking at this. Part of it is a function of Treasury, 
where we oversee certain rules, but we appreciate the issue, 
and we look forward to working with you on it.
    Senator McCaskill. Thank you so much, Mr. Secretary.
    Thank you, Mr. Chairman.
    Senator Wyden. Senator Heller?
    Senator Heller. Mr. Chairman, thank you.
    And to you, Mr. Secretary, thank you for being here today.
    Secretary Mnuchin. Nice to see you.
    Senator Heller. Thanks for taking time to answer our 
questions. I want to talk about the Border Adjustment Tax here 
for just a minute, and get your feel on this.
    As you are well aware, the House Republican tax reform 
blueprint includes a 20-percent BAT tax. It is estimated that 
it would net around $1 trillion of revenue.
    You have cast the BAT as unessential to tax reform and said 
that it is not workable in its current form. Do you still feel 
the same way?
    Secretary Mnuchin. I do. I testified at the House 
yesterday. I had several questions on that. We have been 
working closely with the House on this, and we have expressed 
concerns and suggested that they should go back and rework it.
    Senator Heller. You also mentioned that there are plenty of 
other ways to raise that revenue. Can you shine some light on 
what you mean by these other ways?
    Secretary Mnuchin. I can. I think this is all about base 
broadening, and we are working hard to look at lots of 
different alternatives as to how to fill that gap.
    Senator Heller. Can you give us an example?
    Secretary Mnuchin. We are looking at everything, Senator, 
as you know. Nothing is off the table as far as we are 
concerned.
    Senator Heller. All right. Let me ask you some questions 
dealing with debt. I saw a report recently that said that the 
total U.S. consumer debt is approaching $13 trillion. When you 
talk of student debt, credit card debt, auto debt, we are 
looking at $13 trillion. Do you think that that will have any 
impact on your ability to grow the economy when we see such 
staggering debt out there?
    Secretary Mnuchin. We are concerned about that, and we are 
particularly concerned about the burden on students of student 
debt.
    Senator Heller. Have you guys looked at this and decided 
how much more debt can grow?
    Secretary Mnuchin. We have not, but we have people who are 
looking at that.
    Senator Heller. Okay. Well, would we anticipate that there 
would be answers soon on that?
    Secretary Mnuchin. I would be more than happy to follow up 
with you.
    Senator Heller. I would appreciate that.
    I want to change subjects here for just a minute and talk 
about investment tax credits and see if I can get your feel for 
alternative energy. Since I have been here in Congress and over 
the last couple of years, I have tried to look for some parity 
between, say, solar tax credits, geothermal tax credits, wind 
tax credits--and I am sure you are very familiar with these.
    In the PATH Act of 2015, some of these tax credits were 
left out. The production tax credits, specifically I am talking 
about commercial geothermal--and I am an all-of-the-above 
energy guy--and these alternative energies like solar, 
geothermal, and wind have huge potential in the State of Nevada 
as far as job creation, and are an industry that could do quite 
well.
    I want to know if you are aware of the issue of parity 
between these industries and if you have any concerns or 
problems with trying to find some equal treatment between the 
different industries?
    Secretary Mnuchin. I am only broadly aware of the issue, 
but I would be more than happy to follow up with you and your 
staff on it.
    Senator Heller. Okay. I would be happy to get some 
questions to you.
    I want to talk also about State and local tax deductions. 
Obviously, the State of Nevada is one that has no personal 
income tax, and we are able to write off sales tax. With the 
blueprint in discussions that we have had, everything is on the 
table, including the removal of those deductions. It would cost 
the average person in the State of Nevada about $1,000 more in 
taxes if those deductions were removed.
    I guess I need a commitment from you that as we go through 
this process, we can make sure that it is equitable and that 
individuals in the State of Nevada will, in fact, benefit from 
the proposal you have with or without these deductions.
    Secretary Mnuchin. I would be more than happy to work with 
you. And you do not have State taxes, so I can assure you, the 
people who have State taxes really call me on this one.
    Senator Heller. I can imagine.
    Secretary Mnuchin. But I hope you can appreciate that we 
are trying to get the Federal Government out of the business of 
subsidizing States.
    Senator Heller. I want to talk to you about one more issue, 
and that is mortgage debt relief. We have talked about 
mortgages in the State of Nevada in the past. And the declining 
home prices, rising foreclosure rates, frankly, have forced 
many families to sell their homes in Nevada for less than what 
they paid for them and, in some cases, less than the 
outstanding debt.
    I have worked with several members on this committee to try 
to find some relief for those individuals who are being asked 
to pay for taxes for income that they have never received. I am 
hoping that you would help address this.
    Secretary Mnuchin. Absolutely. I realize the serious issue 
of that, and we will follow up with you.
    Senator Heller. I appreciate that. I will get a list of 
questions to you----
    Secretary Mnuchin. Thank you.
    Senator Heller [continuing]. Get those follow-ups in there. 
Thank you, again, for being here today.
    Secretary Mnuchin. Thank you.
    Senator Wyden. Thank you, Senator Heller.
    Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Secretary, thank you for being here.
    Secretary Mnuchin. Nice to see you.
    Senator Menendez. Let me ask you, do you believe it is a 
good idea to cut Medicaid to provide tax cuts for the wealthy?
    Secretary Mnuchin. Again, we have no intention of cutting 
Medicaid.
    Senator Menendez. I am asking you as an idea. As an idea, 
do you believe that it is a good idea to cut Medicaid to pay 
for tax cuts for the wealthy?
    Secretary Mnuchin. That is not the intent of cutting 
Medicaid.
    Senator Menendez. So is your answer ``yes,'' ``no''?
    Secretary Mnuchin. No. My comment is that it----
    Senator Menendez. Well, whether or not it is your intent, 
do you believe--we are talking about, you know, the 
administration also sets policy views, so your deferral is 
amazing, but the administration sets policy views. Does the 
administration believe that it is a good idea to cut Medicaid 
to pay for tax cuts for the wealthy?
    Secretary Mnuchin. Are you referring to the--what are you 
referring to in the ``tax cuts for the wealthy''?
    Senator Menendez. Well, certainly, let's take the Mnuchin 
Rule.
    Secretary Mnuchin. So, are you referring to the taxes as 
part of Obamacare? Because we heard earlier, many of those 
taxes hit the middle-income----
    Senator Menendez. Well, I am referring to what the House 
Republican health-care bill does, because it cuts nearly $1 
trillion from Medicaid and it rips away health care from the 
most vulnerable in our society, and it hands the money over to 
the most privileged in our country.
    Secretary Mnuchin. I do not share your view that it hands 
the money over to the most privileged. A lot of the----
    Senator Menendez. But you share the view that it cuts 
nearly $1 trillion from Medicaid?
    Secretary Mnuchin. Again, it scales back the growth of 
Medicaid.
    Senator Menendez. It scales back? It cuts nearly $1 
trillion. You call that scaling back? I guess on Wall Street $1 
trillion is nothing.
    Secretary Mnuchin. No, $1 trillion is----
    Senator Menendez. In the lives of real people, it is 
something.
    Secretary Mnuchin. Senator, I appreciate your comments. The 
$1 trillion is, obviously, a lot of money. I realize that--I am 
happy to talk about the tax aspect of that----
    Senator Menendez. Well, let me ask you this.
    Secretary Mnuchin [continuing]. But the other areas on 
health care are out of my domain.
    Senator Menendez. Let me ask you this. Will the President 
adhere to his own budget and only sign a tax reform bill that 
doesn't increase the debt? ``Yes'' or ``no''?
    Secretary Mnuchin. Again, I think the President will look 
at--when there is an overall tax reform bill that can pass the 
House and the Senate, the President has always said he is 
willing to negotiate----
    Senator Menendez. So, he might sign one that increases the 
debt is what you are saying? That is a possibility?
    Secretary Mnuchin. What I would say is that the President 
always has said that he is willing to negotiate on these issues 
and he will make a decision, and I will make a recommendation 
when we have an overall bill.
    Senator Menendez. I know, but the question is----
    Secretary Mnuchin. The President is very----
    Senator Menendez. There are no policy standards here. You 
want us to judge in the absence of any executive policy 
standards. It is all very nebulous. I understand negotiation, 
but at the end of the day, there have to be some standards.
    Let me ask you this. Will the President commit himself to 
your own Mnuchin Rule and not sign a tax reform bill that cuts 
taxes on the top 1 percent?
    Secretary Mnuchin. The President is very concerned about 
the debt and wants to have plans to pay down the debt, and the 
President is very focused on there being a middle-income tax 
cut as part of this.
    Senator Menendez. Well, if you sign a bill that actually 
permits debt to take place, then that concern is not that 
great.
    Let me ask you this. Will the President sign a tax reform 
bill that does not cut taxes for all families earning under 
$100,000?
    Secretary Mnuchin. It is not his intent to do that. He 
wants a middle-income tax cut.
    Senator Menendez. It is not his intent. So does that mean 
``no,'' he will not?
    Secretary Mnuchin. I cannot speak for the President on what 
he will do in hypothetical situations.
    Senator Menendez. Well, you advise him. Would you advise 
him not to?
    Secretary Mnuchin. Yes, I would advise him not to, and we 
will make sure there are tax cuts in this process for the 
middle class.
    Senator Menendez. Will the President sign a bill that gives 
more tax cuts as a percentage of income to the top 1 percent in 
the middle class?
    Secretary Mnuchin. Again, I am not going to go through a 
bunch of hypothetical scenarios of what the President will do 
and what the President will not do. I am happy to explain what 
the President's objectives are, and we are moving through a 
process.
    Senator Menendez. Let me ask you these. Maybe these will 
have greater clarity. Will the President sign a tax reform bill 
that creates a new surtax for millionaires to shore up 
Medicare?
    Secretary Mnuchin. I do not believe that is in the current 
plan.
    Senator Menendez. So that would be a ``no''?
    Secretary Mnuchin. I said it----
    Senator Menendez. Will the President sign a tax reform bill 
that increases the estate tax?
    Secretary Mnuchin. I do not believe that is in the current 
plan.
    Senator Menendez. So that would be a ``no'' then. Will the 
President sign a bill that does not cut taxes on large 
corporations?
    Secretary Mnuchin. The President wants to make sure that we 
have a competitive business system, and for many large 
companies, they pay substantially less than the 35 percent. So, 
our intent is to lower the rate and broaden the base.
    Senator Menendez. So the answer to that is ``no.''
    So you have answered pretty clearly, definitively. You 
could not answer ``yes'' or ``no'' on anything else but pretty 
definitively that on those things, it paints a pretty clear 
picture of what his priorities will be.
    He will sign a bill that explodes the debt, leaves middle-
class families in the cold, breaks the Mnuchin Rule by cutting 
taxes for the top 1 percent, but he will not sign a bill unless 
it includes a giveaway to large multinational corporations.
    Secretary Mnuchin. Senator, in all due respect, okay, that 
is not what I said, and that is not the President's----
    Senator Menendez. Oh no, you did not say that specifically, 
but your line of questions and answers gives me that.
    Let me just say one final thing. I do not get--this sounds 
like Enron-type accounting. The budget, the Trump budget, has 
virtually no details on tax reform. Yet it assumes their 
nonexistent plan will create an additional $2 trillion in 
revenue, and it uses an imaginary revenue to plug an all-too-
real hole in the deficit. Besides the problem of counting your 
chickens before they hatch, the administration also assumes 
that that same $2 trillion in imaginary dollars will be used to 
offset tax cuts.
    So my question is, how did the administration estimate the 
macroeconomic effects of tax reform without knowing any of the 
specifics of tax reform, including whether and how revenue 
deductions would be offset?
    Secretary Mnuchin. I am sorry you were not here earlier, 
but I answered similar questions several times already, in that 
we did not have the details to put in on the impact of taxes. 
We have complete transparency.
    Senator Menendez. You do not have any details today?
    Senator Wyden. We are going to have to wrap this up.
    Senator Menendez. Well, I will finalize, Mr. Chairman.
    You do not have any details, and so if you do not have any 
details of what it will look like, I do not know how you do 
such macroeconomic forecasting.
    Thank you, Mr. Chairman.
    Senator Wyden. Okay. Thank you.
    Mr. Mnuchin, we have one other area we have to explore 
before we wrap up.
    The Treasury Department makes payments directly to health 
insurers to help cover deductibles and copayments for roughly 7 
million Americans. These are folks with modest incomes. They 
have private health plans they bought on the insurance 
exchange, and this is for help with deductibles and copayments. 
These are called Cost Sharing Reduction payments, CSRs.
    The President has been making the payments since he took 
office, but recently it has been reported that he is 
threatening to stop. We have gotten enormous amounts of 
letters, emails, and tweets from citizens, insurers, Governors, 
and experts that this really dangerous rhetoric about these 
payments is causing a lot of uncertainty in the markets, and 
this is raising premiums for hard-working Americans.
    I have two letters from State Commissioners and insurance 
executives. I am just going to put those in the record by 
unanimous consent.
    [The letters appear in the appendix beginning on p. 68.]
    Senator Wyden. Now, we know that you and the President have 
stated your strong belief in the free market, but the lack of 
clarity here is just causing turmoil. It is almost like 
gasoline is being poured on the fires of uncertainty in the 
health-care marketplace, and the private sector just cannot 
continue to operate with this level of uncertainty.
    The insurers have to submit their proposed rates for 2018, 
and they cite the fact that these Cost Sharing Reduction 
payments remain unresolved as a main reason for premium 
increases. So there has been all of this discussion about this.
    But my staff discovered in the President's own budget that 
there is an assumption that they are going to be paid out in 
2018. So after all of this hullabaloo, I was pretty surprised 
at this. So my question is, Mr. Secretary, is the President 
going to follow his own budget proposal? This is in the budget 
document. We were kind of amazed it is in there. Is he going to 
follow his own budget document, his own proposal, and continue 
funding these cost sharing payments next year?
    Secretary Mnuchin. Thank you, Senator Wyden. I have not had 
any direct discussions with the President on this, but I am 
more than happy to follow up with Director Mulvaney and him on 
this issue.
    Senator Wyden. Well, I am asking you--this is in your 
budget, Mr. Secretary. I am not asking you if you went to 
medical school. I am not asking you about health-care policy. I 
am trying to find out about whether the President's budget--and 
it is in your Treasury appendix section--whether you as 
Treasury Secretary agree that these payments ought to continue 
as they have been made for the last several years?
    Secretary Mnuchin. Again, I respect your question, and I am 
going to follow up and get back with you on that.
    Senator Wyden. Well, if I am an insurer who is setting 
rates right now, should I believe that the reported threats 
about these payments from the administration are accurate, or 
should I believe the proposal that is in your Treasury budget? 
Which should I believe right now?
    Secretary Mnuchin. We are happy to provide clarity for you 
and to the free market on that.
    Senator Wyden. I will just tell you, Mr. Secretary, having 
started this, I do not know, maybe 2\1/2\ hours ago, we have 
really gotten virtually no clarity on the big questions, 
starting from this proposal that so dramatically favors the 
very wealthy to my colleagues' questions. I mean, this is 
really a critical issue, and it is critical right now because 
the 90-day period where this is going to continue to be debated 
means that everybody is going to be up in the air while the 
insurance companies are trying to make decisions. And as 
somebody who believes in the free market, I would hope that you 
back the proposal in your own budget. It would be one thing if 
it was coming from somewhere else. But it is in your own 
budget. And I am just baffled why you will not support your own 
budget.
    So let me just leave you with where I think we are. We now 
have on offer a one-page proposal, and I gather that there is 
one section that may have been added. I have not had a chance 
to look at it in detail, but I gather it is something involving 
retirement.
    At the rate we are going, we are going to have a full 
proposal, you know, somewhere like 2075 or something like that. 
We have really got to get moving. I mean, the American people, 
as I said--the first sentence out of my mouth--the American 
people demand that we work in a bipartisan way on the issues 
that are important to them, and particularly matters like 
health care and taxes. These are key bread-and-butter issues 
for anybody who is a nurse, anybody who is a cop, working-class 
people, people who aspire to be middle-class.
    So we have to get more specifics. I have told you, both 
publicly and privately, I wrote two full-fledged tax reform 
bills, not kind of a paper with a few principles on it. They 
are actual bills. They provide a real middle-class tax cut, and 
Republicans went along on it. So it can be done. And it has to 
be real as opposed to much of what my colleagues have said.
    So I gather that some emails about meetings coming up that 
are going to be bipartisan were sent this morning. I just want 
to make it clear that to get this done, we have to take the 
one-pager that is shorter than a drugstore receipt that my 
staff was seeing last night and turn it into something that 
could actually produce a bipartisan bill.
    I know from listening to my colleagues on this side of the 
aisle, they agree the current system is a mess. It is a 
dysfunctional mess. We need changes to create more good-paying 
red, white, and blue jobs. I made it clear this morning that I 
would work very closely with my friend Chairman Hatch because 
he believes that we also ought to try to work in a bipartisan 
way, but you are going to have to speed this up in terms of 
getting us specifics.
    So with that, Mr. Secretary, we will adjourn, and we hope 
to continue this discussion very soon.
    Secretary Mnuchin. Thank you.
    [Whereupon, at 12 p.m., the hearing was concluded.]

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


              Prepared Statement of Hon. Orrin G. Hatch, 
                        a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah) 
today delivered the following opening statement at a hearing to examine 
the administration's fiscal year (FY) 2018 budget request for the 
Treasury Department and current policies to overhaul the Nation's tax 
code:

    Today's hearing has a dual focus. We will discuss the President's 
Budget for Fiscal Year 2018 as well as ongoing efforts to reform our 
Nation's tax code.

    We are pleased to be joined here today by Treasury Secretary Steven 
Mnuchin, who will provide the administration's perspective on these 
important issues.

    Welcome back to the Finance Committee, Secretary Mnuchin. As this 
is your first budget hearing before this committee, let me warn you: 
these hearings tend to be pretty grueling, but that is a necessary 
part, not only of the budget process, but also of the committee's 
oversight function.

    But not to worry, I think you're up to the challenge.

    Let me begin by saying a few words about the President's Budget.

    Obviously, we're all still absorbing the finer details of the 
proposed budget. But, at this point, I can say definitively that I 
applaud the President for his focus on advancing pro-growth policies to 
get our economy moving. And I share the administration's concerns about 
our debt, which ballooned by nearly doubling under the previous 
administration.

    The President's budget envisions increased economic growth that 
eventually reaches 3 percent.

    As I understand it, that vision relies on implementation of a 
number of policies, including pro-growth tax reform, cutting 
unnecessary regulation, building infrastructure, reforming health care, 
boosting energy production, and reducing deficits that would 
significantly improve the supply side of the economy.

    Of course, it is not unheard of that an administration places 
belief in the efficacy of its policy proposals.

    For example, in former President Obama's fiscal year 2010 budget, 
growth was assumed to get to as high as 4.6%, and was assumed to 
average 3.8% over an extended 8-year period. And that was premised on 
the administration's belief in its policy prescriptions.

    So, while critics may want to criticize the optimistic nature of 
the budget's growth projections, it is, I believe, more realistic than 
a number of budget proposals we've seen, particularly some that came 
from the previous administration.

    I also share the overall goal in the budget to reduce deficits 
without raising taxes, keeping in mind that our Nation's debt nearly 
doubled during the previous administration.

    We have a number of difficult choices ahead of us as we work to 
address inefficiencies and reform wasteful programs and agencies, and 
that difficulty is reflected in the budget. I look forward to 
continuing to examine the various proposals and to hearing Secretary 
Mnuchin's insights about the items in the budget.

    Now, I'd like to spend a few minutes discussing the other element 
of today's hearing: tax reform.

    For 6 years now, I have been beating the drum on tax reform.

    I've sought to make the case for reform here in the committee, on 
the Senate floor, in public forums and events, and in private 
conversations. And, I haven't been alone. There has been a bipartisan 
recognition--one that I think is growing more by the day--that our 
current tax system doesn't work.

    Throughout this endeavor, I've stated numerous times that, if it's 
going to be successful, we will need to see engagement from the 
President. And, before anyone writes that off as a political statement, 
let me make it clear that I wasn't simply advocating for the election 
of a Republican President. On the contrary, I repeatedly implored 
President Obama to engage with Congress on tax reform, but to no avail.

    The current administration put out a tax reform framework earlier 
this month, one that I think can serve as an outline as this effort 
moves forward, keeping in mind that, as with any major undertaking, 
we'll need to be realistic and commit to practicing the art of the 
doable.

    I expect that you'll get a number of questions about the tax plan 
here today, Secretary Mnuchin. In addition, I expect we'll hear a lot 
about the process by which tax reform will move through Congress.

    On that point, we've already heard a few demands from my friends on 
the other side of the aisle, stated as if they were preconditions for 
any serious engagement on tax reform. My hope is that these aren't 
really preconditions, but still, I do want to address one of them 
briefly here today.

    One of the demands we've heard is that Republicans abandon the use 
of budget reconciliation for tax reform. This, in my view, is an odd 
demand.

    Historically speaking, most major tax bills that have moved through 
reconciliation have had bipartisan support. In fact, in the past, when 
Republicans have controlled the House and Senate along with the White 
House, all of our tax reconciliation bills have enjoyed some Senate 
Democratic support.

    If we can reach agreements on policy, there is absolutely no reason 
why Democrats couldn't agree to support a tax reform package moved 
through reconciliation.

    I can't imagine a scenario in which my Democratic colleagues would 
be more amendable to compromising on tax reform policy if 
reconciliation is taken off the table. And, in fact, the only thing 
we'd accomplish by foreclosing the use of reconciliation would be to 
ensure that the minority would be able to more easily block any bill 
from passing, which is a strange demand to make before beginning a 
good-faith negotiation.

    In any event, whether this is truly a precondition or simply a 
rhetorical point on the part of my colleagues, let me be clear: my 
strong preference is that our tax reform efforts be bipartisan. I have 
reached out to my colleagues on both sides of the aisle and sincerely 
hope that both parties can be at the table.

    I think I've more than adequately demonstrated my willingness to 
work with my Democratic colleagues on this committee and elsewhere. My 
intention is to continue working with my Democratic colleagues on tax 
reform, so long as they are willing to engage.

    I don't want to speak for Secretary Mnuchin today, but I think it's 
safe to say that he share's this desire and is similarly committed to 
working with our Democratic colleagues on this effort.

    With that, let me once again thank Secretary Mnuchin for being here 
today. I look forward to a rigorous and thoughtful discussion of these 
and other issues.

                                 ______
                                 

                The Wall Street Journal, August 14, 2008

                           The Obama Tax Plan
                  By Jason Furman and Austan Goolsbee
Even as Barack Obama proposes fiscally responsible tax reform to 
strengthen our economy and restore the balance that has been lost in 
recent years, we hear the familiar protests and distortions from the 
guardians of the broken status quo.

Many of these very same critics made many of these same overheated 
predictions in previous elections. They said President Clinton's 1993 
deficit-reduction plan would wreck the economy. Eight years and 23 
million new jobs later, the economy proved them wrong. Now they are 
making the same claims about Senator Obama's tax plan, which has even 
lower taxes than prevailed in the 1990--including lower taxes on 
middle-class families, lower taxes for capital gains, and lower taxes 
for dividends.

Overall, Senator Obama's middle-class tax cuts are larger than his 
partial rollbacks for families earning over $250,000, making the 
proposal as a whole a net tax cut and reducing revenues to less than 
18.2% of GDP--the level of taxes that prevailed under President Reagan.

Both candidates for president have proposed tax plans. But they are 
starkly different in their approaches and their economic impact. 
Senator Obama is focused on cutting taxes for middle-class families and 
small businesses, and investing in key areas like health, innovation 
and education. He would do this while cutting unnecessary spending, 
paying for his proposals and bringing down the budget deficit.

In contrast, John McCain offers what would essentially be a third Bush 
term, with his economic speeches outlining $3-4 trillion of tax cuts 
over 10 years beyond what President Bush has already proposed and 
geared even more to high-income earners. The McCain plan would lead to 
deficits the likes of which we have never seen in this country. It 
would take money from the middle class and from future generations so 
that the wealthy can live better today.

Senator Obama believes a focus on the middle-class is appropriate in 
the wake of the first economic expansion on record where the typical 
family's income fell by almost $1,000. The Obama plan would cut taxes 
for 95% of workers and their families with a tax cut of $500 for 
workers or $1,000 for working couples. In addition, Senator Obama is 
proposing tax cuts for low- and middle-income seniors, homeowners, the 
uninsured, and families sending a child to college or looking to save 
and accumulate wealth.

The Obama plan would dramatically simplify taxes by consolidating 
existing tax credits, eliminating the need for millions of senior 
citizens to file tax forms, and enabling as many as 40 million middle-
class filers to do their own taxes in less than 5 minutes and not have 
to hire an accountant.

Senator Obama also recognizes that small businesses are the engine of 
job growth in the economy. That is why he is proposing additional tax 
cuts, including a tax credit for small businesses that provide health 
care, and the elimination of capital gains taxes for small businesses 
and start ups. The vast majority of small businesses would face lower 
taxes under the Obama plan than under the McCain plan. In addition, 
Senator Obama supports reforming corporate taxes in a manner that would 
help create jobs in America and simplify the tax code by eliminating 
distortions and special preferences.

Senator Obama believes that responsible candidates must put forward 
specific ideas of how they would pay for their proposals. That is why 
he would repeal a portion of the tax cuts passed in the last 8 years 
for families making over $250,000. But to be clear: He would leave 
their tax rates at or below where they were in the 1990s.

-  The top two income-tax brackets would return to their 1990s levels 
of 36% and 39.6% (including the exemption and deduction phase-outs). 
All other brackets would remain as they are today.

-  The top capital-gains rate for families making more than $250,000 
would return to 20%--the lowest rate that existed in the 1990s and the 
rate President Bush proposed in his 2001 tax cut. A 20% rate is almost 
a third lower than the rate President Reagan set in 1986.

-  The tax rate on dividends would also be 20% for families making more 
than $250,000, rather than returning to the ordinary income rate. This 
rate would be 39% lower than the rate President Bush proposed in his 
2001 tax cut and would be lower than all but 5 of the last 92 years we 
have been taxing dividends.

-  The estate tax would be effectively repealed for 99.7% of estates, 
and retained at a 45% rate for estates valued at over $7 million per 
couple. This would cut the number of estates covered by the tax by 84% 
relative to 2000.

Overall, in an Obama administration, the top 1% of households--people 
with an average income of $1.6 million per year--would see their 
average federal income and payroll tax rate increase from 21% today to 
24%, less than the 25% these households would have paid under the tax 
laws of the late 1990s.

Senator Obama believes that one of the principal problems facing the 
economy today is the lack of discretionary income for middle-class wage 
earners. That's why his plan would not raise any taxes on couples 
making less than $250,000 a year, nor on any single person with income 
under $200,000--not income taxes, capital gains taxes, dividend or 
payroll taxes.

In contrast, Senator McCain's tax plan largely leaves the middle class 
behind. His one and only middle-class tax cut--a slow phase-in of a 
bigger dependent exemption--would provide no benefit whatsoever to 101 
million families who do not have children or other dependents, or who 
have a low income.

But Senator McCain's plan does include one new proposal that would 
result in higher taxes on the middle class. As even Senator McCain's 
advisers have acknowledged, his health-care plan would impose a $3.6 
trillion tax increase over 10 years on workers. Senator McCain's plan 
will count the health care you get from your employer as if it were 
taxable cash income. Even after accounting for Senator McCain's 
proposed health-care tax credits, this plan would eventually leave tens 
of millions of middle-class families paying higher taxes. In addition, 
as the Congressional Budget Office has shown, this kind of plan would 
push people into higher tax brackets and increase the taxes people pay 
as their compensation rises, raising marginal tax rates by even more 
than if we let the entire Bush tax-cut plan expire tomorrow.

The McCain plan represents Bush economics on steroids. It has $3-4 
trillion more in tax cuts than President Bush is proposing, largely 
directed at corporations and the most affluent. Senator McCain would 
implement these cuts without proposing any meaningful steps to simplify 
taxes or eliminate distortions and loopholes. In addition, Senator 
McCain has floated over $1 trillion in new spending increases but 
barely any specific spending cuts.

As previously mentioned, the Obama plan is a net tax cut--his middle-
class tax cuts are larger than the rollbacks he has proposed for 
families making over $250,000. Senator Obama would pay for this tax cut 
by cutting spending--including responsibly ending the war in Iraq, 
reducing excessive payments to private plans in Medicare, limiting 
payments for high-income farmers, reducing subsidies for banks that 
make student loans, reforming earmarks, ending no-bid contracts, and 
eliminating other wasteful and unnecessary programs.

While Senator Obama would shrink the deficit from its current record 
levels, he recognizes that it is even more important to confront our 
long-term fiscal challenges, including the growth of health costs in 
the public and private sector. He also believes it is critical to work 
with members of Congress from both parties to strengthen Social 
Security while protecting middle-class families from tax increases or 
benefit cuts. He has done what few presidential candidates have been 
willing to do by making a politically risky proposal to strengthen 
solvency by asking those making over $250,000 to contribute a bit more 
to Social Security to keep it sound.

Senator Obama does not support uncapping the full payroll tax of 12.4% 
rate. Instead, he is considering plans that would ask those making over 
$250,000 to pay in the range of 2% to 4% more in total (combined 
employer and employee). This change to Social Security would start a 
decade or more from now and is similar to the rate increases floated by 
Senator McCain's close adviser Lindsey Graham, and that Senator McCain 
has previously said he ``could'' support.

In contrast, Senator McCain has put forward the most fiscally reckless 
presidential platform in modern memory. The likely results of his Bush-
plus policies are clear. As Berkeley economist Brad Delong has 
estimated, the McCain plan, as compared to the Obama plan, would lower 
annual incomes by $300 billion or more in real terms by 2017, costing 
the typical worker $1,800 or more due to the effect of large deficits 
on national savings and thus capital formation. Senator McCain's 
neglect of critical public investments would further impede economic 
growth for decades to come.

Do not take the critics' word for it. Go look at the plans for yourself 
at www.
barackobama.com/taxes. Get the facts and you will see the real 
priorities at stake in this election. America cannot afford another 8 
years like these.

                                 ______
                                 
       Prepared Statement of Hon. Steven T. Mnuchin, Secretary, 
                       Department of the Treasury
    Chairman Hatch, Ranking Member Wyden, and members of the committee, 
it is an honor to be here today. I am looking forward to working with 
members of Congress and this committee on passing important legislation 
for the American people.

    My number-one priority as Treasury Secretary is creating 
sustainable economic growth for all Americans. The best way to achieve 
this is through a combination of tax reform, regulatory relief, and 
protecting taxpayers; this also includes making some difficult 
decisions with respect to our budget. We are currently bearing the 
costs of excessive government commitments of previous years, and this 
has forced us into hard choices.

    But the remarkable thing about economic growth is that it builds on 
itself. If we develop the right policies today, our children and 
grandchildren will reap the benefits of an ever-growing economy. 
Indeed, in the next 10 years, if we return to the modern historic 
average of above 3% annual GDP growth, our economy would grow by 
trillions of dollars. This will be meaningful to every man, woman, and 
child in this country and future generations.

    Tax reform will play a major role in our campaign for growth. It 
has been more than 30 years since we have had comprehensive tax reform 
in this country. This administration is committed to changing that. We 
have about 100 people working at Treasury on this issue.

    We are working diligently to bring tax relief to lower and middle-
income Americans as well as make American businesses competitive again. 
All of this comes as we simplify the tax code and make it easier for 
hardworking Americans to file.

    Finally, I would like to speak about the importance of free and 
fair international trade. Few doubt that free trade is a crucial 
component of economic growth. But trade deals that disadvantage 
American workers and businesses can hardly be considered either free or 
fair.

    In meetings with my international counterparts I have stressed this 
dual importance. Just 2 weeks ago, I had productive meetings with the 
finance ministers of the G7, and earlier, I met with members of the IMF 
and World Bank. They understand our concerns, and we have approached 
our international dialogue with a renewed spirit of mutual 
understanding.

    In the President's address to the joint session of Congress, he 
spoke about the marvels that this country is capable of when its 
citizens are set free to pursue their visions. Fundamental to that 
freedom is removing imprudent regulation and uncompetitive taxes from 
blocking their way.

    This has been a significant few months at Treasury. We have been 
studying, developing, and implementing policies that will put this 
country on the path toward sustained economic growth.

    In the coming months, we will work with this committee and the 
Congress in what we will look back on as an important time for this 
Nation's economy and in our history.

    Thank you and I look forward to answering your questions.

                                 ______
                                 
      Questions Submitted for the Record to Hon. Steven T. Mnuchin
               Questions Submitted by Hon. Orrin G. Hatch
    Question. Secretary Mnuchin, one of the things that I applaud in 
the President's budget is recognition that we are currently on an 
unsustainable fiscal path. Unfortunately, the previous administration's 
policies, which were too often not focused on growth but, rather, on 
increasing regulation and redistribution, nearly doubled the country's 
debt.

    Treasury is currently using so-called ``extraordinary measures'' to 
keep the debt below the statutory debt limit, but the ability to 
continue to use such measures is limited. When the availability of such 
measures runs out, the debt limit will be breached, absent action by 
Congress to either increase or suspend the debt limit.

    Secretary Mnuchin, when do you project Treasury will run out of 
extraordinary measures to buy headroom below the debt ceiling; that is, 
when do you project that, absent action by Congress, the government 
would be forced to default on the Nation's debt?

    Answer. As you're aware, on September 8, 2017, the President signed 
into law Pub. L. 115-16, which suspended the statutory debt limit 
through December 8, 2017.

    Question. Secretary Mnuchin, Senator Wyden, my friend and the 
ranking member of this committee, dubbed your objective of not 
providing an absolute tax cut for the so-called rich the ``Mnuchin 
Rule.'' And I understand that you take that as a sort of honor, being 
in the midst of other Democrat rules such as the Volcker Rule, which 
seems to be a 900 or so page effort by regulators to define a simple 
concept, and the Buffet rule, which advocates for higher taxes on some 
Americans that the rule's namesake would largely or entirely escape 
himself. I'll leave it up to you whether to feel honored or not.

    In any case, my understanding is that your objective--and the 
President's objective--is to provide competitive tax rates for 
businesses and cut taxes for the middle class, while not giving tax 
breaks to the so-called rich. Of course, what tax reform ends up 
looking like will depend on your objectives, as well as objectives, 
efforts, and preferences of members of Congress, hopefully from both 
sides of the aisle.

    Secretary Mnuchin, in analyzing tax reform options, have you been 
thinking about how to prevent upper earners from disproportionately 
benefitting from lower taxes on business and investment income and how 
to prevent people from mischaracterizing labor income as capital income 
in order to pay lower taxes? If so, what conclusions or ideas can you 
share with us today?

    Answer. Yes, we have been considering these issues. The President 
and I are committed to tax reform that includes middle-income tax 
relief. We are working with Congress and other stakeholders to develop 
appropriate policies to achieve that goal.

    We also have been thinking about the potential problems introduced 
by taxing business income at a rate lower than labor income. We are 
aware that there has to be some safeguards to prevent the inappropriate 
characterization of labor income as business income and have 
tentatively explored a variety of approaches. There are any number of 
rules that can help, including rules that specify reasonable 
compensation and that limit excessive accumulation of earnings within a 
business. We look forward to working with Congress and other 
stakeholders in designing rules that will be effective.

    Question. Secretary Mnuchin, I have another question with respect 
to the so-called ``Mnuchin Rule.'' Some have argued that if taxes 
imposed by the Affordable Care Act were to be repealed, that all of the 
resulting tax reductions would accrue to the so-called ``rich,'' say 
those with incomes above $200,000. Some have gone so far as to say that 
``not one dime'' of tax reductions would accrue to the ``middle 
class.''

    Secretary Mnuchin, can you tell me whether any of the taxes that 
were imposed by the Affordable Care Act distribute to middle-class 
income earners, in which case the claim that ``not one dime'' of tax 
reduction from repeal of the taxes would accrue to anyone but the so-
called rich would be false and would, in fact, reflect a lack of 
recognition of adverse effects on middle-class Americans of taxes 
levied by the Affordable Care Act?

    Answer. Yes, several Affordable Care Act taxes are paid by middle-
income earners. For instance, for tax year 2016, the ACA requires all 
single filers with gross income above $10,350 ($20,700 for joint 
filers) who do not have health-care coverage, and who do not qualify 
for an exemption, to remit to the IRS a tax penalty, known as a shared 
responsibility payment (also known as the individual mandate). For tax 
year 2015, approximately 6.5 million taxpayers, the vast majority with 
incomes below $200,000, reported these payments. In addition, the so 
called ``Cadillac Tax'' on high-premium health insurance plans is 
likely to be paid on plans received by some middle-income families, as 
are the higher taxes on over-the-counter medications and the 
contribution limits on Flexible Spending Accounts, to name a couple 
others.

                                 ______
                                 
                 Questions Submitted by Hon. Ron Wyden
                           retirement savings
    Question. Does the administration intend as part of tax reform to 
change the treatment for some or all contributions to tax-preferred 
retirement savings accounts and plans from pre-tax to after-tax, with a 
corresponding change of not taxing distributions from those accounts or 
plans?

    Answer. The tax reform framework released in September retained tax 
benefits that encourage work, higher education, and retirement 
security. The framework also encouraged Congress to simplify these 
benefits to improve their efficiency and effectiveness. The 
administration will consider proposals from the Congress that meet 
these goals.
                      multi-employer pension plans
    Question. In a letter to me dated May 23, 2017, regarding 
multiemployer pension plans, Treasury observed that ``[t]he problems 
facing multiemployer plans and the PBGC are complex and varied, and 
they cannot be solved through administrative action alone under current 
law.'' The letter then concludes that Treasury is committed to working 
with Congress to develop solutions. Do you and the Trump administration 
support a legislative alternative to the Multiemployer Pension Reform 
Act of 2014 that involves Federal Government assistance or funding for 
critical and declining status plans beyond that law's benefit 
suspension and PBGC partition rules?

    Answer. Treasury is committed to working with Congress and other 
stakeholders to develop fiscally responsible solutions to the issues 
facing multiemployer pension plans. Treasury believes that a fiscally 
responsible solution would avoid the need for additional Federal 
funding. It would be premature for Treasury and the administration to 
endorse a particular legislative alternative at this time.
                               estate tax
    Question. Secretary Mnuchin, Table S-4 of the budget indicates that 
under the administration's budget, estate and gift tax receipts are 
expected to increase from $21 billion in 2016 to $43 billion in 2017. 
In addition, section 11 of the budget's Analytical Perspectives states: 
``The budget assumes deficit neutral tax reform, which the 
administration will work closely with the Congress to enact. . . . Tax 
relief for American families, especially middle-income families, should 
. . . abolish the death tax, which penalizes farmers and small business 
owners who want to pass their family enterprises on to their 
children.''

    The estate tax applies only to families with estates in excess of 
$11 million. Could you please explain why repeal of the estate tax is 
listed under the section describing tax relief for middle-income 
families? Please describe what income threshold the President uses to 
define middle-income families.

    Answer. The repeal of the estate tax is included in the section 
describing several guiding principles for ``[t]ax relief for American 
families, especially middle-income families.'' As stated in the budget, 
repealing the estate tax is intended to help farmers and small 
businesses, many of whom are middle-income earners.

    Question. The budget shows that under the President's policies 
estate tax receipts will increase from $21 billion in 2016 to $43 
billion in 2027. However, the budget also states that the President 
plans to repeal the estate tax. Could you please explain how repealing 
the estate tax increases annual Federal estate and gift tax receipts by 
more than $20 billion over the decade?

    Answer. The budget assumes estate tax repeal will be part of 
deficit neutral tax reform. Because the tax reform proposal is still 
under development, the budget does not show the effects of the proposal 
on individual sources of revenue. Thus, the estate tax receipts in the 
budget are a placeholder at current law levels.
                      economic growth assumptions
    Question. Secretary Mnuchin, Table S-2 of the President's budget 
assumes more than $2 trillion in new revenue attributable to ``economic 
feedback.'' Please explain how much of the $2 trillion in new revenues 
attributable to economic feedback is assumed to be attributable to tax 
reform.

    Answer. The feedback effect is due to a combination of tax reform, 
regulatory reform, and trade reform. We do not have specific estimates 
for each component of the feedback effect, but the feedback from 3-
percent GDP growth amounts to trillions of dollars flowing into the 
economy.
                      tax reform paying for itself
    Question. Secretary Mnuchin, on April 20, 2017 you stated ``tax 
reform will pay for itself with growth.'' On May 24, 2017 you stated 
the budget did not contain any tax reform proposals because you are 
``not far enough along to estimate what that impact will be.''

    In your opening statement during the May 25th hearing before this 
committee, you stated that tax reform will play ``a major role'' in 
achieving the 3-percent economic growth assumed in the Trump budget, 
the same budget that just the day before you said did not include tax 
reform proposals.

    That same morning, OMB Director Mick Mulvaney told the Budget 
Committee, which I serve on, that tax reform will be ``deficit-
neutral.''

    Please explain the assumed revenue and deficit effects of the 
administration's tax reform plan.

    Answer. See response below.

    Question. Is any part of the administration's tax reform plan 
expected to be paid for with economic growth? If so, what portion of 
revenue loss is expected to be made up for with economic growth?

    Answer. See response below.

    Question. You have said repeatedly that tax reform will pay for 
itself through increased economic growth. How much will the President's 
tax cuts cost before repealing tax expenditures and closing tax 
loopholes? How much in higher revenues from growth will be generated by 
these tax cuts? If these amounts are not currently knowable by you and 
Treasury staff, then how can you know that tax reform will pay for 
itself through increased revenues from higher economic growth?

    Answer. See response below.

    Question. Please cite estimates--prepared by government or 
independent economists--of other tax cut proposals that fully paid for 
themselves through revenues generated by higher economic growth.

    Answer. See response below.

    Question. Please provide real-world examples of comprehensive tax 
reform proposals that have fully paid for themselves--either at the 
State level, or anywhere else in the world. By ``fully paid for,'' I 
mean where the tax cut portion, before repealing tax expenditures and 
closing tax loopholes, is paid for by the generation of higher revenues 
from increased economic growth.

    Answer. We are working hard to put together a tax reform proposal. 
While adequate revenues are important, they are only one of several 
important factors. One of our highest priorities is reinvigorating U.S. 
growth, which will help offset, at least in part, the revenue impact of 
tax reform. Cuts in income tax rates, including those rates applied to 
labor income and to capital income, are believed by many economists to 
offer a potential for significant revenue feedback. For example, Greg 
Mankiw has argued that growth can offset about half of the cost of 
capital income tax cuts. The Tax Foundation found that the House 
Republicans' tax reform blueprint and the Trump campaign plans would 
have very large revenue feedback effects from induced economic growth. 
According to their calculations, revenues from additional growth would 
make the House plan nearly revenue-neutral and would offset about 40 
percent of the revenue cost of the Trump campaign plan. The 2018 budget 
assumes that the tax reform plan is deficit-neutral before accounting 
for growth effects, and that revenues from additional growth are 
devoted toward deficit reduction. We look forward to continuing to work 
with our colleagues in Congress and with other stakeholders to develop 
a tax reform proposal that will benefit all Americans.
       revenue-neutral tax reform vs. deficit-neutral tax reform
    Question. Table S-4 of the budget indicates that the President 
proposes revenue-neutral tax reform. However, section 11 of the 
budget's Analytical Perspectives states ``[t]he budget assumes deficit-
neutral tax reform.'' While revenue-neutral tax reform can be deficit-
neutral, deficit-neutral tax reform is not necessarily revenue-neutral. 
This is because major tax policies benefitting working families such as 
the Earned Income Tax Credit and the Child Tax Credit are refundable 
credits, which provide refunds to taxpayers that are treated as outlays 
instead of revenues for budget purposes. Therefore, a tax reform 
proposal could be deficit-neutral and significantly scale back 
refundable credits while providing a net cut in revenues. Could you 
please clarify whether the President will veto any tax reform plan that 
is not (a) revenue-neutral or (b) deficit-neutral?

    Answer. The President recognizes the need for the tax system to 
generate adequate revenue to pay for important governmental functions. 
Any tax reform signed into law will have an adequate revenue stream, 
and we look forward to working with our colleagues in Congress and 
other stakeholders to appropriately balance revenue against the other 
desirable features of a reformed pro-growth tax system that is fair to 
American workers and businesses.
 tax expenditures under consideration for repeal by the administration
    Question. In your testimony you made statements about the 
administration's intention to repeal or preserve certain specific 
provisions in tax reform. To help clarify the administration's 
intentions in tax reform, I have included below a list of major tax 
expenditures in the current Internal Revenue Code as listed in section 
13 of the budget's Analytical Perspectives. For each tax expenditure in 
the table below, please indicate whether the administration intends to 
preserve, repeal, or modify the provision. Also, please describe any 
new revenue sources outside of the tax expenditure budget the 
administration would consider.

    Answer. See response below.
National defense:
      1.  Exclusion of benefits and allowances to armed forces 
personnel.
International affairs:
      2.  Exclusion of income earned abroad by U.S. citizens.
      3.  Exclusion of certain allowances for Federal employees abroad.
      4.  Inventory property sales source rules exception.
      5.  Deferral of income from controlled foreign corporations 
(normal tax method).
      6.  Deferred taxes for financial firms on certain income earned 
overseas.
General science, space, and technology:
      7.  Expensing of research and experimentation expenditures 
(normal tax method).
      8.  Credit for increasing research activities.
Energy:
      9.  Expensing of exploration and development costs, fuels.
     10.  Excess of percentage over cost depletion, fuels.
     11.  Exception from passive loss limitation for working interests 
in oil and gas properties.
     12.  Capital gains treatment of royalties on coal.
     13.  Exclusion of interest on energy facility bonds.
     14.  Energy production credit.
     15.  Marginal wells credit.
     16.  Energy investment credit.
     17.  Alcohol fuel credits.
     18.  Bio-Diesel and small agri-biodiesel producer tax credits.
     19.  Tax credits for clean-fuel burning vehicles and refueling 
property.
     20.  Exclusion of utility conservation subsidies.
     21.  Credit for holding clean renewable energy bonds.
     22.  Deferral of gain from dispositions of transmission property 
to implement FERC restructuring policy.
     23.  Credit for investment in clean coal facilities.
     24.  Temporary 50% expensing for equipment used in the refining of 
liquid fuels.
     25.  Natural gas distribution pipelines treated as 15-year 
property.
     26.  Amortize all geological and geophysical expenditures over 2 
years.
     27.  Allowance of deduction for certain energy efficient 
commercial building property.
     28.  Credit for construction of new energy efficient homes.
     29.  Credit for energy efficiency improvements to existing homes.
     30.  Credit for residential energy efficient property.
     31.  Qualified energy conservation bonds.
     32.  Advanced Energy Property Credit.
     33.  Advanced nuclear power production credit.
     34.  Reduced tax rate for nuclear decommissioning funds.
Natural resources and environment:
     35.  Expensing of exploration and development costs, nonfuel 
minerals.
     36.  Excess of percentage over cost depletion, nonfuel minerals.
     37.  Exclusion of interest on bonds for water, sewage, and 
hazardous waste facilities.
     38.  Capital gains treatment of certain timber income.
     39.  Expensing of multiperiod timber growing costs.
     40.  Tax incentives for preservation of historic structures.
     41.  Industrial CO2 capture and sequestration tax 
credit.
     42.  Deduction for endangered species recovery expenditures.
Agriculture:
     43.  Expensing of certain capital outlays.
     44.  Expensing of certain multiperiod production costs.
     45.  Treatment of loans forgiven for solvent farmers.
     46.  Capital gains treatment of certain income.
     47.  Income averaging for farmers.
     48.  Deferral of gain on sale of farm refiners.
     49.  Expensing of reforestation expenditures.
Commerce and housing:
Financial institutions and insurance:
     50.  Exemption of credit union income.
     51.  Exclusion and deferral of policyholder income earned on life 
insurance and annuity contracts.
     52.  Exclusion or special alternative tax for small property and 
casualty insurance companies.
     53.  Tax exemption of insurance income earned by tax-exempt 
organizations.
     54.  Small life insurance company deduction.
     55.  Exclusion of interest spread of financial institutions
 Housing:
     56.  Exclusion of interest on owner-occupied mortgage subsidy 
bonds.
     57.  Exclusion of interest on rental housing bonds.
     58.  Deductibility of mortgage interest on owner-occupied homes.
     59.  Deductibility of State and local property tax on owner-
occupied homes.
     60.  Deferral of income from installment sales.
     61.  Capital gains exclusion on home sales.
     62.  Exclusion of net imputed rental income.
     63.  Exception from passive loss rules for $25,000 of rental loss.
     64.  Credit for low-income housing investments.
     65.  Accelerated depreciation on rental housing (normal tax 
method).
     66.  Discharge of mortgage indebtedness.
Commerce:
     67.  Discharge of business indebtedness.
     68.  Exceptions from imputed interest rules.
     69.  Treatment of qualified dividends.
     70.  Capital gains (except agriculture, timber, iron ore, and 
coal).
     71.  Capital gains exclusion of small corporation stock.
     72.  Step-up basis of capital gains at death.
     73.  Carryover basis of capital gains on gifts.
     74.  Ordinary income treatment of loss from small business 
corporation stock sale.
     75.  Deferral of gains from like-kind exchanges.
     76.  Depreciation of buildings other than rental housing (normal 
tax method).
     77.  Accelerated depreciation of machinery and equipment (normal 
tax method).
     78.  Expensing of certain small investments (normal tax method).
     79.  Graduated corporation income tax rate (normal tax method).
     80.  Exclusion of interest on small issue bonds.
     81.  Deduction for U.S. production activities.
     82.  Special rules for certain film and TV production.
Transportation:
     83.  Tonnage tax.
     84.  Deferral of tax on shipping companies.
     85.  Exclusion of reimbursed employee parking expenses.
     86.  Exclusion for employer-provided transit passes.
     87.  Tax credit for certain expenditures for maintaining railroad 
tracks.
     88.  Exclusion of interest on bonds for Highway Projects and rail-
truck transfer facilities.
Community and regional development:
     89.  Investment credit for rehabilitation of structures (other 
than historic).
     90.  Exclusion of interest for airport, dock, and similar bonds.
     91.  Exemption of certain mutuals' and cooperatives' income.
     92.  Empowerment zones.
     93.  New Markets Tax Credit.
     94.  Credit to holders of Gulf Tax Credit Bonds.
     95.  Recovery Zone Bonds.
     96.  Tribal Economic Development Bonds.
Education, training, employment, and social services:
Education:
     97.  Exclusion of scholarship and fellowship income (normal tax 
method).
     98.  Tax credits and deductions for postsecondary education 
expenses.
     99.  Education Individual Retirement Accounts.
    100.  Deductibility of student-loan interest.
    101.  Qualified tuition programs.
    102.  Exclusion of interest on student-loan bonds.
    103.  Exclusion of interest on bonds for private nonprofit 
educational facilities.
    104.  Credit for holders of zone academy bonds.
    105.  Exclusion of interest on savings bonds redeemed to finance 
educational expenses.
    106.  Parental personal exemption for students age 19 or over.
    107.  Deductibility of charitable contributions (education).
    108.  Exclusion of employer-provided educational assistance.
    109.  Special deduction for teacher expenses.
    110.  Discharge of student loan indebtedness.
    111.  Qualified school construction bonds.
Training, employment, and social services:
    112.  Work Opportunity Tax Credit.
    113.  Employer provided child care exclusion.
    114.  Employer-provided child care credit.
    115.  Assistance for adopted foster children.
    116.  Adoption credit and exclusion.
    117.  Exclusion of employee meals and lodging (other than 
military).
    118.  Credit for child and dependent care expenses.
    119.  Credit for disabled access expenditures.
    120.  Deductibility of charitable contributions, other than 
education and health.
    121.  Exclusion of certain foster care payments.
    122.  Exclusion of parsonage allowances.
    123.  Indian employment credit.
    124.  Credit for employer differential wage payments.
Health:
    125.  Exclusion of employer contributions for medical insurance 
premiums and medical care.
    126.  Self-employed medical insurance premiums.
    127.  Medical Savings Accounts/Health Savings Accounts.
    128.  Deductibility of medical expenses.
    129.  Exclusion of interest on hospital construction bonds.
    130.  Refundable Premium Assistance Tax Credit.
    131.  Credit for employee health insurance expenses of small 
business.
    132.  Deductibility of charitable contributions (health).
    133.  Tax credit for orphan drug research.
    134.  Special Blue Cross/Blue Shield tax benefits.
    135.  Tax credit for health insurance purchased by certain 
displaced and retired individuals.
    136.  Distributions from retirement plans for premiums for health 
and long-term care insurance.
Income security:
    137.  Child credit.
    138.  Exclusion of railroad retirement (Social Security equivalent) 
benefits.
    139.  Exclusion of workers' compensation benefits.
    140.  Exclusion of public assistance benefits (normal tax method).
    141.  Exclusion of special benefits for disabled coal miners.
    142.  Exclusion of military disability pensions.
Net exclusion of pension contributions and earnings:
    143.  Defined benefit employer plans.
    144.  Defined contribution employer plans.
    145.  Individual Retirement Accounts.
    146.  Low- and moderate-income savers credit.
    147.  Self-Employed plans.
Exclusion of other employee benefits:
    148.  Premiums on group term life insurance.
    149.  Premiums on accident and disability insurance.
    150.  Income of trusts to finance supplementary unemployment 
benefits.
    151.  Income of trusts to finance voluntary employee benefits 
associations.
    152.  Special ESOP rules.
    153.  Additional deduction for the blind.
    154.  Additional deduction for the elderly.
    155.  Tax credit for the elderly and disabled.
    156.  Deductibility of casualty losses.
    157.  Earned Income Tax Credit.
Social Security:
Exclusion of social security benefits:
    158.  Social Security benefits for retired and disabled workers and 
spouses, dependents, and survivors.
    159.  Credit for certain employer contributions to Social Security.
Veterans benefits and services:
    160.  Exclusion of veterans death benefits and disability 
compensation.
    161.  Exclusion of veterans pensions.
    162.  Exclusion of GI bill benefits.
    163.  Exclusion of interest on veterans housing bonds.
General purpose fiscal assistance:
    164.  Exclusion of interest on public purpose State and local 
bonds.
    165.  Build America Bonds.
    166.  Deductibility of nonbusiness State and local taxes other than 
on owner-
occupied homes.
Interest:
    167.  Deferral of interest on U.S. savings bonds.
Addendum: Aid to State and local governments:
Deductibility of:
    168.  Property taxes on owner-occupied homes.
    169.  Nonbusiness State and local taxes other than on owner-
occupied homes.
    170.  Exclusion of interest on State and local bonds for:
         a.  Public purposes.
         b.  Energy facilities.
         c.  Water, sewage, and hazardous waste disposal facilities.
         d.  Small-issues.
         e.  Owner-occupied mortgage subsidies.
         f.  Rental housing.
         g.  Airports, docks, and similar facilities.
         h.  Student loans.
         i.  Private nonprofit educational facilities.
         j.  Hospital construction.
         k.  Veterans' housing.

    Answer. Tax reform is still a work in progress and it would not be 
constructive to pre-judge the process by setting forth, at this point, 
a detailed list of tax provisions that the administration may propose 
be preserved, repealed, or modified. From Treasury's perspective, a 
variety of reform proposals are suitable for discussion, provided that 
they are consistent with the principles for reform outlined by the 
administration.
         alcohol and tobacco tax and trade bureau (ttb) funding
    Question. Secretary Mnuchin, between 2012 and 2016 the number of 
U.S. breweries has more than doubled, however, TTB funding has not kept 
pace. TTB is responsible for administration of Federal excise tax laws, 
as well as certain Federal alcohol and labeling regulations. 
Specifically, brewers are required to obtain TTB approval for beverage 
labels and formulas in certain cases. The brewing industry recognizes 
these regulations are crucial to ensure the integrity of the industry 
and fairness in the marketplace.

    Due to resource limitations and the significant increases in the 
number of U.S. brewers, TTB has in recent years faced a significant 
backlog of formula and label approvals--sometime as long as 2 months. 
In 2015 Congress acted in a bipartisan, bicameral manner to address 
this backlog by appropriating $5 million to streamline and accelerate 
formula and label approvals. In the FY 2017 appropriations bill passed 
earlier this year, Congress again, in a bipartisan, bicameral manner 
extended and enhanced appropriations for TTB's regulatory functions.

    The TTB FY 2018 budget justification, which is part of the 
President's budget, proposed to terminate these funding increases. In 
addition, the budget justification described this bipartisan, bicameral 
priority as an ``earmark.''

    Please describe the policy justification for proposing to terminate 
the funding increases for formula and label approval. In addition, 
please describe what steps were taken to consult Congress, industry, or 
other stakeholders before making the decision to propose terminating 
this program.

    Answer. The President's budget reflects the need to make many 
difficult decisions across government in order to focus resources on 
activities that promote national security and public safety and move 
toward a balanced budget. Progress that has been made in the reduction 
of TTB label approval wait times and enhancements in the electronic 
formula approval process led to the budget recommendation with regard 
to funding that has been used to streamline and accelerate formula and 
label approvals. TTB is in continual contact with the industry with 
regard to performance levels.

    Question. Beer brewers exist in every State, and the beverage 
alcohol industry represents a significant portion of the U.S. economy. 
Please explain why the Treasury Department views appropriations to 
improve broad agency operations as an ``earmark.''

    Answer. The congressional appropriation of $5 million to streamline 
and accelerate formula and label approvals is an ``earmark'' in the 
common sense of the term--a set-aside for a specific purpose.

    Question. Despite the budget's significant cuts to TTB broadly and 
its proposals to undermine efforts to accelerate formula and label 
approvals, the TTB budget justification suggests that TTB ``customer 
satisfaction'' is expected to increase. Please describe the methodology 
used to obtain this contradictory result.

    Answer. The specific reference in the Congressional Justification 
for Appropriations and Annual Performance Report and Plan to increased 
customer satisfaction relates directly to the impending release of a 
new version of Permits Online. TTB expects the release of a new version 
of Permits Online to increase satisfaction rates by improving system-
based guidance as well as overall customer experience with the system. 
TTB will continue its efforts to increase overall customer satisfaction 
by streamlining internal processes, implementing enhancements to online 
filing systems, modernizing filing requirements, providing clearer 
guidance to industry members, and by clearly communicating realistic 
service standards so that industry members may plan their operations 
accordingly.

                             infrastructure
    Question. The Trump administration has proposed providing $200 
billion to support infrastructure investments, while noting that ``more 
Federal spending'' is ``not the solution,'' and while gutting more than 
$200 billion in existing Federal grant programs.

    What is the intended use of the newly supplied $200 billion?

    Answer. The President's Infrastructure Initiative takes a 
fundamentally different approach to how the government funds 
infrastructure. As stated in the President's budget and accompanying 
Infrastructure Fact Sheet, the target of $1 trillion in infrastructure 
investment will be funded through a combination of new Federal funding, 
incentivized non-Federal funding, and newly prioritized and expedited 
projects. The $200 billion in Federal investment will be structured to 
incentivize additional non-Federal funding, and reduce the cost 
associated with accepting Federal dollars to leverage at least $1 
trillion in total infrastructure spending. The infrastructure 
initiative will also focus on streamlining regulations and permitting; 
tapping into private sector capital and management methods; and 
aligning infrastructure with the entity best suited for operation and 
maintenance.

    Question. Is it the intention of this administration to reduce 
Federal support for infrastructure through the Highway Trust Fund?

    Answer. There is a structural deficit that continues to exist 
within the Highway Trust Fund (HTF) because more is spent annually for 
transportation programs than the trust fund receives from gas tax 
revenue and other user fees. The administration does not believe it is 
appropriate for budgetary presentation purposes to show HTF spending in 
excess of what the HTF can legally support. Therefore, beginning in 
2021, the budget reflects a reduction in HTF outlays to levels that can 
be supported with existing HTF tax receipts.

    The administration looks forward to working in collaboration with 
Congress to address this structural deficit to sustain the HTF beyond 
the FAST Act.

    Question. Various members of the administration have alluded to 
using a 10-
percent tax to the currently deferred offshore profits to pay for 
infrastructure investment.

    Does the administration intend to use these revenues to pay for 
infrastructure investment?

    Answer. The administration's tax reform principles call for a one-
time tax on profits held offshore. The budget makes no assumptions 
regarding the use of the specific proceeds from repatriation.

                           china 100-day plan
    Question. In April, Chairman Hatch and I, along with Chairman Brady 
and Ranking Member Neal, sent a letter to President Trump outlining our 
key priorities for addressing trade barriers with respect to China. 
Secretary Mnuchin, as co-chair of the U.S.-China Comprehensive Economic 
Dialogue, are you committed to making resolution of the issues outlined 
in that letter your top priority, including by addressing market 
distorting behavior such as overcapacity that harms American 
manufacturers, and discriminatory and distortive technology policies, 
such as China's proposed restrictions on U.S. cloud computing 
providers? If ``yes,'' what steps have you taken to date to resolve 
these issues with China?

    Answer. I am committed to addressing the issues outlined in your 
letter. The focus of this administration is on delivering concrete 
results for our workers and firms. During the April Presidential 
Summit, we pressed China on a range of priority trade issues, including 
China's discriminatory technology and cybersecurity policies and its 
trade-distorting industrial excess capacity. We agreed at that same 
meeting to undertake with China a 100-day action plan to seek tangible 
progress on a set of trade and investment issues, and a month later we 
announced initial commitments by China to expand market access for U.S. 
agricultural trade and financial services. We continue to press China 
to address trade distortions, including overcapacity in the steel and 
aluminum industries, and to ensure non-discriminatory treatment of U.S. 
technology products and services. We will continue to work through the 
CED process toward a more fair and balanced economic relationship with 
China by expanding opportunities for U.S. workers and businesses.
                                currency
    Question. This administration has issued its first report on 
foreign exchange policies of major U.S. trade partners--under enhanced 
criteria and enforcement measures put in place by this committee. In 
that report, Treasury for the most part followed the analysis of the 
last administration, which had concluded since April of last year that 
China is not currently manipulating its currency. In an interview with 
the Economist that you were present at, the President seemed to say 
that he is not naming China a currency manipulator because of national 
security concerns--in particular cooperation over North Korea. Could 
you tell me what the position is of the administration? If China is no 
longer manipulating its currency, wasn't it also doing so last year 
when the Obama administration declined to designate them as a 
manipulator? If you're claiming manipulation ended during the Trump 
administration, what specific action(s) has China taken this year with 
respect to its currency practices that support your claim?

    Answer. This administration's position places a very high priority 
on ensuring that American workers and companies face a level playing 
field when competing internationally. Treasury is committed to 
aggressively and vigilantly monitoring and combatting currency 
practices that unfairly disadvantage our exports and unfairly advantage 
the exports of our trading partners through artificially distorted 
exchange rates.

    China has a long track record of engaging in persistent, large-
scale, one-way foreign exchange intervention, doing so for roughly a 
decade to resist renminbi (RMB) appreciation even as its trade and 
current account surpluses soared. However, China's recent intervention 
in foreign exchange markets has sought to prevent a rapid RMB 
depreciation that would have negative consequences for the United 
States, China, and the global economy.
                   international labor affairs bureau
    Question. As the President's own budget describes it, the 
Department of Labor's International Labor Affairs Bureau ``promotes a 
fair global playing field for workers in the United States and around 
the world by enforcing trade and labor commitments, strengthening labor 
standards, and combating child labor, forced labor and human 
trafficking.'' Given the President's repeated promises to give workers 
a fair shake in the global economy, why is ILAB's budget being slashed 
by more than 75%?

    Answer. As the Department responsible for promoting economic 
growth, we are committed to ensuring that workers have a safe and level 
playing field. Given that the Bureau of International Labor Affairs is 
not in the jurisdiction of the Department of the Treasury, I am not in 
a position to comment on its budget. However, we work very 
collaboratively with the Department of Labor on a number of issues and 
support their efforts to ensure that trade agreements and preference 
programs are fair to U.S. workers and companies, and that the 
exploitation of children and adults is addressed.
               russia oil transaction and u.s. sanctions
    Question. Secretary Mnuchin, last week you suggested that the 
Committee on Foreign Investment in the United States would be prepared 
to investigate the national security implications of a potential 
acquisition of Citgo by Russian oil producer Rosneft. That transaction 
also raises serious concerns regarding the application of U.S. 
sanctions administered by Treasury's Office of Foreign Assets Control, 
since as you know both Rosneft and its chairman--a close ally of 
President Putin--are currently prohibited from participating in certain 
transactions in the United States and with U.S. entities due to Russian 
aggression in Crimea. Would Rosneft be barred, under current Treasury 
sanctions directives, from exercising the lien it holds against Citgo?

    Answer. Rosneft is subject to sectoral sanctions that prohibit U.S. 
persons from (1) transacting or dealing in new Rosneft-issued debt of 
greater than 90 days maturity, or (2) providing goods, services (other 
than financial services), or technology in support of exploration or 
production for deepwater, Arctic offshore, or shale projects that have 
the potential to produce oil in Russian waters and in which Rosneft is 
involved. These sectoral sanctions do not preclude Rosneft from 
obtaining an interest in a U.S. entity.

    However, as the details of this potential acquisition are still 
developing, we cannot yet make a determination as to whether it may 
ultimately involve other sanctions issues. For example, Igor Sechin, 
Rosneft's executive chairman, is a Specially Designated National 
pursuant to Executive Order 13661, and accordingly, his involvement in 
a potential transaction could have sanctions implications. Treasury 
will continue to closely monitor the situation.
                       aca cost-sharing payments
    Question. There's been a lot of discussion about ``cost-sharing 
reduction subsidies,'' or ``CSRs.'' These are payments made directly to 
insurers that help cover things like deductibles and co-pays for those 
between 100-250% of the poverty who bought their insurance on the 
Exchange. Roughly 7 million Americans have these private plans.

    The President has been making these payments since he took office, 
but recently it's been reported that he is threatening to stop. We have 
heard from insurers, insurance commissioners, Governors, and other 
experts, that dangerous rhetoric about CSRs is causing uncertainty in 
health insurance markets, raising premium rates for hardworking 
Americans.

    The administration's lack of clarity on this is causing turmoil. 
There is no way that the private sector can continue to operate with 
this level of uncertainty. Insurers are starting to submit their 
proposed rates for 2018, and they cite the fact that CSRs remain 
unresolved as a main reason for premium increases.

    With all of the discussion on whether or not CSRs would continue to 
be paid, my staff discovered that the President's own budget assumes 
they will continue in 2018. As you know, the Treasury Department 
administers the CSR payments, and my staff found this information in 
the Treasury appendix. When I asked you about these payments at the 
Senate Finance hearing, you couldn't answer the question and said you 
would get back to me so I am resubmitting the question in writing.

    Will the President follow his own budget proposal and continue 
funding CSR payments next year?

    Answer. See response below.

    Question. If the administration will not commit to funding CSR 
payments next year, why was it included in the budget?

    Answer. The administration recently determined that there is not a 
valid appropriation for providing CSR payments, and has stopped making 
them. At the time when the budget was released, White House and agency 
lawyers were still reviewing the matter.

    The administration has emphasized the importance of reforming our 
health-care system to one that works better for patients and their 
providers. Our budget proposal calls for Congress to repeal and replace 
the Affordable Care Act, which could eliminate the need for the CSR 
subsidy.

                                 ______
                                 
               Questions Submitted by Hon. Sherrod Brown
    Question. During a hearing in the Senate Banking Committee, you 
told Senator Toomey that you want to work with Congress to appropriate 
the CFPB.

    I oppose that change because I am concerned that it could be used 
to starve the agency of resources, resulting in fewer consumer 
protections.

    When the President's budget came out, it proved me right. The only 
way to generate the $6.8 billion in savings that you project is by 
zeroing out the CFPB's entire budget.

    Secretary Mnuchin, how can the CFPB protect consumers from 
predatory lenders and abusive servicers, at banks like OneWest for 
example, without any money?

    Answer. I strongly support robust consumer financial protection. I 
also believe that the CFPB should be funded through the annual 
congressional appropriations process like most Federal regulatory 
agencies. Congress's power of the purse serves as an important check to 
ensure that regulators exercise their power responsibly and spend 
taxpayer dollars wisely.

    Question. Are you considering including in the administrations tax 
reform proposal changes to the overall deductibility of interest as a 
business expense?

    Answer. Tax reform is still a work in progress, and we are 
considering a wide range of changes to the tax system.

    Question. Are you considering including in the administrations tax 
reform proposal changes to the historic tax credit?

    Answer. Tax reform is still a work in progress, and we are 
considering a wide range of changes to the tax system.

    Question. When will the administration present Congress with a 
proposal to repeal the Multiemployer Pension Rehabilitation Act and 
replace that legislation with a permanent solution to protect the 
pensions of participants in the Central States Teamsters Pension, the 
United Mine Workers Association Pension, and every other distressed 
multiemployer pension plan?

    Answer. Treasury is committed to working with Congress and other 
stakeholders to develop fiscally responsible solutions to address the 
issues that continue to face multiemployer pension plans. For Treasury, 
fiscally responsible solutions would avoid the need for additional 
Federal funding. In the interim, we continue to work hard on fulfilling 
our role of administering the law as it currently stands.

                                 ______
                                 
             Questions Submitted by Hon. Benjamin L. Cardin
    Question. When you met with the Senate Finance Committee members in 
May, I was encouraged by your statements that the administration would 
prefer to put together a bipartisan tax reform bill. I believe that the 
only way we can get to strong bipartisan reform is by having a public 
and transparent tax reform process.

    I understand that before last week's hearing, you reached out to 
Senate Finance Committee staff in order to schedule a meeting to 
discuss your tax reform package. And, last weekend, President Trump 
indicated via Twitter that his tax reform package was ``moving along in 
the process very well, actually ahead of schedule.''

    Could you clarify what schedule and steps in the ``process'' Mr. 
Trump is referring to?

    Answer. See response below.

    Question. In addition to the meeting you mentioned during the 
hearing, do you have any specific plans in place coordinate with the 
Senate Finance Committee regularly on a bipartisan basis as you flesh 
out the details of your tax reform overview? If so, what are those 
plans?

    Answer. See response below.

    Question. Do you agree that public hearings would be helpful not 
only to building bipartisan consensus, but also to providing a 
transparent process for our constituents? Again, without this 
transparency and public buy-in, I do not think bipartisan tax reform is 
achievable.

    Answer. We have had numerous meetings with members of Congress on 
both sides of the aisle and their staffs, along with many other 
stakeholders. We welcome input from all interested parties and look 
forward to continuing to work with the Congress to achieve our shared 
goal of comprehensive tax reform that grows our economy and provides 
middle-income tax relief.

    Question. Before I joined the U.S. Congress, I was a State 
legislator in Maryland. Because of that experience, I know how 
important the partnership between the Federal Government and State and 
local governments can be.

    The budget already targets programs that are important to State and 
local governments outside of Treasury's jurisdiction. Within your 
jurisdiction, I'm particularly concerned about the fate of the State 
and local tax deduction.

    I know that you're still working on the details of your tax reform 
plan. But I also understand from our bipartisan meeting last week--and 
your other statements in the past and during the hearing--that the 
State and local tax deduction will be eliminated.

    Could you confirm whether you are still considering eliminating the 
State and local tax deduction? If so, how do you respond to the concern 
that you are raising revenues through what amounts to double taxation? 
Essentially, your plan would be taxing income, property, and purchases 
twice. This may not matter as much to the lowest and highest income 
brackets but it does matter to households who are considered in the 
middle class, especially in high cost of living areas.

    Answer. See response below.

    Question. How do you respond to the concern that you are limiting 
the ability of State and local governments to govern as they see fit? 
The deduction has been in place since the beginning of our income tax 
system. Many State and local government organizations are against 
eliminating the deduction. I understand that President Trump wants to 
see State and local governments retain flexibility in helping their 
citizens. If that's the case, I'm curious as to your reasoning behind 
targeting this deduction in particular.

    Answer. See response below.

    Question. Finally, if you are still considering eliminating the 
State and local tax deduction, are you targeting all State and local 
tax deductions, or just the State and local income tax deduction? For 
example, as you know, taxpayers can deduct State and local general 
sales tax instead of State and local income tax. During the hearing, 
Senator Heller raised the State and local deduction and sales taxes, 
and your answer to that issue was a bit unclear. In particular, you 
said, ``We'd be more than happy to work with you, and you don't have 
State taxes, so I can assure you the people who have State taxes really 
call me on this one.'' A clarification on this issue from you would be 
helpful.

    Answer. The deduction for State and local taxes allows taxpayers 
who itemize to choose to deduct either State income taxes or sales 
taxes, which provides an opportunity for the tax deduction in states 
that do not impose income taxes. Modifying the tax treatment of State 
and local tax deductions is something that should be considered in the 
broader context of tax reform. Tax reform is still an ongoing process, 
and I am confident that Congress will ultimately pass into law pro-
growth tax reform that provides middle-income tax relief.

    Question. During your hearing, you took a number of revenue-raising 
``base broadeners'' off the table that are needed to make the 
administration's tax cuts 
revenue-neutral. Many of these ``base broadeners'' represent large tax 
expenditures, such as accelerated depreciation. On the one hand, it was 
very useful to hear these specifics. As you know, one of the biggest 
concerns we hear from taxpayers has been the lack of certainty 
surrounding the tax reform process, including the ``loopholes'' 
referenced in President Trump's tax plan. On the other hand, by 
eliminating the consideration of these ``base broadeners,'' the 
administration has made it very difficult to pay for the large tax cuts 
that Mr. Trump is proposing, without turning to deficit-financed cuts, 
or using an alternative revenue source.

    Do you have any concerns about the impact that deficit-financed tax 
cuts could have on the middle class? For instance, tax cuts financed 
with government debt could raise interest rates, which could have a 
significant impact on the cost of things like mortgages and car loans 
for many middle-income households.

    Answer. We are concerned about welfare of hardworking American 
families, and that is why middle-income tax relief is a priority for 
tax reform. We expect, of course, that in addition to direct tax 
relief, the middle class would benefit from the jobs and higher wages 
that would accompany pro-growth tax reform.

    Question. Are you considering any alternative revenue sources as 
you flesh out the details of the administration's tax reform proposal? 
For instance, in your recent hearing before our House Ways and Means 
colleagues, you suggested a value-added tax could be used to pay for 
tax reform as an alternative to the House's border adjustability tax. 
You and I have also discussed my Progressive Consumption Tax Act, which 
imposes a 10-percent consumption tax, lowers the individual income tax, 
and lowers the corporate tax, in a way that is at least as progressive 
as our current system.

    Answer. We expect to raise revenue from base broadening, including 
repealing special interest tax breaks. Such changes also will make the 
tax code more equitable and more efficient.

    Question. During your hearing, you answered a series of questions 
about the ``economic feedback'' effects incorporated into your budget.

    In particular, to questions regarding the double-counting of 
economic growth obtained through tax reform, you stated the ``intent 
was not to do double-counting'' and that instead you ``overlaid the 
administration's plans for growth'' but that ``we do not have tax 
changes, so we did not model in tax changes.''

    To clarify, did you mean that the administration was comfortable 
modeling the growth benefits of tax reform--but did not feel 
comfortable modeling the costs of tax reform?

    Answer. See response below.

    Question. If so, could you please share the assumptions you made to 
model the growth benefits, and the reasons why those assumptions could 
not be used to model the costs of tax reform?

    Answer. See response below.

    Question. If not, could you explain what you meant by the 
statements above?

    Answer. Our tax reform principles outlined in the budget are simply 
that--principles or targets that would inform a desirable tax system. 
We did not put forth, nor did we model in the budget, a complete set of 
specific proposals consistent with those principles. The budget does 
reflect, however, our view that appropriate tax reform can contribute 
significantly to economic growth.

    Question. You also responded to the question ``Is the growth coming 
through tax changes?'' in the following way: ``One of them, but there's 
also plenty of other economic policies, trade policies, or whether it's 
our regulatory policies. There's plenty of other things that will 
impact the growth.''

    Could you please share a list of the other economic policies that 
contributed to the growth effects in your budget? Could you also 
indicate how much economic growth was estimated to be gained from those 
other, non-tax policies?

    Answer. We anticipate that economic growth will result from a 
combination of tax reform, regulatory reform, and trade reform. We 
believe it is reasonable to expect that tax reform alone can 
significantly add to economic growth, which can in turn increase tax 
revenues. We did not put forth, nor did we model in the budget, 
specific trade and regulatory reform proposals because the 
administration is still evaluating those reform proposals.

    Question. During the hearing, and in other public forums like the 
meeting of the G7, you stated that ``over 70 percent of the cost of 
corporate taxes are actually borne by the worker,'' and so reducing the 
corporate tax rate will mean increased wages and opportunities for U.S. 
workers.

    I support making our tax code more competitive and doing so in a 
way that helps American workers. However, it's my understanding that 
the incidence of the corporate tax burden is quite controversial. For 
instance, the Joint Committee on Taxation staff follows what I believe 
is the middle range of the current economic literature by assuming that 
25 percent of corporate income taxes are borne by domestic labor and 75 
percent are borne by owners of domestic capital--almost the opposite of 
what you are assuming.

    Could you please clarify the sources for your assumptions (in the 
hearing, you mentioned ``multiple economic studies'')?

    Answer. See response below.

    Question. In addition, is it your position that your ``70% on 
workers'' assumption represents a consensus economic position, or falls 
in the middle of the range proposed by economists?

    Answer. See response below.

    Question. If not, could you please explain why you have chosen a 
position without consensus in arguing that a corporate rate reduction 
will benefit workers more than shareholders?

    Answer. I was expressing an informed opinion based on available 
information. While estimates of the incidence of the corporate income 
tax by reputable economists and organizations span a range, most 
economists agree that a substantial share of the burden of the tax is 
shifted onto labor. Recent literature reviews include two CBO working 
papers (e.g., Jennifer Gravelle's working papers 2010-3 and 2011-01) 
and a recent paper by Professor Glenn Hubbard (Azemar and Hubbard in 
the Canadian Journal of Economics, December 2015). This literature 
shows that 70 percent shifted to workers is within the realm of 
reasonableness. Hubbard, for example, has new results that suggest 
about 60 percent is shifted to labor. Another frequently cited CBO 
paper by William Randolph has 70 percent shifted to labor. Some studies 
have over 100 percent of the burden shifted to labor.

                                 ______
                                 
                Questions Submitted By Hon. John Cornyn
    Question. Mr. Secretary, I want to circle back on a topic that we 
initially discussed in my office prior to your confirmation, and that 
we discussed again about a month ago. The Committee on Foreign 
Investment in the United States, or CFIUS, plays a very important role 
in reviewing foreign investment transactions and vetting them for 
national security risks. As we speak, China continues its aggressive 
campaign to vacuum up advanced U.S. technology however and wherever it 
can, whether stealing it through cyber means, taking advantage of 
research environments within U.S. academic institutions to get it, and 
investing in companies that have it.

    I consider this to be a serious and growing national security 
problem, which is why I am working on legislation to close obvious gaps 
in the CFIUS process. China seeks not just the technology, but also 
U.S. ``know-how,'' the so-called human capital that resides with these 
U.S. companies, and that is not something our export control system 
really guards against. It is clear that China has identified the gaps 
in our processes, as the Director of the National Security Agency, 
Admiral Mike Rogers, recently said in testimony before another Senate 
committee. In particular, China continues to coerce U.S. companies into 
forming joint ventures, based in China, with Chinese entities for the 
purpose of getting U.S. technology. These joint ventures, in most 
cases, are not subject to CFIUS jurisdiction, which is a glaring 
problem.

    Another one of these gaps is what others have dubbed, 
``foundational technologies,'' or early-stage technologies that are so 
cutting-edge, so new that they are beyond the current reach of our 
export control system, at least until it figures out how to categorize 
them. These are the technologies that China wants and has had some 
success in getting its hands on.

    Do you agree that, in the past few years, China has been exploiting 
the open investment system that we have in the United States, 
particularly with an eye towards harvesting our technology?

    Answer. China's industrial policies for technology explicitly State 
the aim of acquiring know-how to promote indigenous Chinese 
``champions.'' To the extent that it seeks to carry out these policies 
through acquisition of U.S. technology, and to the extent that any 
country seeks to acquire U.S. technology in pursuit of strategic 
objectives, it is appropriate and necessary for us to consider the 
impact of such activities on U.S. national security, including--
importantly--through CFIUS. CFIUS is one of several tools, like export 
controls, that the United States has to address concerns related to 
transactions involving potential technology transfer risks. We are 
prepared to work with Congress to ensure that the U.S. Government has 
the necessary and appropriate tools to address any emerging national 
security risks.

    Question. Do you feel like the current CFIUS process adequately 
protects against this threat, or are targeted and measured legislative 
reforms needed?

    Answer. See previous response.

    Question. Mr. Secretary, President Obama's first budget in 2009 
assumed an average growth rate of 4 percent over the first 4 years. 
President Trump's budget assumes less than 2.8 percent over the next 4 
years. In addition, President's Obama's first budget assumed an average 
growth of 3.2 percent over 10 years; President Trump's budget assumes 
2.9 percent. In seven of the eight budgets submitted by the previous 
administration, 3 percent or more of economic growth was assumed at 
some point in time. Finally, half of the budgets proposed by President 
Obama also assumed annual growth of more than 4 percent sometime in the 
10-year budget window.

    With this mind, how would you describe the economic assumptions in 
the President's budget?

    Answer. They are reasonable post-policy assumptions.

    Question. What factors or policies do they reflect?

    Answer. We anticipate that economic growth will result from a 
combination of tax reform, regulatory reform, and trade reform. We 
believe it is reasonable to expect that tax reform alone can 
significantly add to economic growth, which can in turn increase tax 
revenues. We did not put forth, nor did we model in the budget, 
specific trade and regulatory reform proposals because the 
administration is still evaluating those reform proposals.

    Question. As you may know, Texas has led the Nation in exports 
since 2002. In 2016 alone, Texas farmers, ranchers, and manufacturers 
exported more than $232 billion worth of goods to buyers around the 
globe. In fact, $92 billion worth of goods went to Mexico, which 
represented more than 37 percent of the State's total goods exports.

    NAFTA went into effect in 1994--more than 23-years ago--and has 
provided significant opportunities for American businesses and 
consumers. Today, 8 million U.S. jobs depend on trade with Canada, and 
more than 5 million U.S. jobs depend on trade with Mexico. That means 
hundreds of thousands of jobs in each State depend on trade with our 
NAFTA partners. In Texas, more than 380,000 jobs depend on trade with 
Mexico.

    I recently discussed the importance of NAFTA with Secretary of 
Commerce Wilbur Ross and U.S. Trade Representative Bob Lighthizer. They 
mentioned to me that their number-one priority in modernizing NAFTA is 
to ``do no harm.'' I could not agree more. With the number of benefits 
trade and NAFTA represent to my State, you can see how doing no harm is 
pretty important to those who grow, raise, and assemble the products we 
consume in Texas and sell internationally.

    With that said, what role will you play in the NAFTA negotiations?

    Answer. Treasury co-leads with USTR negotiations in financial 
services and works closely with U.S. financial regulators, Congress, 
the financial services industry, and other stakeholders to develop and 
review trade proposals that advance U.S. economic priorities, preserve 
the ability of U.S. regulators to safeguard the integrity of the 
financial system, and protect taxpayers.

    Treasury also leads on issues related to currency, tax policy, and 
some areas of Customs policy. Treasury is engaged in the interagency 
process to determine U.S. trade policy and sends negotiators to rounds 
of trade talks, as needed.

    Question. Can you elaborate on the priorities this administration 
will seek to achieve in NAFTA negotiations?

    Answer. The administration will inform Congress of our detailed 
negotiating objectives according to the timeframes set out in Trade 
Promotion Authority (TPA). USTR, in consultation with Treasury and 
other agencies, is considering the objectives in the context of TPA and 
will also take into account points raised in consultations with 
Congress, and the public, including the public hearing on June 27th.

                                 ______
                                 
                Questions Submitted by Hon. Dean Heller
    Question. I have strongly opposed the 385 rules, which Treasury 
finalized in October 2016. As you know, these rules would impact 
ordinary day-to-day transactions involving related-party debt. I'm 
aware of many businesses--from small businesses to large 
multinationals--in my home State that would have been detrimentally 
impacted had I not pushed on Treasury to modify its rules. Although we 
have seen some welcome changes made to these rules once finalized, I 
believe these rules were an overreach by the previous administration 
and that an overhaul of the tax code is the only thing that can and 
will address Treasury's concerns on inversions. Pursuant to the 
executive order issued this April, Treasury is currently reviewing 
``significant'' tax regulations that ``impose an undue financial burden 
on [American] taxpayers, add undue complexity . . . , or exceed 
statutory authority.''

    What is the status of this review? Is Treasury planning to withdraw 
the 385 rules in the near future?

    Answer. On April 21, 2017, President Trump signed Executive Order 
13789, which orders the Secretary to immediately review all significant 
tax regulations issued by the Department of the Treasury on or after 
January 1, 2016, and, in consultation with the Administrator of the 
Office of Information and Regulatory Affairs, Office of Management and 
Budget, identify in an interim report to the President all such 
regulations that: (1) impose an undue financial burden on United States 
taxpayers; (2) add undue complexity to the Federal tax laws; or (3) 
exceed the statutory authority of the Internal Revenue Service. The 
Treasury Department completed that review on October 2, 2017. With 
respect to the section 385 regulations, the Treasury and IRS have 
delayed application of the burdensome documentation rules until 2019. I 
also anticipate that tax reform legislation will address the 
distortions and earnings stripping and other tax incentives that lead 
to inversions so that the section 385 distribution regulations can be 
revoked.

    Question. Since coming to Congress, I have been an outspoken 
advocate for parity between tax credits for solar, geothermal, and 
other innovative technologies. However, due to a drafting error, the 
section 48 investment tax credits (ITCs) for certain innovative 
technologies--including commercial geothermal--were inadvertently 
omitted from the 2015 PATH Act. The resulting disparity in tax 
treatment has created an uneven playing field that disincentivizes 
investment in these orphan technologies. Since the PATH Act's passage, 
I have been working with my colleagues to rectify the situation and 
secure a fix for commercial geothermal and other orphan technologies. 
This fix is critically important for the alternative energy sectors in 
Nevada, which have the potential of creating a huge number of jobs in 
the State.

    Do you have any concerns or problems with providing parity across 
the alternative energy sectors so that all section 48 technologies are 
treated equally?

    Answer. It is a priority of this administration to promote U.S. 
energy sources, and we recognize the important role that all of the 
different technologies play in the promotion of U.S. energy sources, 
both in terms of energy production and job creation. We hope to 
continue to work with Congress to support innovative energy solutions.

    Question. According to a recent report in the Reno Gazette-Journal, 
U.S. consumer debt--including student debt, credit card debt, and auto 
debt--is approaching $13 trillion.

    Do you think the current indebtedness of American consumers will 
hinder the growth of our Nation's economy? If not, how much more can 
consumer debt grow before it begins to negatively impact economic 
growth?

    Answer. Consumer borrowing does not appear to be a near-term threat 
to economic growth, despite its currently high level. In Q1, consumer 
credit outstanding reached $3.8 trillion, equivalent to 26.5 percent of 
disposable personal income and the highest proportion in 46 years. 
Combined with mortgage debt, household debt stood at $13.6 trillion in 
Q1, equivalent to 94.7 percent of disposable personal income. Although 
aggregate household debt levels have risen, the debt service ratio, or 
share of debt service payments in disposable personal income, has 
remained near historic lows for the past 2 years. In the latest data 
available, the household debt service ratio was 10.0 percent in 2016 
Q4, well below the series peak of 13.2 percent reached in 2007.

[GRAPHIC] [TIFF OMITTED] T2517.003


    Healthy household balance sheets also support the argument that 
consumer borrowing presents only a modest risk to the near-term 
outlook. In Q1, net worth rose to 662 percent of disposable income--the 
highest level since 1955--supported by gains in real estate assets, 
corporate equities, mutual funds, and retirement accounts. Consumer 
credit and mortgage debt account for 14.3 percent of household net 
worth in Q1, and owner's equity in real estate has risen to 58.3 
percent as interest rates have remained low and households have paid 
down mortgage debt. In recent quarters, consumer borrowing has 
supported the economy amidst slow real wage growth (the latter a result 
of persistently slow productivity growth in the past few years).

[GRAPHIC] [TIFF OMITTED] T2517.004


    Although consumer borrowing may not be a risk to current economic 
growth, there are possible downside risks: (1) abrupt increases in 
interest rates, (2) wealth shocks, and (3) unemployment and income 
loss. Each of these shocks has the potential to increase debt-service 
payments, constrain consumption, and increase the probability of 
default. Of the three broad shocks, quickly rising interest rates poses 
a low immediate risk since about 73 percent of household debt is from 
mortgages, often locked in by fixed rates. Overall delinquency rates 
(including credit cards, auto loans, mortgages, and student loans) have 
been little changed in recent quarters but auto delinquency rates have 
shown a modest uptick. In addition, the Federal Reserve has signaled 
that it anticipates raising interest rates very gradually.

    Question. The Trump administration has indicated that it is in 
favor of repealing all personal deductions except those for mortgage 
interest and charitable contributions. However, repealing the State and 
local tax (SALT) deduction would cause the Federal taxes of Nevadans 
who itemize to go up by more than $1,000 on average, according to a 
recent Tax Policy Center analysis.

    Will you commit to working with me to ensure that the majority of 
Nevadans are better off under any tax reform that occurs?

    Answer. We are committed to reforming the tax system to produce 
better outcomes for Americans in all States, Nevada included. One 
important consideration is the effect tax reform will have on economic 
growth, which can help to improve the situation of some who may lose 
specially targeted tax breaks.

    Question. Declining home prices and rising foreclosure rates have 
forced many Nevada families to sell their homes for less than they paid 
for them, and in some cases for less than the outstanding debt. 
Homeowners in these hardship situations still unfairly face additional 
income taxes if part of their mortgage loan is forgiven. I have worked 
and continue to work with several members of this committee to try to 
find some relief for those individuals being asked to pay taxes on 
income they have never received.

    Given tax reform is moving forward, how would you address this 
issue?

    Answer. As you know, we are working closely with Congress to 
develop a tax reform package. I am, of course, willing to consider tax 
relief that would exclude from tax the value of forgiven home mortgage 
debt.

                                 ______
                                 
              Question Submitted by Hon. Claire McCaskill
    Question. Since January 2017, I have sent five letters to the 
Treasury Department regarding its ability to address potential 
conflicts of interest stemming from President Trump's failure to divest 
his financial holdings. As I described in these letters, the Treasury 
may confront conflicts arising during its money laundering 
investigations, Financial Stability Oversight Council (FSOC) 
deliberations, and Committee on Foreign Investment in the United States 
(CFIUS) reviews. In addition, President Trump has tasked the Treasury 
with receiving profits the Trump Organization will generate from 
foreign government patronage of Trump-owned hotels and similar 
businesses. As a result, the Treasury now stands on the front lines of 
the effort to mitigate President Trump's serious and wide-ranging 
conflicts of interest.

    In response to these concerns, the Treasury sent a letter dated 
March 31, 2017, in which it merely stated, quote, ``Treasury diligently 
monitors its own compliance with the applicable conflicts of interest 
laws,'' and ``Treasury's ethics officials work with agency personnel to 
address and mitigate potential conflicts if and when they arise.'' 
Treasury provided a similar response in another letter on May 19, 2017. 
These inadequate responses suggest the Treasury is unable or unwilling 
to develop the policies and procedures necessary to shield it from 
apparent or actual conflicts of interest.

    Can Secretary Mnuchin pledge to me and the committee that the 
Treasury will provide substantive answers to all requests and will work 
with Congress to address the conflicts of interest challenges posed by 
the President's holdings?

    Answer. Treasury is committed to responding appropriately to 
requests for information for members of Congress. As stated in the 
March 31, 2017 and May 19, 2017 letters, Treasury is committed to 
addressing and mitigating all potential conflicts of interest within 
its jurisdiction under applicable law if and when they arise.

                                 ______
                                 
                 Questions Submitted by Hon. Tim Scott
    Question. The Foreign Accounts Tax Compliance Act (FATCA) was 
intended to prohibit the use of international financial accounts and 
transactions to evade Federal income taxes. However, under the previous 
administration, the IRS and Treasury Department decided that such 
transactions should be treated as ``withholdable payments'' and 
therefore included under the FATCA enforcement regime. International 
property and casualty insurance transactions have no cash value and 
can't be used to evade taxes. The inclusion of these transactions under 
FATCA does not help fight tax evasion, but brings about a significant 
cost in regulatory compliance.

    Please answer the following questions as specifically as possible.

    What is your understanding of the previous administration's 
justification for treating property and casualty premiums as 
withholdable payments under FATCA?

    Answer. See response below.

    Question. Does the administration believe that the 
extraterritoriality of capturing insurance agreements on U.S. risk 
between foreign persons under FATCA is justified?

    Answer. See response below.

    Question. Can your Department issue additional guidance around the 
definition of when a premium is U.S.-sourced in an effort to reduce the 
burdens associated with FATCA compliance for insurers and reinsurers?

    Answer. See response below.

    Question. Is the Treasury Department willing to determine if there 
is a legitimate purpose to imposing FATCA requirements on property and 
casualty premiums that outweighs the significant burdens on the 
insurance industry and policyholders?

    Answer. This is a complicated issue because, on the one hand, non-
cash-value insurance contracts present a low risk of tax evasion, but 
on the other, we are aware that some foreign insurance companies that 
issue only non-cash-value insurance contracts are being used by their 
U.S. owners to avoid reporting certain income to the IRS. The FATCA 
regulations take these different risk profiles into account and exclude 
non-cash-value insurance contracts from the definition of a ``financial 
account'' and therefore the beneficial owner of the contract is not 
required to be documented and reported under FATCA. However, a 
privately held foreign insurance company with substantial passive 
assets may be treated as passive non-financial foreign entity (passive 
NFFE) to ensure that information on the U.S. owners of these companies 
is reported to the IRS. The withholding on premiums paid to insurance 
contracts may be subject to withholding when the payment is made to a 
passive NFFE to incentivize the entity to certify to withholding agents 
whether such entity has any substantial U.S. owners, and if so, to 
provide certain information to the withholding agent to avoid being 
withheld upon.

    Treasury and the IRS have had many discussions with stakeholders 
specifically regarding how the FATCA rules should apply to non-cash-
value insurance contracts and the companies that issue them, including 
the development of a regime for directly reporting NFFEs that further 
streamlines the information reporting of substantial U.S. owners with 
regards to passive NFFEs. The Treasury Department and the IRS will 
continue to engage interested stakeholders to implement FATCA in a 
manner that appropriately balances the compliance objectives of the 
statute with the burdens imposed.

                                 ______
                                 
              Questions Submitted by Hon. Debbie Stabenow
    Question. I believe that we do not have an economy or a middle 
class unless we are making things and growing things here in the United 
States. To stay ahead of the global competition, we must be at the 
forefront of investment in research and development. Any changes to our 
tax code should not put at risk the advantage the United States has in 
R&D and we must find ways to foster that advantage. According to both 
the Treasury Department and private studies, the R&D tax credit has 
created economic and job growth in the United States, and kept us 
competitive with the rest of the world. These are high-paying, good 
jobs that we should be fighting to keep, and we should not miss 
opportunities to help encourage businesses to move their R&D inside our 
borders.

    Do you support maintaining and strengthening the R&D tax credit to 
encourage companies to move their innovation facilities to the United 
States?

    Answer. The administration supports maintaining and strengthening 
the R&D tax credit.

    Question. How will you ensure that U.S. R&D stays ahead of the rest 
of the world and that companies increase their high-paying research 
jobs here in the United States?

    Answer. The administration supports policies that make the United 
States a more attractive place for businesses to invest, including in 
R&D. Specifically, tax reform that reduces the tax rate on businesses 
would encourage job creation and economic growth. In addition, the 
administration is committed to eliminating unnecessary and wasteful 
regulations that function much like taxes by inhibiting economic growth 
and employment.

    Question. In recent iterations of tax reform proposals, 
consideration was given to closely held businesses. Closely held 
businesses make significant investments in our economy and are impacted 
differently than corporations by the tax code. What consideration do 
you plan to give closely held businesses when reforming the tax code?

    Answer. The administration agrees that closely held businesses, 
including operating partnerships and S corporations, make significant 
economic and social contributions to the U.S. economy. We are 
considering tax reform proposals that would provide all businesses, 
including such closely held businesses, a tax cut.

    Question. As you well know, our tax code should be predictable and 
fair so businesses are able to make long-term plans. One such example 
has been the business interest expenses deduction, which has been 
around for nearly 100 years. Businesses of all sizes and industries 
rely on credit financing and interest deduction to expand their 
operations, and this is particularly true of small businesses, which 
are more likely to rely on loans to be able to invest and grow. We need 
to make sure that we are not raising costs for businesses that are 
investing in equipment and jobs.

    Do you believe interest deductibility is currently a critical tool 
to help businesses maintain their operations and expand?

    Answer. Tax burdens are reduced by lower statutory rates and more 
generous exemptions, deductions, and credits. Loss of particular tax 
preferences can be offset by increasing others. Interest expense is 
typically fully deductible under current U.S. corporate income tax law, 
meaning that investment financed by debt, unlike that financed by 
equity, bears no burden from U.S. corporate income tax on the margin. 
Many tax reform plans reduce this tax preference for debt by limiting 
the deductibility of interest and/or reducing the tax burden on 
investment financed with equity. Eliminating this tax distortion is 
considered to improve efficiency by, for example, reducing the chances 
of bankruptcy.

    Question. Would elimination or limitation of interest deductibility 
influence businesses' decisions to invest?

    Answer. In isolation, yes, but most tax reform plans fully offset 
the effect on investment decisions by expanding deductions for equity-
financed investment and/or lowering statutory tax rates.

    Question. How would the mix of rising interest rates along with the 
elimination of interest deductibility affect the ability of business 
owners to borrow and invest in growing their businesses?

    Answer. Nominal interest rates reflect inflation and real interest 
rates. If interest rates rise due to a rise in inflation, revenues 
typically rise to offset the rise in debt service and other costs. 
Increases in real interest rates burden borrowers (and reward savers) 
whether or not interest expense is fully deductible, but the increase 
in burden is larger with less interest deductibility, in isolation 
(assuming no offsetting changes in the tax code).

    Question. What role does credit financing and interest 
deductibility through the current tax code play for these small 
businesses?

    Answer. Interest deductibility reduces the tax burden of small 
businesses, like all other deductions, exemptions, credits, and reduced 
statutory tax rates.

    Question. Whether I can support a tax reform proposal is going to 
be based on how it will help families in Michigan. That means creating 
good-paying jobs by promoting manufacturing and agriculture; making 
sure that we have a well-trained workforce; relieving high cost burdens 
on middle class such as child care and higher education place; and 
being fiscally responsible. We need to bring jobs back to the United 
States, promote innovation, and help small businesses grow and thrive. 
The administration's proposal did not provide any clarity about how it 
will help families in Michigan. Estimates from the nonpartisan Tax 
Policy Center suggest that almost half of the benefits from your tax 
proposal go to the top 1 percent, and the proposal provides no 
information about how it will help manufacturing or encourage the 
creation of good domestic jobs.

    How is your proposal going to help an average family in Michigan?

    Answer. Middle-income tax relief for all American families, 
including those in Michigan, is a priority for tax reform. We expect 
that in addition to direct tax relief for middle-income families, 
American workers would benefit from the jobs and higher wages that 
would accompany pro-growth tax reform.

    Question. How would this proposal promote manufacturing and create 
good-
paying jobs in Michigan?

    Answer. Tax reform that reduces the tax rate on businesses would 
encourage job creation and economic growth, including in the 
manufacturing sector, a key source of good-paying jobs in Michigan.

    Question. President Trump promised that he would not cut Social 
Security. However, the budget does exactly that, cutting tens of 
billions of dollars from Social Security Disability Insurance. These 
cuts would hurt some of the most vulnerable Americans.

    OMB Director Mulvaney said that these cuts do not violate President 
Trump's campaign promise not to cut Social Security because Social 
Security Disability Insurance is not what people think of when they 
think of Social Security. Do you agree with him?

    Answer. The Social Security payroll tax funds both the Old Age and 
Survivors program and the Disability Insurance program. Most workers 
expect to receive benefits from the Old Age and Survivors program when 
they retire, and likely welcome reforms to Disability Insurance that 
promote, where feasible, labor force participation of people with 
disabilities and help individuals with temporary disabilities return to 
work.

    Question. OMB Director Mulvaney said that Social Security 
Disability Insurance is ``welfare . . . for the long-term disabled.'' 
Do you agree with that statement?

    Answer. Disability Insurance improves the welfare of the long-term 
disabled.

    Question. OMB Director Mulvaney said that he ``hopes'' that people 
lose benefits or get less in benefits under the administration's 
proposed Social Security cuts. Do you agree with that statement?

    Answer. Reforms that promote, where feasible, labor force 
participation of people with disabilities and help individuals with 
temporary disabilities return to work should be encouraged.

    Question. There is no question we are facing a looming crisis on 
multiemployer pensions. Some multiemployer plans--like Central States, 
which affects 47,000 workers and retirees in Michigan--are at imminent 
risk of not being able to pay out all of the benefits that workers have 
earned over a lifelong career, and given up pay raises and other 
benefits for. When you had your nominations hearing, I asked you how 
the administration planned to address this issue, and you did not 
provide any specifics. In fact, your response to my questions for the 
record on pensions--which I submitted twice--were very generic. I sent 
you, Secretary Ross, and Secretary Acosta a letter asking again what 
this administration proposes as a way to secure workers' much-needed 
and hard-earned pensions. Your response did not outline any plan to 
address the solvency of the PBGC, or the looming cuts to earned pension 
benefits.

    How does the administration propose to address multiemployer 
pensions?

    Answer. The administration is committed to working with Congress 
and other stakeholders to develop a fiscally responsible solution that 
will address the issues that multiemployer pension plans continue to 
face. For us, fiscally responsible solutions would avoid the need for 
additional Federal funding.

    Question. If the administration does not yet have a proposal, what 
specific steps are being taken right now to develop one?

    Answer. Treasury has been meeting with stakeholders on this issue, 
and it was discussed at the June 21, 2017 meeting of the PBGC board. 
Treasury is committed to working with Congress and other stakeholders 
to develop a fiscally responsible solution that will address the issues 
that multiemployer pension plans continue to face.

    Question. The administration did provide one proposal in the budget 
to change the way PBGC assesses premiums in an effort to improve its 
solvency. How would that proposal increase premiums?

    Answer. The budget proposes to create a variable-rate premium (VRP) 
and an exit premium in PBGC's multiemployer program. The VRP would 
require plans to pay additional premiums based on their level of 
underfunding, as is done in the single-employer program. An exit 
premium assessed on employers that withdraw from a plan would 
compensate the insurance program for the additional risk imposed on it 
when employers exit. Premium rate changes would be phased in over the 
10-year budget window. PBGC would have limited authority to design 
waivers for some or all of the variable rate premium assessed to 
terminated plans or ongoing plans that are in critical status, if there 
is a substantial risk that the payment of premiums will accelerate plan 
insolvency resulting in earlier financial assistance to the plan. 
Aggregate waivers for a year would be limited to 25% of anticipated 
total multiemployer variable rate premiums for all plans. In my 
capacity as a Board member of the PBGC, I will continue to work with 
the other Board members to continually evaluate various options for 
working with distressed multiemployer and single-
employer plans.

    Question. What would be the impact of those increased premiums on 
employers and employer participation in multiemployer pension plans?

    Answer. The proposal is not expected to have a significant effect 
on employer participation in multiemployer plans. The inclusion of 
waiver authority is intended to limit the negative impacts that 
increased premiums could have on certain plans in critical status.

    Question. Why does this proposal not address the very low PBGC 
guarantee level for multiemployer pension benefits?

    Answer. The budget proposal does not include changes to PBGC 
guarantee levels for either the multiemployer or single-employer 
programs. In my capacity as a board member of the PBGC, I will continue 
to work with the other board members to evaluate various options for 
working with distressed multiemployer and single-
employer plans.

    Question. Your tax reform proposal maintains the mortgage interest 
deduction, but significantly increases the standard deduction. This 
would cause about 25 million homeowners to lose the value of the 
mortgage interest deduction, because a married couple would need to 
have a home loan of at least $608,000 (almost triple the mortgage on a 
median U.S. home) before their mortgage interest deduction would be 
more than the standard deduction. In fact, between the impact these 
proposals would have on the mortgage interest deduction and your 
administration's consideration of eliminating the deduction for State 
and local taxes, taxes could actually go up for some homeowners.

    What impact do you believe your proposal would have on housing 
prices and the housing market as a whole?

    Answer. If families choose a doubled standard deduction, their tax 
bills will be lower than they would be if the current-law standard 
deduction continued. In addition, the doubled standard deduction would 
lower the tax bills not only of the families that you mention but also 
of both home-owning families that do not itemize today and renters, who 
cannot claim the mortgage interest deduction at all today but could 
dedicate their tax savings toward building up down payments for 
``starter homes.'' These reductions in middle-class families' taxes 
will buoy the housing market through economic growth.

    Limiting deductions for home mortgage interest and real property 
taxes would likely have only a modest effect on the price of housing, 
even in the very short run. Moreover, in the long run, the price of 
housing is likely to be relatively insensitive to changes in tax 
policy.

                                 ______
                                 
                 Questions Submitted by Hon. John Thune
    Question. On May 17, 2017, I introduced the Investment in New 
Ventures and Economic Success Today Act (S. 1144). The bill is an 
approach that will allow businesses, farms, and ranches in South Dakota 
and across the country to recover their capital investments faster--for 
many expensing them immediately. The administration's tax reform 
framework focuses on the other main tool we can use in tax reform to 
foster economic growth--reducing tax rates. How does the administration 
see expensing and faster cost recovery fitting into the President's tax 
reform framework?

    Answer. We have been working with the Congress on many aspects of 
tax reform intended to promote economic growth, including some type of 
accelerated cost recovery. I am confident that Congress will ultimately 
produce legislation that provides economic growth and middle-income tax 
relief for Americans across the country, including South Dakota.

    Question. Last month, you and Director Cohn released the 
President's framework for tax reform. At that time, you indicated that 
you would be holding listening sessions and discussions with taxpayers, 
businesses, Congress, and other stakeholders. Can you share with the 
committee some of the feedback you have been receiving with respect to 
the President's framework and any other areas that need to be addressed 
in tax reform?

    Answer. I have spent a great deal of time this year working on tax 
reform and that includes meeting with members of Congress, both 
Republicans and Democrats, as well as meeting with workers and business 
owners in different parts of the country. The one thing that nearly 
everyone agrees on is the need to make our tax code simpler and fairer 
so that it creates economic growth and provides a tax cut to 
middle-income Americans. As the tax reform process continues, I am 
confident Congress will pass legislation that accomplishes these goals.

    Question. Under the President's April 21st executive order, you are 
in the process of identifying regulations within the Treasury 
Department that impose undue financial burden and complexity. I believe 
there are a number of final regulations that were promulgated by the 
last administration that should be on that list. It is unclear, 
however, how you plan on handling regulations that were proposed but 
not finalized--ones like the estate tax valuation discount regulations 
that the Obama administration proposed in August of 2016. These 
regulations, if finalized, would make it more difficult for owners of 
family farms and businesses to pass them on to future generations and 
significantly increase the estate-tax burden on family businesses. Mr. 
Secretary, as part of your review of regulations, will you include 
proposed regulations? In addition, will you withdraw those proposed 
regulations that were not finalized in order to give taxpayers 
confidence that these proposals will not move forward without at least 
being reproposed?

    Answer. The Treasury Department's review of post-2015 regulations 
pursuant to the President's April 21, 2017, executive order has 
included all regulations--final as well as proposed and temporary 
regulations. For each regulation that we determine meets the criteria 
of the executive order, we will determine separately for each such 
regulation whether it should be withdrawn, reproposed, or finalized 
with changes made in accordance with the usual regulatory process and 
in response to the public comments received.

    Question. I was pleased to see that the administration's tax-reform 
framework seeks to preserve the incentive for charitable giving. 
Stakeholders have raised concerns, however, that increasing the 
standard deduction could create disincentives for charitable giving. 
Have you looked at that potential interaction? Are there other steps we 
can take to encourage charitable giving so the generosity of Americans 
can continue to be put to work in our communities helping those in 
need?

    Answer. We have made clear that it is important to have a tax 
incentive for charitable giving. A reformed tax system has multiple 
goals, including simplicity, fairness, and efficiency, all broadly 
conceived. An increased standard deduction, in combination with reduced 
tax incentives that favor the wealthy or special interests, seem to us 
to help advance these goals. We do not anticipate that increasing the 
standard deduction will cause former users of the itemized deduction to 
markedly change their charitable giving.

                                 ______
                                 
                 Prepared Statement of Hon. Ron Wyden, 
                       a U.S. Senator From Oregon
    What the American people demand of us is bipartisan cooperation on 
taxes, health care, and the many other issues that affect their daily 
lives. Yet what the new administration has offered is a one-page tax 
cut proposal that's shorter than the typical drug store receipt and a 
budget that looks like it was written by people who believe working 
families and seniors have it too easy.

    The tax one-pager puts forward numbers that don't come close to 
adding up. The math behind this tax plan would make Bernie Madoff 
blush. So without realistic tax numbers to analyze, I want to focus my 
remarks on two specific points.

    First, the administration's economic team says the President's 
focus is a middle-class tax cut. If this plan was built for a middle-
class tax cut, then Trump Tower was built for middle-class housing.

    On one side of the ledger, there's not much detail on how the Trump 
tax plan would help working families or the middle class, just vague, 
open-ended promises.

    Contrast that with how it treats the very fortunate, very few. 
Eliminating the estate tax and opening a new, mile-wide loophole for 
the wealthy to exploit passthrough status is a prescription for more 
inequality in America.

    Right here in this room, Mr. Mnuchin and I agreed on the now-
legendary Mnuchin Rule of ``no absolute tax cut for the rich.'' But 
after what we've seen in the tax plan and the budget, we'll throw that 
in the dustbin alongside the Trump promise not to cut Medicare, 
Medicaid, and Social Security.

    Now to the second point. The Trump economic team is dusting off the 
old, disproven idea that tax cuts pay for themselves. There's not a 
reputable economist out there who will tell you that. But you don't 
have to take my word for it, you can look back at history.

    Just in the last few years, Kansas slashed rates for the wealthy 
and businesses, zeroing them out in some cases. They sold the plan by 
saying it would launch the State's economy into the stratosphere. 
Instead, its revenues have cratered. Kansas is struggling to keep its 
schools open and basic services running.

    Go back a little further to the early 2000s and the Bush tax cuts. 
Those tax cuts didn't pay for themselves either.

    Look back to Ronald Reagan--that noted tax-and-spend liberal. He 
passed a big, regressive tax cut in 1981. But lo and behold, in 1982 
and 1984, he had to raise new revenue to make up for the deficits that 
were caused.

    Bottom line, the pay-for-itself argument behind this tax plan holds 
up about as well as the flat-Earth theory, except people still try to 
defend it.

    The only way to pass lasting, job-creating tax reform that's more 
than an economic sugar-high is for it to be bipartisan. Tax reform is 
not a haphazard exercise, throwing together a set of bullet points in 
the wake of a critical op-ed written by campaign advisors. It takes a 
lot of careful consideration to write a bipartisan tax reform bill, and 
I know, because I've written two of them.

    The focus ought to be on writing an economically responsible 
proposal that will create good-paying, red, white, and blue jobs 
without heaping a new burden on the middle class. That's the kind of 
reform that will win the support of both sides and will last. Thank 
you, Chairman Hatch.

                                 ______
                                 
                America's Health Insurance Plans et al.

April 12, 2017

The Honorable Donald J. Trump
President of the United States
The White House
1600 Pennsylvania Avenue, NW
Washington, DC 20050

Dear Mr. President:

As providers of healthcare and coverage to hundreds of millions of 
Americans, we share many core principles and common priorities. We 
believe that every American deserves affordable coverage and high-
quality care. We stand ready to work with the Administration and all 
members of Congress to keep this commitment.

A critical priority is to stabilize the individual health insurance 
market. The window is quickly closing to properly price individual 
insurance products for 2018.

The most critical action to help stabilize the individual market for 
2017 and 2018 is to remove uncertainty about continued funding for cost 
sharing reductions (CSRs). Nearly 60 percent of all individuals who 
purchase coverage via the marketplace--7 million people--receive 
assistance to reduce deductibles, co-
payments, and/or out-of-pocket limits through CSR payments. This 
funding helps those who need it the most access quality care: low- and 
modest-income consumers earning less than 250 percent of the federal 
poverty level. If CSRs are not funded, Americans will be dramatically 
impacted:

   Choices for consumers will be more limited. If reliable 
        funding for CSRs is not provided, it may impact plan 
        participation, which would leave individuals without coverage 
        options.

   Premiums for 2018 and beyond will be higher. Analysts 
        estimate that loss of CSR funding alone would increase premiums 
        for all consumers--both on and off the exchange--by at least 15 
        percent. Higher premium rates could drive out of the market 
        those middle-income individuals who are not eligible for tax 
        credits.

   If more people are uninsured, providers will experience more 
        uncompensated care which will further strain their ability to 
        meet the needs of their communities and will raise costs for 
        everyone, including employers who sponsor group health plans 
        for their employees.

   Hardworking taxpayers will pay more, as premiums grow and 
        tax credits for low-income families increase, than if CSRs are 
        funded.

We urge the Administration and Congress to take quick action to ensure 
CSRs are funded. We are committed to working with you to deliver the 
short-term stability we all want and the affordable coverage and high-
quality care that every American deserves. But time is short and action 
is needed. By working together, we can create effective, market-based 
solutions that best serve the American people.

Respectfully,

America's Health Insurance Plans
American Academy of Family Physicians
American Benefits Council
American Hospital Association
American Medical Association
Blue Cross Blue Shield Association
Federation of American Hospitals
U.S. Chamber of Commerce

cc: The Honorable Thomas E. Price, M.D., Secretary of Health and Human 
Services; The Honorable Steven T. Mnuchin, Secretary of the Treasury; 
The Honorable Mick Mulvaney, Director of the Office of Management and 
Budget; The Honorable Seema Verma, Administrator, Centers for Medicare 
and Medicaid Services
                                 ______
                                 
          National Association of Insurance Commissioners and 
                Center for Insurance Policy and Research

EXECUTIVE OFFICE: 444 North Capitol Street, NW, Suite 700, Washington, 
                             DC 20001-1509
               Phone: (202) 471-3990  Fax: (816) 460-7493

 CENTRAL OFFICE: 1100 Walnut Street, Suite 1500, Kansas City, MO 64106-
                                  2197
               Phone: (816) 842-3600  Fax: (816) 783-8175

            CAPITAL MARKETS AND INVESTMENT ANALYSIS OFFICE:

           One New York Plaza, Suite 4210, New York, NY 10004

               Phone: (212) 398-9000  Fax: (212) 382-4207

May 17, 2017

Mick Mulvaney
Director
Office of Management and Budget
301 G Street, SW
Washington, DC 20024

Dear Director Mulvaney:

On behalf of the nation's state insurance commissioners, the primary 
regulators of U.S. insurance markets, we write today to urge the 
Administration to continue full funding for the cost-sharing reduction 
payments for 2017 and make a commitment that such payments will 
continue, unless the law is changed. Your action is critical to the 
viability and stability of the individual health insurance markets in a 
significant number of states across the country.

State regulators have had numerous discussions with health insurance 
carriers in their states about rates and participation in the 
individual market in 2018. As you know, there is increasing concern 
that more carriers will pull out of this market and rates will continue 
to rise, leaving consumers with fewer and more expensive options, if 
they have any options at all. This is not a theoretical argument--
carriers have already left the individual market in several states, and 
too many counties have only one carrier remaining. The one concern 
carriers consistently raise as they consider whether to participate and 
how much to charge in 2018 is the uncertainty surrounding the federal 
cost-sharing reduction payments.

As long as the court case, House v. Price, remains unresolved and 
federal funding is not assured, carriers will be forced to think twice 
about participating on the Exchanges. Even if they do decide to 
participate, state regulators have been informed that the uncertainty 
of this funding could add a 15-20% load to the rates, or even more.

The time to act is now. Carriers are currently developing their rates 
for 2018 and making the decision whether to participate on the 
Exchanges, or even off the Exchanges, in 2018. Assurances from the 
Administration that the cost-sharing reduction payments will continue 
under current law will go a long way toward stabilizing the individual 
markets in our states while legislative replacement and reform options 
are debated in Congress.

Sincerely,

Theodore K. Nickel                  Julie Mix McPeak
NAIC President                      NAIC President-Elect
Commissioner                        Commissioner
Wisconsin Office of the             Tennessee Department of
  Commissioner of Insurance           Commerce and Insurance

Eric A. Cioppa                      Raymond G. Farmer
NAIC Vice President                 NAIC Secretary-Treasurer
Superintendent                      Director
Maine Bureau of Insurance           South Carolina Department of 
                                    Insurance

                             Communications

                              ----------                              


                       The Advertising Coalition
Executive Summary
We appreciate the opportunity to submit these comments on behalf of The 
Advertising Coalition (TAC) to be included in the Committee on Finance 
hearing on the Fiscal Year 2018 Budget Proposals for the Department of 
Treasury and Tax Reform. TAC includes national trade associations whose 
members are advertisers, advertising agencies, broadcast companies, 
cable operators and program networks, and newspaper, magazine and 
online publishers. Our coalition represents perhaps the single broadest 
constituency of advertisers, advertising agencies, and media-related 
businesses in this country engaged in protecting the free flow of 
advertising content and volume. As a direct correlation to that 
objective, TAC members are vitally interested in assuring that any 
reform of the Tax Code preserves the current ability of businesses to 
deduct the cost of advertising as an ordinary and necessary business 
expense.

While we agree with the general goal of lowering the statutory 
corporate tax rate, we believe that it would be counterproductive and 
in direct conflict with 104 years of established tax policy to impose 
limits on the deduction for advertising in an effort to ``pay for'' 
such changes. The stated goals of tax reform are to make the U.S. more 
competitive, stimulate growth and simplify the tax code, but burdening 
advertising with additional tax liabilities would not further any of 
these important initiatives. Our concerns are not merely hypothetical 
as former Ways and Means Chairman Dave Camp included a $169 billion tax 
on advertising in his 2014 comprehensive reform proposal (the Tax 
Reform Act of 2014).

Historically, Congress has reviewed the operation of the Tax Code and 
proposed revenue raising measures that involved limiting or eliminating 
nonproductive, revenue losing provisions such as tax expenditures 
identified by the Joint Committee on Taxation or the Office of 
Management and Budget. The deduction for the cost of advertising, 
however, has been an accepted business expense since the adoption of 
the corporate Tax Code, along with the deduction of other business 
operating expenses such as rent, salaries and office supplies. This 
deduction has never been characterized as a tax expenditure or in any 
way inconsistent with sound tax policy. However, it has become the 
focus of tax reform for the same reason that Willie Sutton once 
explained why he robbed banks. ``I rob banks because that's where the 
money is.''

One of the unintended consequences of the proposed tax on advertising 
is that it would result in less information being available to 
consumers through Internet publishers, newspapers, magazines, radio and 
television stations and networks, and cable network, and operators. 
Advertising is essential to the operation and even the survival of our 
national independent providers of news and information, particularly in 
rural and smaller communities. Reducing the advertising revenue 
received by these media outlets would reduce their ability to make 
information available and would weaken a core underpinning of our 
democracy an informed electorate.

A tax on advertising such as what was proposed in the Camp legislation 
would not only damage the advertising and media industries, but also 
would negatively affect the jobs and sales generated by advertising's 
ripple effect throughout the economy. A 2015 study conducted by the 
world-renowned economics and data analysis firm IHS Economics and 
Country Risk (``IHS'') determined that every $1 spent on advertising 
generates nearly $19 in economic activity (sales), and that every 
million dollars in advertising supports 67 American jobs. In 2012, 
advertising drove $5.8 trillion of the $36.7 trillion in U.S. economic 
output and supported 20 million of the 142 million jobs in the United 
States.\1\ These figures demonstrate that every form of advertising--
ranging from newspapers, magazines, and television to the Internet--
strengthens business and triggers a cascade of economic activity that 
stimulates job creation and retention throughout the U.S. economy.
---------------------------------------------------------------------------
    \1\ ``Economic Impact of Advertising in the United States.'' IHS 
Economics and Country Risk. (March 2015).

The nation's businesses that advertise would annually feel the brunt of 
a Camp-like proposal, leaving them with fewer resources to commit to 
advertising spending year after year. The resulting decrease in 
advertising purchases would, as described above, cause a chain reaction 
throughout the economy and sharply affect media companies that depend 
on advertising as a critical source of revenue for daily operations. 
Given the complex role of advertising in the economy, this type of tax 
policy would work counter to the key objectives of tax reform of making 
the Tax Code simpler and more efficient, and fostering a pro-growth 
---------------------------------------------------------------------------
environment.

A tax on advertising is neither supported by sound economic policy nor 
informed tax policy. Two leading experts on the role of advertising, 
Nobel laureates in Economics Dr. Kenneth Arrow and Dr. George Stigler, 
concluded that ``Proposals to change the tax treatment of advertising 
are not supported by the economic evidence,'' and that any policy of 
making advertising more expensive would cause a decisive decline in 
advertising spending.\2\ In addition to helping businesses communicate 
the benefits of their products and services, advertising is a critical 
driver of U.S. economic activity and should remain a fully deductible 
expense, just like salaries, rent, utilities, and office supplies.
---------------------------------------------------------------------------
    \2\ Arrow, Kenneth, et al. ``Economic Analysis of Proposed Changes 
in the Tax Treatment of Advertising Expenditures.'' Lexecon Inc. 
(August 1990).
---------------------------------------------------------------------------
Advertising Consistently Has Been Defined as an Ordinary and Necessary 
        Business Expense
The treatment of business advertising costs as an ordinary and 
necessary business expense under Section 162 of the Tax Code has been 
upheld in the U.S. Tax Court,\3\ supported by a Revenue Ruling from the 
Internal Revenue Service,\4\ as well as endorsed by Dr. Arrow and Dr. 
Stigler.\5\ The commitment by leaders in Congress to improve the way 
the government identifies and collects tax revenues can bring important 
and productive changes to the Tax Code, including a reevaluation of 
what constitutes a ``tax expenditure,'' to be more consistent with 
sound tax policy. However, it is essential to maintain a clear 
distinction between the definition and treatment of tax expenditures 
and the need for businesses to deduct ordinary and necessary business 
expenses, such as advertising.
---------------------------------------------------------------------------
    \3\ RJR Nabisco Inc. v. Commissioner, 76 T.C.M.71 (1998).
    \4\ See Rev. Rul. 92-80, 1992-39 I.R.B.7.
    \5\ Arrow, Kenneth, et al. ``Economic Analysis of Proposed Changes 
in the Tax Treatment of Advertising Expenditures.'' Lexecon Inc. 
(August 1990).

The Congressional Budget Act defines tax expenditures as ``revenue 
losses [to the government] caused by provisions of the tax laws that 
allow a special exclusion, exemption, or deduction from gross income or 
which provide a special credit, a preferential rate of tax, or a 
deferral of tax liability.'' \6\ In other words, a tax expenditure is a 
form of federal spending designed to encourage specific behavior. 
However worthy the objective, a tax expenditure is an exception to 
sound tax policy. Neither the Joint Committee on Taxation nor the 
Office of Management and Budget has ever classified the deduction for 
advertising costs as a tax expenditure.
---------------------------------------------------------------------------
    \6\  Pub. L. 93-344, 88 Stat. 297, enacted July 12, 1974.

The deduction for advertising costs is essential to the proper 
calculation of the net income tax liability of a business. This 
principle has been upheld by the U.S. Tax Court in the face of 
challenges from the Internal Revenue Service that have attempted to 
test this standard over a period of several decades.\7\
---------------------------------------------------------------------------
    \7\ Id. RJR Nabisco Inc.
---------------------------------------------------------------------------
Advertising Creates Millions of Jobs and Adds Trillions of Dollars to 
        the U.S. Economy
As the nation's leading advertisers and media companies, members of The 
Advertising Coalition understand first-hand the extent to which 
advertising is a powerful tool that not only may be used to promote 
goods and services, but also helps to educate consumers about the world 
around them. Advertising also is responsible for generating trillions 
of dollars in economic activity. IHS Economics and Country Risk, using 
an economic model developed by Dr. Lawrence R. Klein, the 1980 
recipient of the Nobel Prize in Economics, demonstrated how advertising 
performs as a key driver of economic activity and a generator of 
jobs.\8\ This macroecomomic model has been employed by the Treasury 
Department, Commerce Department, Labor Department, and most Fortune 500 
companies. IHS concluded in 2015 that the jobs of 14 percent (19.5 
million) of all U.S. employees are related to advertising, the sales 
driven by advertising, and the induced economic activity that occurs 
throughout the economy as a result of advertising.\9\ Additionally, IHS 
previously established that advertising does not merely shift market 
share among competing firms, but rather stimulates new economic 
activity that otherwise would not have occurred. This, in turn, 
triggers a cascade of economic activity and stimulates job creation and 
retention throughout the U.S. economy.'' \10\
---------------------------------------------------------------------------
    \8\ ``Economic Impact of Advertising in the United States.'' IHS 
Economics and Country Risk. (March 2015).
    \9\ ``The Economic Impact of Advertising Expenditures in the United 
States, 2012-2017.'' IHS Economics and Country Risk, Inc. (June 2013).
    \10\ Ibid.

The IHS study quantifies the levels of sales and employment that are 
attributable to the stimulus produced by advertising. It 
comprehensively assesses the total economic contribution of advertising 
expenditures across 16 industries, plus government, in each of the 50 
states, Washington, DC, and each of the 435 Congressional Districts in 
the United States. The overall economic impact of advertising consists 
of the direct impact of advertising dollars and subsequent sales, 
supplier sales, inter-industry sales, and resulting consumer spending. 
Each of these effects also creates and maintains new jobs that are 
needed to support a higher level of production. The IHS analysis 
quantifies the economic impact of advertising along four 
dimensions:\11\
---------------------------------------------------------------------------
    \11\ ``Economic Impact of Advertising in the United States.'' IHS 
Economics and Country Risk. (March 2015).

  Direct Economic Impact. This category refers to the dollars and jobs 
dedicated to developing and implementing advertising in order to 
stimulate demand for products and services. It includes the work of 
advertising agencies and the purchase of time and space on a host of 
media like radio, television, newspapers, magazines, the Internet, and 
other outlets. This level of impact stimulates transactions such as the 
sale of an automobile or an insurance policy sold as a direct result of 
---------------------------------------------------------------------------
television advertising.

  Supplier Economic Impact. Advertising-generated sale; set off chain 
reactions throughout the economy and create sales and jobs supported by 
first-level suppliers. Using the example of a car sale, this level of 
impact encompasses activity by the suppliers of raw materials for 
upholstery, plastic, tires and parts, radio and GPS receivers, and 
other products and services that are used to produce the vehicle.

  Inter-industry Economic Impact. In the automobile example, sales to 
first-level suppliers generate subsequent inter-industry economic 
activity that creates jobs in a host of related industries, such as 
rail and truck transportation, gasoline and oil, insurance, and after-
market sales of automobile products. The demand for products and 
services, sales, and jobs at this inter-industry tier depends upon the 
initial consumer purchase of the automobile, which is facilitated by 
advertising.

  Induced Consumer Spending. Every person with a direct, supplier, or 
inter-
industry job also plays the role of consumer in the U.S. economy. They 
spend a portion of their salaries in the economy on items such as food, 
consumer goods and services, healthcare, and other needs. This spending 
initiates multiple rounds of economic activity, stimulates additional 
sales, and creates jobs.
Leading Economists Have Reinforced Deduction for Advertising
For the past quarter century following enactment of the Tax Reform Act 
of 1986, a wide range of proposals have been advanced to limit the 
deduction for advertising costs as a means of raising additional 
revenue for the federal government. These proposals to change the 
treatment of advertising as an ordinary and necessary business expense 
generally have been based on the theories that (1) advertising is 
durable and generates revenues beyond the period in which the cost is 
incurred; (2) advertising costs create intangible assets and should, 
therefore, be capitalized in part, and (3) advertising costs are 
incurred with a future expectation of income and also should be 
capitalized in part.

In response to the 1987 book of revenue options drafted by the Joint 
Committee on Taxation that included limits on the deductibility of 
advertising,\12\ TAC worked with Drs. Arrow and Stigler to identify 
economic policies and data that would provide a counterpoint to 
proposals to limit this deduction. The American Institute of Certified 
Public Accountants similarly examined and rejected a proposal to 
capitalize advertising costs for book income treatment.\13\ The 
analyses of our economic advisers support the principle that 
advertising costs should continue to be treated as ordinary and 
necessary business expenses while concluding that theories advocating 
otherwise are not sustainable.
---------------------------------------------------------------------------
    \12\ ``A Description of Possible Options to Increase Revenues 
Prepared for the Committee on Ways and Means.'' Joint Committee on 
Taxation, pp. 138-139 (1987).
    \13\ ``Statement of Position 93-7: Reporting on Advertising 
Costs.'' The American Institute of Certified Public Accountants (1993).

Durability of advertising. This argument centers on the notion that the 
benefit of advertising extends beyond the year in which it is 
purchased, and that it is more appropriate to link advertising expenses 
and the income they generate by requiring a portion of advertising 
costs to be deducted in subsequent years. TAC asked Arrow and Stigler, 
and the economic consulting firm Lexecon, Inc., to explain the role of 
advertising in the economy and provide their analysis of this theory. 
Dr. Arrow was awarded the Nobel Prize for Economics in 1972 and Dr. 
Stigler was awarded the Nobel Prize for Economics in 1982 for research 
on consumer choice and the role of consumer information in the economy. 
Together they prepared the ``Economic Analysis of Proposed Changes in 
the Tax Treatment of Advertising Expenditures.'' \14\
---------------------------------------------------------------------------
    \14\ K. Arrow, et. al.

Drs. Arrow and Stigler specifically examined a number of economic 
studies that proposed increasing the cost of advertising to the 
advertiser. The goal of many of these studies was to demonstrate the 
longevity of the impact of advertising on sales in order to justify 
capitalizing all or part of advertising costs. The Nobel economists 
concluded that these studies on the durability of advertising had 
reached such different conclusions that they could not be used as a 
coherent basis for formulating tax policy. Moreover, Drs. Arrow and 
Stigler found that these studies suffered from technical flaws that 
rendered their conclusions meaningless. Their analysis suggests that 
most, if not all, advertising is short-lived.\15\ The economists 
cautioned against changing the tax treatment of advertising, which 
would make advertising more expensive:
---------------------------------------------------------------------------
    \15\ K. Arrow, et. al., at p. 23.

        Since the information conveyed by advertising is valuable, one 
        must be particularly cautious about taxes that would raise the 
        cost, and hence lower the quantity of advertising. Such taxes 
        would reduce the overall flow of economic information available 
        to consumers. As a result, we expect that prices would rise, 
        the dispersion in prices for particular products would 
        increase, and consumers would be less able to find goods that 
        satisfy their preferences. \16\
---------------------------------------------------------------------------
    \16\ Ibid at p. iii.

Intangible assets. Critics of the current deduction for advertising 
costs have contended that it creates a preference for businesses that 
invest in advertising rather than tangible assets, and that advertising 
similarly must be depreciated over time. They also say it raises 
questions about whether the current deduction of advertising costs 
---------------------------------------------------------------------------
results in the creation of intangible assets.

However, the economic research provided by Drs. Arrow and Stigler shows 
that the intangible asset is the firm's product, not the advertising 
for the product. The results indicate that advertising only 
communicates information about the product to customers. Arrow and 
Stigler said that while some economists have attempted to measure the 
relationship between a firm's advertising costs and its intangible 
capital, they incorrectly ignore the fact that there are many economic 
factors other than advertising that determine a firm's market value. 
Indeed the value of the firm's product--e.g., its effectiveness or 
innovativeness--is the firm's true intangible asset. Advertising is 
only a means by which the firm can exploit fully the value of that 
asset.\17\
---------------------------------------------------------------------------
    \17\ Ibid at p. 36.

Arrow and Stigler offered the innovative user interface developed by 
Apple Computer as an example of this point. ``The `Finder,' which it 
provides on its Apple . . . personal computer . . . has been enormously 
popular and Apple has exploited its value by advertising its advantages 
to potential users. As a result of the success of this product [and 
other Apple innovations including the iPhone and iPad], Apple's sales 
have soared, as has its market value. But Apple's advertising [Mac 
versus PC, et al.] is not the intangible here; it is only a tool for 
maximizing the value of the true intangible--the interface.'' \18\
---------------------------------------------------------------------------
    \18\ K. Arrow, et. al. ``Economic Analysis of Proposed Changes in 
the Tax Treatment of Advertising Expenditures.''

Legal background. The case law supporting the current deduction of 
business costs had been settled for more than 20 years when the U.S. 
Supreme Court in 1992 introduced a different viewpoint in INDOPCO, Inc. 
v. Commissioner of Internal Revenue.\19\ Prior to INDOPCO, an expense 
would have been capitalized only if it ``create[d] or enhance[d] . . . 
a separate and distinct additional asset.'' \20\ The Court in INDOPCO 
held that legal fees and other costs incurred by Unilever United States 
in the acquisition of INDOPCO, Inc. (formerly National Starch and 
Chemical Corporation) should be capitalized and not deducted in the 
year in which they were incurred because the resulting legal structure 
enhanced the future value of the enterprise.
---------------------------------------------------------------------------
    \19\ INDOPCO, Inc. v. Commissioner of Internal Revenue, 503 U.S. 79 
(1992).
    \20\ Commissioner v. Lincoln Savings and Loan Association, 403 U.S. 
345, 354 (1971).

The decision in INDOPCO focused on the tax treatment of legal fees 
related to a corporate acquisition--whether they should be deducted in 
the year incurred or capitalized because they contribute to future 
company income. The Court's ruling, however, prompted TAC and many 
other industry groups jointly to ask the Internal Revenue Service (IRS) 
whether this decision might in the future be extended to advertising 
expenditures and require any portion of advertising costs to be 
capitalized. The IRS Office of Chief Counsel responded on September 11, 
---------------------------------------------------------------------------
1992:

        Section 162-1(a) of the Income Tax Regulations expressly 
        provides that ``advertising and other selling expenses'' are 
        among the items included in deductible business expenses under 
        Section 162 of the Code. Section 1.162-20(a)(2) of the 
        regulations provides, in part that expenditures for 
        institutional or goodwill advertising which keeps the 
        taxpayer's name before the public are generally deductible as 
        ordinary and necessary business expenses provided the 
        expenditures are related to the [business] patronage the 
        taxpayer might reasonably expect in the future. \21\
---------------------------------------------------------------------------
    \21\ Rev. Rul. 92-80, 1992-39 I.R.B. 7, 1992-2 C.B. 57, 1992 WL 
224893 (IRS RRU), September 11, 1992.

Congress in 1993 also addressed the treatment of intangible business 
expenses that are incurred in generating consumer sales. Supporters of 
a change in the tax treatment of intangible assets advocated that some 
of these costs should be capitalized. The Omnibus Budget Reconciliation 
Act of 1993 \22\ provided that these costs generally should be 
amortized ratably over 15 years, but Congress specifically exempted any 
intangible ``created by the taxpayer.'' \23\ The legislation also 
excluded from amortization ``any franchise, trademark, or trade name.'' 
\24\ In other words, advertising that promotes an intangible asset--
such as the brand name of a product--should not be capitalized, but 
rather may be deducted in the year the cost was incurred.
---------------------------------------------------------------------------
    \22\ Pub. L. 103-66,107 Stat. 312, enacted August 10, 1993.
    \23\ Ibid, sec. 197 (c)(2).
    \24\ Ibid, sec. 197 (d)(1)(F).

In the period leading up to the Omnibus Budget Reconciliation Act of 
1993, the accounting profession conducted a formal examination of the 
business accounting standards for the treatment of advertising costs. 
The Accounting Standards Executive Committee (AcSEC) of the American 
Institute of Certified Public Accountants (AICPA) issued a Statement of 
Position in 1993 that recommended expensing advertising costs either as 
incurred or at the first time the advertising takes place, unless the 
advertising meets criteria for capitalizing direct-response 
advertising.\25\ Because the Congress and the Committee on Ways and 
Means regularly look to the treatment the accounting profession 
recommends or requires for guidance in the treatment of business 
expenses, TAC was pleased that AcSEC affirmed the current deduction of 
advertising costs.
---------------------------------------------------------------------------
    \25\ ``Statement of Position 93-7.'' American Institute of 
Certified Public Accountants, Accounting Standards Executive Committee. 
December 29, 1993.
---------------------------------------------------------------------------
Conclusion
Decades of legal and policy justifications support the current tax 
treatment of advertising as an ordinary and necessary business expense, 
rather than an asset to be capitalized over time. TAC strongly opposes 
efforts that would tax the business cost of advertising. Our coalition 
includes companies and associations of all sizes that share the common 
goals of protecting the right of companies to advertise, and securing a 
fair, affordable business tax rate.

Thank you for your consideration of our views.

                                 ______
                                 
          Computing Technology Industry Association (CompTIA)

                           515 2nd Street NE

                          Washington, DC 20002

                        https://www.comptia.org/

Thank you for the opportunity to express our views on this very 
important subject. On behalf of the Computing Technology Industry 
Association (CompTIA), I urge members of the Senate Committee on 
Finance, and the Congress as a whole, to pursue much-needed reforms to 
our corporate tax code.

The Computing Technology Industry Association is a non-profit trade 
association serving as the voice of the information technology (IT) 
industry.\1\ With approximately 2,000 member companies, 3,000 academic 
and training partners, and nearly 2 million IT certifications issued, 
CompTIA is dedicated to advancing industry growth through educational 
programs, market research, networking events, professional 
certifications, and public advocacy.
---------------------------------------------------------------------------
    \1\ ``About Us.'' CompTIA. https://www.comptia.org/about-us.

A competitive tax policy that lowers the corporate rate, employs 
territoriality, and incentivizes innovation and investment in the 
United States, is critical for American technology companies to thrive 
in the United States and the world. Our industry and many others are 
constrained by an outmoded and complex federal tax code that is in need 
of overhaul to reflect the dynamism of American ingenuity. The U.S. 
corporate tax rate is among the highest in the industrialized world, 
and of the countries that employ a territorial tax system, it is more 
than 50 percent higher (39 percent) than the next ranking country (23 
percent).\2\
---------------------------------------------------------------------------
    \2\ ``Corporate Income Tax Rates Around the World, 2016.'' Tax 
Foundation. August 18, 2016. https://taxfoundation.org/corporate-
income-tax-rates-around-world-2016/.

Our members support leveling the playing field both domestically and 
internationally, seeking to eliminate the inequities of the current tax 
code, including the ever-increasing costs associated with tax 
compliance. Any corporate tax reform proposals must treat the 
information technology industry equitably--both large companies, as 
well as small- and medium-sized businesses. Specifically; CompTIA 
supports the following principles within the broader context of 
---------------------------------------------------------------------------
corporate tax reform:

      Reduce the corporate tax rate to 20 percent. U.S. companies are 
burdened with the highest corporate tax rate among OECD countries, 
making them less competitive with their foreign counterparts. We 
support reducing the corporate tax rate to no higher than 20 percent, 
without increasing taxes on small and medium-sized businesses.

      Enact a territorial international tax system. The U.S. is one of 
a handful of developed countries that taxes corporate earnings on a 
global basis. This means that a U.S. company's foreign earnings are 
subject to U.S. tax when repatriated, increasing the foreign tax rate 
on these earnings to the U.S. rate. We support enactment of a 
territorial international system that would remove the punitive tax 
that prevents foreign earnings from being repatriated to the U.S.

      Tax repatriated profits at a lower rate. We support legislation 
that incentivizes U.S.-based companies to reinvest profits back into 
the U.S. by allowing those repatriated profits to be taxed at a lower 
rate. Currently, companies are discouraged from repatriating their 
profits because of the high corporate tax rate that would result.

      Tax ``innovation box profits'' at a lower rate than the 
corporate rate. We support policies that foster innovation such as a 
``patent box'' to attract and retain domestic intellectual property 
development and ownership. A lower rate of taxation on innovation would 
encourage companies to continue to reinvest in domestic IP development 
while remaining competitive globally.

      Make the CFC look-through rule permanent. The territoriality 
provisions of most other developed countries allow domestically-based 
companies operating abroad to structure their foreign operations 
without the additional home country tax of the sort imposed by the U.S. 
Subpart F rules. In December 2015, the rule was extended through FY20 
in the FY16 omnibus. Making the CFC look-through permanent would allow 
U.S. based companies to marshal their capital outside the U.S. in a way 
that would enable them to compete on a more level playing field with 
their foreign counterparts.

The last major tax reform occurred in 1986. While many support reform, 
Congressional debate continues, and timing for action remains 
uncertain. Such uncertainty hinders growth. The United States has long 
been the global hub for innovation, but absent broad, commonsense 
reforms to our tax code, innovation, job, and economic growth could all 
be stifled, threatening our position as the global leader.

CompTIA welcomes this opportunity to offer our perspective on this 
issue and others facing the IT industry and nation. The information, 
communication and technology sector is one of the largest industry 
sectors in the U.S. economy. The market is $3.7 trillion globally, and 
$1 trillion in the United States, employing approximately 7 million 
Americans.\3\ To put into perspective, the gross output of the 
technology sector exceeds that of the legal services industry, the 
automotive industry, the airline industry, the motion picture industry, 
the hospitality industry, the agriculture industry and the restaurant 
industry, just to name a few examples (source: U.S. Bureau of Economic 
Analysis).
---------------------------------------------------------------------------
    \3\ ``Cyberstates 2017.'' CompTIA. March 2017. http://
cyberstates.org/#.

The technology industry not only helps drive economic growth in a 
multitude of ways, but it continues to significantly enrich how we 
live, work, and play. We stand ready to work with you, and I am happy 
---------------------------------------------------------------------------
to address any questions you may have.

Respectfully,

Elizabeth Hyman
Executive Vice President, Public Advocacy

                                 ______
                                 
               Federation of Exchange Accommodators (FEA)

                       1255 SW Prairie Trail Pkwy

                            Ankeny, IA 50023

                         Phone: (515) 244-6515

                          Fax: (515) 334-1174

                          http://www.1031.org/

                              June 1, 2017

As the Committee meets with the Secretary of the Treasury to consider 
budget and tax priorities, the Federation of Exchange Accommodators 
(``FEA'') appreciates this opportunity to provide input regarding tax 
reform priorities and specifically, the benefits and need for retention 
of IRC Section 1031 like-kind exchanges, in present form, in any tax 
reform bill.

Although there is no specific proposal from either the Senate or the 
Administration currently calling for repeal or replacement of 
Sec. 1031, the House Ways and Means Committee is evaluating a number of 
proposals, set forth in the House Republican Conference's ``A Better 
Way'' document released in June 2016. Better known as the House 
Republican Blueprint for Tax Reform, it proposes reduced tax rates and 
full, immediate expensing with unlimited loss carryforward for all 
investment and 
business-use tangible and intangible depreciable personal property 
assets, including real estate improvements, but not land. We understand 
that some policymakers believe that if these proposals are enacted, 
that Sec. 1031 would no longer be necessary. We disagree.

The Blueprint proposals, taken as a whole, do not provide equal 
benefits, and are not as comprehensive, as the benefits provided to 
both taxpayers and our economy by Sec. 1031 like-kind exchanges. Even 
with lower tax rates and immediate expensing, Section 1031 will still 
be necessary to remove friction from transactions and fill in the gaps.

At its core, IRC Sec. 1031 is a powerful economic stimulator that is 
grounded in sound tax policy. The non-recognition provision is premised 
on the requirement that the taxpayer demonstrates continuity of 
investment in qualifying replacement property with no intervening 
receipt of cash. There is no profit-taking, and at the conclusion of 
the exchange, the taxpayer is in the same tax position as if the 
relinquished asset was never sold.

Since 1921, Federal tax law under IRC Sec. 1031 has permitted a 
taxpayer to exchange business-use or investment assets for other like-
kind business-use or investment assets without recognizing taxable gain 
on the sale of the old assets. Taxes which otherwise would be due if 
the transaction was structured as a sale are deferred. Qualifying 
assets include commercial, agricultural and rental real estate, 
aircraft, trucks, automobiles, trailers, containers, railcars, 
agricultural equipment, heavy equipment, livestock, and other assets 
involved in a broad spectrum of industries, owned by an equally broad 
spectrum of taxpayers ranging from individuals of modest means and 
small businesses to large business entities.

Under current law, Sec. 1031 promotes capital formation and liquidity. 
A macro-economic impact study by Ernst and Young, and a micro-economic 
impact study on commercial real estate by Dr. David Ling and Dr. Milena 
Petrova, both published in 2015, concluded that Section 1031 removes 
the tax lock-in effect and permits taxpayers to make good business 
decisions without being impeded by negative tax consequences.\1\ Like-
kind exchanges stimulate economic activity and promote property 
improvements that benefit communities, increase property values and 
local tax revenues, improve neighborhoods, and generate a multitude of 
jobs ancillary to the exchange transactions. These studies quantified 
that restricting or eliminating like-kind exchanges would result in a 
decline in GDP of up to $13.1 billion annually, reduce velocity in the 
economy and increase the cost of capital to taxpayers.\2\ A 2016 Tax 
Foundation report estimated a significantly larger economic contraction 
of approximately $18 billion per year.\3\
---------------------------------------------------------------------------
    \1\ Economic Impact of Repealing Like-Kind Exchange Rules, Ernst 
and Young (March 2015, Revised November 2015) available at http://
www.1031taxreform.com/1031economics/; and The Economic Impact of 
Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate, 
David C. Ling and Milena Petrova (March 2015, revised June 22, 2015), 
available at http://www.1031taxreform.com/ling-petrova/.
    \2\ Ernst and Young LLP, Economic Impact at (v), and Ling and 
Petrova, Economic Impact, at 6.
    \3\ Options for Reforming America's Tax Code, Tax Foundation 
(2016), p. 79, available at https://taxfoundation.org/options-
reforming-americas-tax-code/.

Like-kind exchanges benefit the economy in a myriad of ways. Commercial 
real estate owners, individuals, and businesses of all sizes use like-
kind exchanges to trade up from a small rental to a larger apartment 
building, from a factory or office space that met yesterday's needs to 
a business facility that positions the business for tomorrow, and 
upgrade machinery, equipment or vehicles into newer assets that better 
meet current and future needs. The ability to take advantage of good 
business opportunities stimulates transactional activity that generates 
taxable revenue for brokers, lenders, appraisers, surveyors, 
inspectors, insurers, equipment dealers, manufacturers, suppliers, 
attorneys, accountants, and more. This transactional velocity also 
creates opportunities for smaller businesses to acquire entry-level 
facilities and used equipment from which to launch and grow their 
---------------------------------------------------------------------------
fledgling businesses.

Farmers and ranchers use Sec. 1031 to preserve the value of their 
investments and agricultural businesses while they combine acreage, 
acquire higher grade land, or otherwise improve the quality of their 
operations. They rely on Sec. 1031 to defer depreciation recapture tax 
when they trade up to more efficient farm machinery and equipment. 
Farmers and ranchers trade dairy cows and breeding stock when they move 
their operations to a new location.

Immediate expensing does not remove the lock-in effect on a host of 
real estate owners. Given that improvements would be eligible for 
immediate expensing, but the value allocated to land would not be 
deductible, it is important to recognize that land values represent on 
average, approximately 30% of the value of commercial improved 
properties, and up to 100% of agricultural land investments. If these 
property owners are faced with reducing the value of their investments 
and life savings through capital gains tax when they sell and reinvest 
in other real estate, even with lower rates, they will likely hold onto 
these properties longer. The ability to use Sec. 1031 to defer gain 
recognition removes the lock-in effect, takes the government out of the 
decision-making process, and permits taxpayers to engage in 
opportunistic transactions that make good business and investment sense 
without fear of negative tax ramifications.

Repeal or restriction of like-kind exchanges would be especially 
troublesome for agricultural and commercial real estate investments in 
which the land value, relative to the value of improvements, is great. 
A taxpayer replacing low basis real estate would recognize substantial 
capital gains that would not be fully offset by the proposed expensing 
deduction for improvements on equal value replacement real estate if 
the improvements are minimal in value or non-existent, as in the case 
of agricultural land, or if the property is located in an area with 
high land to improvement ratios. Without additional cash to cover both 
the tax liability and the new investment, loss of Sec. 1031 would 
result in a government-induced shrinkage of agricultural and commercial 
real estate investment, retarding ability for growth as well as 
diminishing the net worth of farmers, ranchers, and real estate 
investors.

Like-kind exchanges make the economics work for conservation 
conveyances of environmentally sensitive lands that benefit our 
environment, improve water quality, mitigate erosion, preserve wildlife 
habitats, and create recreational green spaces for all Americans. 
Farmers, ranchers, and other landowners reinvest sale proceeds from 
conservation conveyances through Sec. 1031 like-kind exchanges into 
more productive, less environmentally sensitive land. These socially 
beneficial conveyances are dependent upon the absence of negative tax 
consequences.

Many taxpayers benefitting from like-kind exchanges are not ultra-high 
net worth individuals or large corporations. These individual taxpayers 
do not have use for a large net operating loss carryforward from the 
unused expense deduction for real estate improvements. They do not have 
sufficient related income to offset the expense, thus they would 
realize minimal benefit. These taxpayers would face a massive amount of 
depreciation recapture upon sale, for which they may not have 
sufficient liquidity, or may not have set aside enough cash to satisfy, 
creating further personal challenges, locking them in, and putting 
other wealth building options out of reach. The tax-deferral provisions 
of Section 1031 fill this gap by permitting full reinvestment of sales 
proceeds into like-kind property.

Retiring taxpayers benefit by exchanging their most valuable asset, 
their farm, ranch, or apartment building, for other real estate that 
doesn't require a 24/7/365 workday, without diminishing the value of 
their life savings. With a Sec. 1031 exchange, farmers and ranchers can 
downsize or divest their agricultural operations, landlords can 
eliminate the ``3 Ts'' of tenants, toilets, and trash, and these 
retirees can reinvest in other income producing real estate, such as a 
storage unit facility, or a triple net leased commercial property. The 
loss of Sec. 1031 would result in a direct reduction of the retirement 
savings of these taxpayers whose work has provided food for our nation 
and affordable living space for other Americans.

Unlike the Blueprint, Section 1031 provides a mechanism for asset sales 
and replacement purchases that bridge 2 tax years. Absent Sec. 1031, 
taxpayers would be forced to acquire new assets prior to year-end, or 
be faced with recapture tax on the Year 1 sale and less equity 
available for the replacement purchase in Year 2. This would create a 
disincentive to engage in real estate and personal property 
transactions during the 4th quarter, resulting in tax-driven market 
distortions. Seasonal businesses in particular can benefit from 
exchanges in which assets are divested in late autumn and replaced in 
early spring, at the start of the new season, thereby eliminating off-
season storage and debt-service expenses, without any tax-induced cash-
flow impairment.

Retention of Sec. 1031 in present form eliminates potential expensing 
abuse. The proposal to fully expense real estate improvements in the 
year of acquisition, with an unlimited carryforward, provides a 
tremendous incentive at acquisition for a taxpayer to inflate the value 
of improvements, so as to maximize the write-off. Conversely, upon 
sale, there would be great incentive to minimize the value of the 
buildings and over-allocate value to the land, thus minimizing 
recapture tax on the improvements at ordinary income tax rates, and 
benefiting from lower capital gains tax rates on the land.

Appraising is not an exact science. There are different methodologies, 
and a considerable amount of subjectivity, particularly when there is a 
scarcity of market activity and relevant data upon which to rely. Given 
the multiple variables that can impact land and structure values, 
appraisals can vary widely. A taxpayer with a clear incentive could 
easily game the system to maximize tax benefit and minimize taxes owed 
on disposition. Section 1031 eliminates this conflict and simply 
encourages reinvestment of the full value.

Professional Qualified Intermediaries simplify like-kind exchanges and 
promote compliance with tax laws. Treasury regulations provide rules 
and a safe harbor for taxpayers engaging in nonsimultaneous exchanges 
under Sec. 1031 that involve different buyers and sellers.\4\ In these 
delayed, multiparty exchanges (which constitute the majority of like-
kind exchanges), the taxpayer is prohibited from having receipt of or 
control over the sale proceeds from the relinquished property prior to 
receiving replacement property, or termination of the exchange.
---------------------------------------------------------------------------
    \4\ 26 CFR 1.1031(k)-1.

The Qualified Intermediary (``QI'') is the independent third party that 
receives the sale proceeds from the relinquished property buyer, holds 
and safeguards the funds for the benefit of the taxpayer, and then 
disburses the funds to the seller of the replacement property. Although 
a QI occasionally takes title to the exchanged properties, typically 
the QI is only assigned into the chain of contracts, and the safe 
harbor treats the transaction, for tax purposes, as if the exchange 
occurs between the QI and the taxpayer. Agents, such as the taxpayer's 
attorney, accountant, broker, or employee, and parties related to the 
---------------------------------------------------------------------------
taxpayer, are disqualified from acting as a Qualified Intermediary.

      Professional Qualified Intermediaries facilitate Sec. 1031 like-
kind exchanges, for a nominal fee, by providing necessary 
documentation, and by holding, safeguarding, and disbursing the 
exchange funds for qualifying like-kind replacement property.

      FEA member QIs are subject matter experts in Sec. 1031 
exchanges. Our members serve as a valuable resource to taxpayers and 
their advisors, providing a simple, streamlined process, and promoting 
compliance with tax rules.

      Qualified Intermediaries do not act as brokers, deal makers, or 
advisors to the taxpayer--doing so would disqualify them from serving 
as a QI.

      Qualified Intermediaries are subject to exchange facilitator 
laws in nine states.

Capital-intensive businesses rely upon like-kind exchanges and 
affordable access to debt to build and expand. Both tax-deferral and 
interest deductibility are important economic drivers that stimulate 
transactional activity, capital investment and growth in the United 
States.

In summary, like-kind exchanges remove friction from business 
transactions and stimulate economic activity that would not otherwise 
benefit from the proposed Blueprint. Section 1031 facilitates 
opportunistic investment of capital and community improvement. Like-
kind exchanges assist the recycling of real estate and other capital to 
its highest and best use in the marketplace, thereby creating value and 
improving economic conditions for local communities, rural and urban. 
Landowners and other businesses would be disadvantaged if they had 
neither the option of a tax deferred like-kind exchange nor expense 
deductions for asset acquisition and interest on related debt.

We are grateful for the opportunity to cooperatively work with you and 
your staff to provide productive, constructive, practical input toward 
achieving the goal of a fairer, simpler, pro-growth tax reform plan.

Sincerely,

Stephen Chacon, President, Federation of Exchange Accommodators
Vice President, Accruit, LLC
1331 17th St., Suite 1250
Denver, CO 80202      (303) 865-7316, [email protected]

Suzanne Goldstein Baker, Co-Chair, FEA Government Affairs Committee
Executive Vice President and General Counsel, Investment Property 
Exchange
Services, Inc.
10 S. LaSalle St., Suite 3100
Chicago, IL 60603      (312) 223-3003, [email protected]

Brent Abrahm, Co-Chair, FEA Government Affairs Committee
President, Accruit, LLC
1331 17th St., Suite 1250
Denver, CO 80202      (303) 865-7301, [email protected]

Max A. Hansen, Co-Chair, FEA Government Affairs Committee
President, American Equity Exchange, Inc.
P.O. Box 1031
Dillon, MT 59725      (406) 683-6886, [email protected]

                                 ______
                                 
            National Multifamily Housing Council (NMHC) and 
                  National Apartment Association (NAA)

                   NMHC/NAA Joint Legislative Program

                     1775 Eye St., N.W., Suite 1100

                          Washington, DC 20006

                              202-974-2300

                      https://weareapartments.org/

The National Multifamily Housing Council (NMHC) and the National 
Apartment Association (NAA) respectfully submit this statement for the 
record for the Senate Finance Committee's May 25, 2017 hearing titled 
``Fiscal Year 2018 Budget Proposals for the Department of Treasury and 
Tax Reform.''

For more than 20 years, the National Multifamily Housing Council (NMHC) 
and the National Apartment Association (NAA) have partnered in a joint 
legislative program to provide a single voice for America's apartment 
industry. Our combined memberships are engaged in all aspects of the 
apartment industry, including ownership, development, management and 
finance. NMHC represents the principal officers of the apartment 
industry's largest and most prominent firms. As a federation of nearly 
170 state and local affiliates, NAA encompasses over 72,000 members 
representing more than 8.4 million apartment homes throughout the 
United States and Canada.

Background on the Multifamily Housing Sector

Prior to addressing the multifamily housing industry's recommendations 
for tax reform, it is worthwhile to note the critical role multifamily 
housing plays in providing safe and decent shelter to millions of 
Americans, as well as the sector's considerable impact on our nation's 
economy.

Today, 111 million Americans, over one-third of all Americans, rent 
their housing (whether in an apartment home or single-family home).\1\ 
There are 18.7 million renter households, or over 15 percent of all 
households, who live in apartments (buildings with five or more 
units).\2\ On an aggregate basis, the value of the entire apartment 
stock is $3.3 trillion.\3\ Our industry and its 38.8 million residents 
contributed $1.3 trillion to the national economy in 2013 while 
supporting 12.3 million jobs.\4\
---------------------------------------------------------------------------
    \1\ 2015 American Community Survey, 1-Year Estimates, U.S. Census 
Bureau ``Total Population in Occupied Housing Units by Tenure.''
    \2\ 2015 American Community Survey 1-Year Estimates, U.S. Census 
Bureau, ``Tenure by Units in Structure.''
    \3\ NMHC estimate based on a report by Rosen Consulting, updated 
June 2014.
    \4\ National Multifamily Housing Council and National Apartment 
Association.

The U.S. is on the cusp of fundamental change in our housing dynamics 
as changing demographics and housing preferences drive more people away 
from the typical suburban house. Rising demand is not just a 
consequence of the bursting of the housing price bubble. In the 5 years 
ending 2016, the number of renter households was up by 5.8 million; 
homeowners were up by 1.3 million. Going back 10 years, there were 9.9 
million new renter households and approximately 1.6 million new owner 
households. In other words, the growth in renter households precedes 
the 2008 housing crisis.\5\
---------------------------------------------------------------------------
    \5\ NMHC tabulations of 2016, 2011, and 2006 Current Population 
Survey, Annual Social and Economic Supplement, U.S. Census Bureau.

Changing demographics are driving the demand for apartments. Married 
couples with children now represent only 21 percent of households. 
Single-person households (28 percent), single-parent households (9 
percent) and roommates (6 percent) collectively account for 43 percent 
of all households, and these households are more likely to rent.\6\ 
Moreover, the surge toward rental housing cuts across generations. In 
fact, nearly 73 million Baby Boomers (those born between 1946 and 
1964), as well as other empty nesters, have the option of downsizing as 
their children leave the house and many will choose the convenience of 
renting.\7\ Over half (56.6 percent) of the net increase in renter 
households from 2006 to 2016 came from householders 45 years or 
older.\8\
---------------------------------------------------------------------------
    \6\ 2015 Current Population Survey, Annual Social and Economic 
Supplement, U.S. Census Bureau, ``America's Families and Living 
Arrangements: 2015,'' Households (H table series), table H3/Family 
Groups (FG series), table FG6.
    \7\ ``Annual Estimates of the Resident Population by Single Year of 
Age and Sex for the United States: April 1, 2010 to July 1, 2015,'' 
U.S. Census Bureau. Baby Boomers are defined as those born 1946 through 
1964.
    \8\ NMHC tabulations of 2016 Current Population Survey, Annual 
Social and Economic Supplement, U.S. Census Bureau.

Unfortunately, the supply of new apartments is falling well short of 
demand. An estimated 300,000 to 400,000 units a year must be built to 
meet expected demand; yet, on average, just 244,000 apartments were 
delivered from 2012-2016.\9\ Furthermore, according to Harvard's 
America's Rental Housing, the number of renter households could rise by 
more than 4.4 million in the next decade (depending upon the rate of 
immigration).\10\
---------------------------------------------------------------------------
    \9\ U.S. Census Bureau, New Residential Construction, updated 
February 2016.
    \10\ Harvard Joint Center for Housing Studies, ``America's Rental 
Housing'' (2015).

The bottom line is that the multifamily industry provides housing to 
tens of millions of Americans while generating significant economic 
activity in communities nationwide. Changing demographics and growing 
demand will only cause the industry's footprint to expand in the coming 
years. As will be described below, tax policy will have a critical role 
to play in ensuring the multifamily industry can efficiently meet the 
needs of America's renters.

Key Priorities for Tax Reform

Owners, operators, and developers of multifamily housing, who favor 
pro-growth tax reform that does not disadvantage multifamily housing 
relative to other asset classes, have a considerable stake in the 
outcome of the debate over how to reform and simplify the nation's tax 
code. Industry participants pay federal tax at each stage of an 
apartment's lifecycle. Federal taxes are paid when properties are 
built, operated, sold or transferred to heirs.

In providing our recommendations, which we respectfully make below, we 
are guided by the principle that real estate relies on the free-flow of 
capital and that investment decisions are driven by after-tax rates of 
return rather than by statutory tax rates standing alone. Thus, the 
number of layers of taxation, the marginal rate of tax imposed on 
income, cost recovery rules, investment incentives and taxes imposed 
when properties are sold, exchanged or transferred to heirs are all 
critical in assessing the viability of an investment. In developing 
reform proposals, we recommend that the Finance Committee and Congress 
certainly consider--but also look well beyond--lowering statutory tax 
rates and focus on the ability of a reformed system to efficiently 
allocate capital and drive job-creating business investment. As is 
outlined in the pages below, NMHC/NAA believe that any tax reform 
proposal must:

      Protect pass-through entities from higher taxes or compliance 
burdens;
      Ensure depreciation rules avoid harming multifamily real estate;
      Retain the full deductibility of business interest;
      Preserve the ability to conduct like-kind exchanges;
      Maintain the current law tax treatment of carried interest;
      Preserve and strengthen the Low-Income Housing Tax Credit;
      Maintain the current law estate tax; and
      Repeal or reform the Foreign Investment in Real Property Tax Act 
to promote investment in the domestic apartment industry.

NMHC/NAA recognize that the Ways and Means Committee is considering the 
House Republican Tax Blueprint that would move the nation from the 
current income tax toward a cash-flow tax.\11\ This proposal would 
dramatically alter current-law cost recovery rules, principally, by 
providing for the full expensing (instead of depreciation) of property 
held for investment (except land) and denying the deductibility of 
business interest. The multifamily industry's recommendations for tax 
reform that are made below are provided in the context of reforming the 
current-law income tax. The multifamily industry continues to analyze 
the House Republican Blueprint and is committed to working with the 
entire Congress to consider a full range of options to achieve a viable 
plan. Following the discussion of our tax reform priorities, the 
multifamily industry offers a few preliminary thoughts on how the 
Blueprint may impact cost recovery should the Finance Committee decide 
to consider a similar proposal.
---------------------------------------------------------------------------
    \11\ ``A Better Way: Our Vision for a Confident America,'' Tax, 
June 24, 2016.

Priority 1: Tax Reform Must Not Harm Pass-Through Entities

The multifamily industry is dominated by ``pass-through'' entities 
(e.g., LLCs, partnerships and S corporations) rather than publicly held 
corporations (i.e., C corporations). Indeed, over three-quarters of 
apartment properties are owned by pass-through entities.\12\ This means 
that a company's taxable income is passed through to the owners, who 
pay taxes on their share of the income on their individual tax returns. 
This treatment contrasts with the taxation of large publicly held 
corporations that generally face two levels of tax. Those entities 
remit tax at the corporate level under the corporate tax system. 
Shareholders are then taxed upon the receipt of dividend income.
---------------------------------------------------------------------------
    \12\ U.S. Census Bureau and U.S. Department of Housing and Urban 
Development, Rental Housing Finance Survey, 2012.

In addition to pass-through entities, a significant number of industry 
participants are organized as REITs. So long as certain conditions are 
satisfied, REITs pay no tax at the entity level. Instead, REIT 
---------------------------------------------------------------------------
shareholders are taxed on distributed dividends.

The multifamily industry opposes any tax reform effort that would lead 
to higher taxes or compliance burdens for pass-through entities or 
REITs. For example, while many are calling for a reduction in the 
nation's 35 percent corporate tax rate, flow-through entities should 
not be called upon to make up the lost revenue from this change. 
Additionally, the multifamily industry would be extremely concerned by 
proposals that would arbitrarily limit the ability of current and 
future pass-through entities to fully utilize lower tax rates and other 
benefits tax reform may provide.

Priority 2: Ensure Depreciation Rules Avoid Harming Multifamily Real 
Estate

Enabling multifamily developers to recover their investment through 
depreciation rules that reflect underlying economic realities promotes 
apartment construction, economic growth, and job creation. Tax reform 
should ensure that depreciation tax rules are not longer than the 
economic life of assets by taking into account natural wear and tear 
and technological obsolescence.

In this regard, NMHC/NAA recommend that the Finance Committee consider 
a recent study that suggests the depreciation of multifamily buildings 
should certainly be no longer than the current-law 27.5-year period and 
perhaps shorter. In particular, David Geltner and Sheharyar Bokhari of 
the MIT Center for Real Estate in November 2015 published a paper 
Commercial Building Capital Consumption in the United States, which 
represents the first comprehensive study on this topic in nearly 40 
years.\13\ By including capital improvement expenditures, the MIT study 
finds that residential properties net of land depreciate at 7.3 percent 
per year on average, which is a significantly faster rate than 
previously understood. Translated into tax policy terms, we believe 
this data shows that the current-law 27.5-year depreciation period 
overstates the economic life of an underlying multifamily asset by 
nearly 9 years.
---------------------------------------------------------------------------
    \13\ David Geltner and Sheharyar Bokhari, MIT Center for Real 
Estate, Commercial Buildings Capital Consumption in the United States, 
November 2015.

The apartment industry would be particularly concerned by proposals to 
extend the depreciation period of multifamily buildings, such as those 
made in the past to set multifamily depreciation periods at 40 or even 
43 years. These proposals, which would create an arbitrary and 
discriminatory cost recovery system that does not reflect the economic 
life of actual structures, would have a devastating effect on the 
apartment industry's ability to construct new apartment buildings, 
particularly when, as noted above, supply continues to fall short of 
demand. Extending the straight-line recovery period for residential 
rental property from 27.5 years to 43 years, for example, would reduce 
a multifamily operator's annual depreciation deduction by 36 percent. 
This result would diminish investment and development in multifamily 
properties, drive down real estate values and stifle the multifamily 
industry's ability to continue creating new jobs. Put another way, the 
proposal would significantly impact cash flows and investment returns 
that are at the heart of a developer's analysis of whether a particular 
---------------------------------------------------------------------------
project is economically viable.

Furthermore, it is not just property owners who would suffer the 
consequences of depreciation periods that do not reflect the economic 
life of underlying assets. For example, pension plans and life 
insurance companies, which provide retirement and income security to 
millions of working Americans and retirees, could be harmed as their 
real estate investments lose value. Local governments would also see 
lower revenues as the value of multifamily properties decline, leaving 
a smaller amount of property taxes to finance core services including 
law enforcement and schools. In this regard, the Tax Foundation found 
that in fiscal year 2014, property taxes accounted for 31.3 percent of 
state and local tax collections, more than general sales taxes, 
individual income taxes, and corporate income taxes.\14\
---------------------------------------------------------------------------
    \14\ Tax Foundation, Facts and Figures, How Does Your State 
Compare?, 2017, p. 14.

Finally, a note is warranted regarding so-called deprecation recapture. 
Under current law, when a multifamily property is sold, there are two 
types of taxes that apply. First, gain from the sale of the property is 
taxed as a capital gain, typically at a rate of 20 percent for a 
general partner and 23.8 percent for a limited partner. Second, the 
portion of the gain attributable to prior depreciation deductions is 
generally subject to a 25 percent tax. This second tax is referred to 
---------------------------------------------------------------------------
as depreciation recapture.

NMHC/NAA believe that depreciation recapture taxes as they stand today 
can have a pernicious effect on property investment and should be made 
no worse. After decades of operations, many multifamily owners have a 
very low tax basis in their properties. If sold under current law, 
owners would have to pay large depreciation recapture taxes. To avoid 
this huge tax bill, many current owners of properties with low tax 
basis will not only avoid selling their properties, but they will also 
be reluctant to make additional capital investments in properties. The 
result is deteriorating properties that are lost from the stock of 
safe, affordable housing. The other alternative is for the long-time 
owners to sell their properties to an entity that is able to pay a 
large enough sales price to cover the recapture taxes. To make their 
investment pay off, however, the new owner will likely convert the 
property to higher, market-rate rents, meaning a loss of our nation's 
affordable housing stock.

Therefore, either scenario can have the same result: the possible loss 
of hundreds of thousands of affordable housing units. Increasing 
depreciation recapture taxes will exacerbate this result and further 
discourage owners from selling these properties to entities that can 
retain them as affordable housing.

Finally, the multifamily industry would like to commend Senators Thune 
and Roberts for introducing the Investment in New Ventures and Economic 
Success Today Act of 2017 (S. 1144). By enhancing and making permanent 
section 179 small business expensing and 50-percent bonus depreciation, 
the bill would encourage multifamily firms to increase investment. We 
particularly support the bill's provision to modify current-law section 
179 rules to enable property used in rental real estate, such as 
appliances and furnishings, to qualify for this incentive.

Priority 3: Retain the Full Deductibility of Business Interest

Under current law, business interest is fully deductible. However, 
efforts to prevent companies from overleveraging are leading to an 
examination of whether the current 100-percent deduction for business 
interest expenses should be curtailed. Unfortunately, curtailing this 
deductibility would greatly increase the cost of debt financing 
necessary for multifamily projects, curbing development activity.

As mentioned above, over three-quarters of multifamily properties are 
owned by pass-through entities. Although such entities can access some 
equity from investors, they must generally borrow a significant portion 
of the funds necessary to finance a multifamily development. A typical 
multifamily deal might consist of 65 percent debt and 35 percent 
equity. Because such entities often look to debt markets, which lend 
money at a rate of interest, to garner capital, the full deductibility 
of interest expenses is critical to promoting investment. Indeed, 
according to the Federal Reserve, as of December 31, 2016, total 
multifamily debt outstanding was $1,186.7 billion.\15\ Reducing the 
full deductibility of interest would undoubtedly increase investment 
costs for owners and developers of multifamily housing and negatively 
impact aggregate construction.
---------------------------------------------------------------------------
    \15\ Board of Governors of the Federal Reserve System, Mortgage 
Debt Outstanding, by type of property, multifamily residences, 2016Q4, 
March 2017.

In addition to harming the multifamily industry, it is instructive to 
note that modifying the full deductibility of business interest would 
be precedent setting. Drs. Robert Carroll and Thomas Neubig of Ernst 
and Young LLP concluded in their analysis, Business Tax Reform and the 
---------------------------------------------------------------------------
Tax Treatment of Debt:

        The current income tax generally applies broad income tax 
        principles to the taxation of interest. Interest expenses paid 
        by borrowers are generally deductible as a business expense, 
        while interest income received by lenders is generally 
        includible in income and subject to tax at applicable recipient 
        tax rates. With this treatment, interest income is generally 
        subject to one level of tax under the graduated individual 
        income tax rates. This is the same manner in which most other 
        business expenses, such as wages payments to employees, are 
        taxed, and also follows the practice in other developed 
        nations.\16\
---------------------------------------------------------------------------
    \16\  Drs. Robert Carroll and Thomas Neubig, Business Tax Reform 
and the Tax Treatment of Debt: Revenue neutral rate reduction financed 
by an across-the-board interest deduction limit would deter investment, 
Ernst and Young LLP, May 2012, p. 3.
---------------------------------------------------------------------------

Priority 4: Preserve the Ability to Conduct Like-Kind Exchanges

Since 1921, the Internal Revenue Code has codified the principle that 
the exchange of one property held for business use or investment for a 
property of a like-kind constitutes no change in the economic position 
of the taxpayer and, therefore, should not result in the imposition of 
tax. This concept is codified today in section 1031 of the Internal 
Revenue Code with respect to the exchange of real and personal 
property,\17\ and it is one of many non-recognition provisions in the 
Code that provide for deferral of gains.\18\
---------------------------------------------------------------------------
    \17\ Section 1031 permits taxpayers to exchange assets used for 
investment or business purposes, including multifamily properties, for 
other like-kind assets without the recognition of gain. The tax on such 
gain is deferred, and, in return, the taxpayer carries over the basis 
of the original property to the new property, losing the ability to 
take depreciation at the higher exchange value. Gain is immediately 
recognized to the extent cash is received as part of the like-kind 
exchange, and the taxes paid on such gain serve to increase the newly 
acquired property's basis. Congress has largely left the like-kind rule 
unchanged since 1928, though it has narrowed its scope.
    The like-kind exchange rules are based on the concept that when one 
property is exchanged for another property, there is no receipt of cash 
that gives the owner the ability to pay taxes on any unrealized gain. 
The deferral is limited to illiquid assets, such as real estate, and 
does not extend to investments that are liquid and readily convertible 
to cash, such as securities. Furthermore, the person who exchanges one 
property for another property of like-kind has not really changed his 
economic position; the taxpayer, having exchanged one property for 
another property of like-kind is in a nearly identical position to the 
holder of an asset that has appreciated or depreciated in value, but 
who has not yet exited the investment.
    \18\ Under the tax code, the mere change in value of an asset, 
without realization of the gain or loss, does not generally trigger a 
taxable event. In such situations, the proper tax treatment is to defer 
recognition of any gain and maintain in the new property the same basis 
as existed in the exchanged property. This is similar in concept to 
other non-recognition, tax deferral provisions in the tax code, 
including property exchanges for stock under Section 351, property 
exchanges for an interest in a partnership under section 721, and stock 
exchanges for stock or property under section 361 pursuant to a 
corporate reorganization.

Like-kind exchanges play a significant role and are widely used in the 
multifamily industry. Current-law like-kind exchange rules enable the 
smooth functioning of the multifamily industry by allowing capital to 
flow more freely, which, thereby, supports economic growth and job 
creation. Multifamily property owners use section 1031 to efficiently 
allocate capital to optimize portfolios, realign property 
geographically to improve operating efficiencies and manage risk. By 
increasing the frequency of property transactions, the like-kind 
exchange rules facilitate a more dynamic multifamily sector that 
supports additional reinvestment and construction activity in the 
---------------------------------------------------------------------------
apartment industry.

According to recent research by Drs. David C. Ling and Milena Petrova 
regarding the economic impact of repealing like-kind exchanges for real 
estate and the multifamily industry in particular: \19\
---------------------------------------------------------------------------
    \19\ David C. Ling and Milena Petrova, The Economic Impact of 
Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate, 
June 2015.

      Assuming a typical 9-year holding period, apartment rents would 
have to increase by 11.8 percent to offset the taxation of capital 
gains and depreciation recapture income at rates of 23.8 percent and 25 
---------------------------------------------------------------------------
percent, respectively.

      Whether based on the number of transactions or dollar volume, 
multifamily properties, both large and small, are the property type 
most frequently acquired or disposed of with an exchange.

      Nearly 9 in 10 (88 percent) of commercial properties acquired by 
a like-kind exchange result in a taxable sale in the very next 
transaction. Thus, like-kind exchange rules are not used to 
indefinitely defer taxes.

      Governments collect 19 percent more taxes on commercial 
properties sold following a like-kind exchange than by an ordinary 
sale.

Additional research suggests that like-kind exchanges play such a 
critical role in driving investment that repealing the ability to 
conduct them would harm the economy even if the resulting revenue were 
used to reduce tax rates. Indeed, Ernst and Young LLP estimates that 
repealing like-kind exchange rules and using the resulting revenue to 
enact a revenue-neutral corporate income tax rate reduction or a 
revenue-neutral business sector income tax reduction (i.e., 
encompassing both C corporations and flow-through entities) would 
reduce Gross Domestic Product by $8.1 billion each year and $6.1 
billion each year, respectively.\20\ Put another way, a tax rate 
reduction financed by repealing like-kind exchange rules would, on a 
net basis, harm the economy.
---------------------------------------------------------------------------
    \20\ Ernst and Young LLP, Economic impact of repealing like-kind 
exchange rules, March 2015 (Revised November 2015).

Ernst and Young LLP summed up its analysis of how repealing like-kind 
exchanges would impair investment by concluding, ``While repealing 
like-kind exchange rules could help fund a reduced corporate income tax 
rate, its repeal increases the tax cost of investing by more than a 
corresponding revenue-neutral reduction in the corporate income tax 
rate and reduces GDP in the long-run.'' \21\ This result, of course, 
moves in the opposite direction of one of the stated goals for tax 
reform put forward by many of its proponents.
---------------------------------------------------------------------------
    \21\ Ibid.
---------------------------------------------------------------------------

Priority 5: Maintain the Current Law Tax Treatment of Carried Interest

A carried interest, also called a ``promote,'' has been a fundamental 
part of real estate partnerships for decades. Investing partners grant 
this interest to the general partners to recognize the value they bring 
to the venture as well as the risks they take. Such risks include 
responsibility for recourse debt, litigation risks, and cost overruns, 
to name a few.

Current tax law, which treats carried interest as a capital gain, is 
the proper treatment of this income because carried interest represents 
a return on an underlying long-term capital asset, as well as risk and 
entrepreneurial activity. Extending ordinary income treatment to this 
revenue would be inappropriate and result in skewed and inconsistent 
tax treatment vis-a-vis other investments. Notably, any fees that a 
general partner receives that represent payment for operations and 
management activities are today properly taxed as ordinary income.

Taxing carried interest at ordinary income rates would adversely affect 
real estate partnerships. At a time when the nation already faces a 
shortage of affordable rental housing, increasing the tax rate on long-
term capital gains would discourage real estate partnerships from 
investing in new construction. Furthermore, such a reduction would 
translate into fewer construction, maintenance, on-site employee and 
service provider jobs.

Notably, former House Ways and Means Committee Chairman Camp recognized 
the devastating impact that a change in the manner in which carried 
interest is taxed would have on commercial real estate when he 
specifically exempted real estate from a change he sought to the 
taxation of carried interest in his Tax Reform Act of 2014.\22\
---------------------------------------------------------------------------
    \22\ H.R. 1, Tax Reform Act of 2014, Section 3621, Ordinary income 
treatment in the case of partnership interest held in connection with 
performance of services.

Finally, some in Congress see the tax revenue generated by the carried 
interest proposal as a way to offset the cost of other tax changes. 
Enacting a bad tax law, such as changing the taxation of carried 
interest, merely to gain revenue to make other tax changes, is a 
distorted view of good tax policy, which demands that each tax proposal 
be judged on its individual merits.

Priority 6: Preserve and Strengthen the Low-Income Housing Tax Credit

The Low-Income Housing Tax Credit (LIHTC) has a long history of 
successfully generating the capital needed to produce low-income 
housing while also enjoying broad bipartisan support in Congress. This 
public/private partnership program has led to the construction of 
nearly 3 million units since its inception in 1986.\23\ The LIHTC 
program also allocates units to low-income residents while helping to 
boost the economy. According to a December 2014 Department of Housing 
and Urban Development study, Understanding Whom the LIHTC Program 
Serves: Tenants in LIHTC Units as of December 31, 2012, the median 
income of a household residing in a LIHTC unit was $17,066 \24\ with 
just under two-thirds of residents earning 40 percent or less of area 
median income.\25\ Finally, the National Association of Home Builders 
reports that, in a typical year, LIHTC development supports 
approximately: 95,700 jobs; $3.5 billion in federal, state, and local 
taxes; and $9.1 billion in wags and business income.\26\
---------------------------------------------------------------------------
    \23\ National Council of State Housing Agencies, 2016 Housing 
Credit FAQ, February 25, 2016. https://www.ncsha.org/resource/2016-
housing-credit-faq.
    \24\ Department of Housing and Urban Development, Understanding 
Whom the LIHTC Program Serves: Tenants in LIHTC Units as of December 
31, 2012, December 2014, p. 23.
    \25\ Ibid, p. 24.
    \26\ Robert Dietz, The Economic Impact of the Affordable Housing 
Credit, National Association of Home Builders, Eye on Housing, July 15, 
2014. http://eyeonhousing.org/2014/oz/the-economic-impact-of-the-
affordable-housing-credit/.

Maintaining and bolstering the LIHTC's ability to both construct and 
rehab affordable housing is critical given acute supply shortages. 
Indeed, the Harvard Joint Center for Housing Studies estimated that 
there were only 58 affordable units for every 100 very low-income 
households (those earning up to 50 percent of area median income in the 
United States in 2013.\27\
---------------------------------------------------------------------------
    \27\ Harvard Joint Center for Housing Studies, ``The State of the 
Nation's Housing 2015: Housing Challenges'' (2015), available at http:/
/www.jchs.harvard.edu/sites/jchs.harvard.edu/files/jchs-sonhr-2015-
ch6.pdf.

The LIHTC has two components that enable the construction and 
redevelopment of affordable rental units. The so-called 9 percent tax 
credit supports new construction by subsidizing 70 percent of the 
costs. Meanwhile, the 4 percent tax credit can be used to subsidize 30 
percent of the unit costs in an acquisition of a project or new 
construction of a federally subsidized project and can be paired with 
---------------------------------------------------------------------------
additional federal subsidies.

Developers receive an allocation of LIHTC's from state agencies through 
a competitive application process. They generally sell these credits to 
investors, who receive a dollar-for-dollar reduction in their federal 
tax liability paid in annual allotments, generally over 10 years. The 
equity raised by selling the credits reduces the cost of apartment 
construction, which allows the property to operate at below-market 
rents for qualifying families; LIHTC-financed properties must be kept 
affordable for at least 15 years, but, in practice, a development 
receiving an allocation must commit to 30 years. Property compliance is 
monitored by state allocating agencies, the Internal Revenue Service, 
investors, equity syndicators and the developers.

First and foremost, Congress should retain the LIHTC as part of any tax 
reform legislation. In so doing, Congress must take care to offset any 
reduction in equity LIHTC could raise attributable to a reduction in 
the corporate tax rate. Furthermore, NMHC/NAA reminds Congress that 
tax-exempt private activity multifamily housing bonds, are often paired 
with 4 percent tax credits to finance multifamily development, and that 
such tax-exempt bonds should be retained in any tax reform legislation 
as they play a critical role in making deals viable to investors.

Second, Congress should also look to strengthen the credit by both 
increasing program resources so that additional units can be developed 
or redeveloped and making targeted improvements to the program to 
improve its efficiency Congress could increase program authority by 
allocating additional tax credits. Additionally, a part of the LIHTC 
that could benefit from a targeted adjustment involves program rules 
that require owners to either rent 40 percent of their units to 
households earning no more than 60 percent of area median income (AMI) 
or 20 percent to those earning no more than 50 percent of AMI. If 
program rules were revised to allow owners to reserve 40 percent of the 
units for people whose average income is below 60 percent of AMI, it 
could serve a wider array of households.

In this regard, the multifamily industry strongly supports the 
Affordable Housing Credit Improvement Act of 2017 (S. 548) and commends 
Senators Cantwell and Hatch for its introduction. We also thank Finance 
Committee Senators Wyden, Bennet, Heller and Portman for their 
cosponsorship. Finally, we would also urge the Committee to strongly 
consider the Middle-Income Housing Tax Credit Act of 2016 (S. 3384) 
that Ranking Member Wyden introduced during the 114th Congress to 
address the shortage of workforce housing available to American 
households. We believe that this bill would be a worthy complement of 
measures to expand and improve LIHTC.

Priority 7: Preserve the Current Law Estate Tax

As part of the American Taxpayer Relief Act of 2012 (Pub. L. 112-240), 
Congress in January 2013 enacted permanent estate tax legislation. The 
Act sensibly made permanent the $5 million exemption level (indexed for 
inflation) enacted as part of the Tax Relief, Unemployment Insurance 
Reauthorization, and Job Creation Act of 2010 (Pub. L. 111-312) and set 
a top tax rate of 40 percent. Crucially, it also retained the stepped-
up basis rules applicable to inherited assets. As many apartment 
executives prepare to leave a legacy to their heirs, it is vital to 
have clarity and consistency in the tax code with regard to estate tax 
rules. For this reason, the apartment industry remains supportive of 
the permanent estate tax legislation passed in early 2013.

There are three key elements to the estate tax: (1) the exemption 
level; (2) the estate tax rate; and (3) the basis rules. While all 
three elements can be important for all types of estates, estates with 
significant amounts of depreciable real property are especially 
concerned with how various types of basis rules may affect them.

      Exemption Levels: The estate tax exemption level is, in 
simplified terms, the amount that a donor may leave to an heir without 
incurring any federal estate tax liability. In 2017, there is a $5.49 
million exemption.

      Tax Rates: The estate tax rate applies to the value of an estate 
that exceeds the exemption level. The maximum rate is 40 percent.

      Basis Rules: The basis rules determine the tax basis to the 
recipient of inherited property. There are generally two different ways 
that basis is determined--stepped-up basis and carryover basis. The 
estate tax today features stepped-up basis rules, and under this 
regime, the tax basis of inherited property is generally reset to 
reflect the fair market value of the property at the date of the 
decedent's death. By contrast, under carryover basis, the tax basis of 
the inherited properties is the same for heirs as it was for the donor. 
This includes any decreases in tax basis to reflect depreciation 
allowances claimed by the donor in prior years. Retaining a stepped-up 
basis rule is critical for estates that contain significant amounts of 
depreciated real property as it helps heirs reduce capital gains taxes 
and maximize depreciation deductions.

Priority 8: Reform the Foreign Investment in Real Property Tax Act to 
Promote Investment in the Domestic Apartment Industry

The Foreign Investment in Real Property Tax Act (FIRPTA) (Pub. L. 96-
499) serves as an impediment to investment in U.S. commercial real 
estate, including multifamily housing. The FIRPTA regime is 
particularly pernicious because it treats foreign investment in real 
estate differently than investment in other economic sectors and, 
thereby, prevents commercial real estate from securing a key source of 
private-sector capital that could be used to develop, upgrade, and 
refinance properties. Congress should enact tax reform that either 
repeals FIRPTA or, at the very least, further mitigates its corrosive 
effect on foreign investment in U.S. real estate.

Under current law, the U.S. does not generally impose capital gains 
taxes on foreign investors who sell interests in assets sourced to the 
U.S. unless those gains are effectively connected with a U.S. trade or 
business. This means that a foreign investor generally incurs no U.S. 
tax liability on capital gains attributable to the sale of stocks and 
bonds in non-real estate U.S. companies.

FIRPTA, however, serves as an exception to the general tax rules and 
imposes a punitive barrier on foreign investment in U.S. real estate. 
Under FIRPTA, when a foreign person disposes of an interest in U.S. 
real property, the resulting capital gain is automatically treated as 
income effectively connected to a U.S. trade or business. Thus, the 
foreign investor is subject to a withholding tax on the proceeds of the 
sale only because it is associated with an investment in U.S. real 
estate.

In addition to levying tax, FIRPTA mandates onerous administrative 
obligations that further deter foreign investment in U.S. real estate. 
First, the buyer of a property must withhold 15 percent of the sales 
price of a property sold by a foreign investor so as to ensure taxes 
are collected. Second, if they overpay tax through the withholding, 
foreigners investing in U.S. real estate must file tax returns with the 
IRS to receive a refund of the overpayment.

The taxes and administrative burdens FIRPTA imposes have negative 
consequences for U.S. commercial real estate and the multifamily 
industry. Because foreign investors can avoid U.S. tax and reduce their 
worldwide tax burden tax by investing in U.S. securities or in real 
estate outside of the U.S., they may simply choose not to invest in 
U.S. real estate. This is particularly harmful to an apartment industry 
that relies on capital to finance and refinance properties. 
Furthermore, because it is the sale of a U.S. property interest that 
triggers FIRPTA, foreign investors may hold on to U.S. real estate sold 
for tax considerations.

Repealing FIRPTA would ensure that tax considerations will not prevent 
capital from flowing to the most productive investments. Such reform 
could unlock billions in foreign capital that could help to both drive 
new investment and refinance real estate loans. If outright repeal 
proves impossible, Congress should consider additional targeted reforms 
to the FIRPTA regime. NMHC/NAA were particularly pleased that Congress 
in late 2015 enacted legislation to both provide a partial exemption 
from FIRPTA for certain stock of real estate investment trusts and 
exempt from the application of FIRPTA gains of foreign pension funds 
from the disposition of U.S. real property interests.\28\
---------------------------------------------------------------------------
    \28\ Public Law 114-113, Consolidated Appropriations Act, 2016, 
Division Q, Protecting Americans from Tax Hikes Act of 2015.
---------------------------------------------------------------------------

The House Republican Tax Blueprint and Cost Recovery

As noted above, the recommendations discussed in previous sections 
relate to reform of the current-law income tax. The House Republican 
Tax Reform Blueprint released in June 2016 represents a fundamental 
change in the way multifamily real estate would be treated for tax 
purposes. While it would reduce tax rates for the flow-through entities 
(e.g., LLCs, partnerships, and S corporations) that dominate the 
multifamily industry, the proposal, by moving from an income tax toward 
a cash-flow tax, dramatically alters the manner in which owners and 
investors recover their expense. Under current law, multifamily real 
estate is depreciated over 27.5 years, all business interest may be 
deducted and properties can be like-kind exchanged to keep investment 
dollars in the real estate sector. In contrast, the House Republican 
proposal would provide for the immediate expensing of all assets--other 
than land--while denying interest deductibility. It is silent on like-
kind exchanges.

The multifamily industry is continuing to evaluate the impact the House 
Republican proposal would have on the development of existing and 
future multifamily housing. In the interim, we would offer the 
following preliminary observations should the Finance Committee 
consider a similar proposal.

First and foremost, the interest on debt, which has been fully tax 
deductible for 100 years, plays a critical role in developing 
multifamily real estate. Given the prevalence of the pass-through 
structure of ownership, multifamily entities are heavily reliant on 
debt markets--as opposed to equity markets that corporations access 
through the issuance of stock--to finance development. Accordingly, 
reducing the full deductibility of interest would, standing alone, 
increase investment costs for owners and developers of multifamily 
housing and negatively impact aggregate construction.

Second, it is unclear whether the benefits of full expensing would 
fully offset the loss of interest deductibility. This result is 
dependent on factors that include whether an entity is able to use the 
full value of an investment deduction in the year it is generated, the 
cost of capital, how much leverage a particular investor may choose to 
employ and statutory tax rates. In this regard, if the value of a 
deduction must be carried forward in the form of a net operating loss 
(NOL), it may be less beneficial. The House Republican tax plan 
proposes to allow NOLs to be carried forward indefinitely and to 
increase them by an interest factor that accounts for inflation and a 
real return on capital. It is uncertain how that real return on capital 
will be determined, but the formula will be critical. Given that a 
multifamily building may cost millions of dollars to construct, it is 
likely that many developers will have to recognize NOLs. If a real rate 
of return on capital is determined by reference to Treasury bonds, this 
will be substantially less valuable than a formula that references 
returns in equities markets. Until the Ways and Means Committee makes 
clear how NOLs will be calculated, the multifamily industry will be 
unable to fully analyze the proposal.

Third, it is critical to view cost recovery rules as a whole instead of 
in isolation. As noted above, current tax law, provides for 
depreciation, interest deductibility, and like-kind exchanges. While 
expensing under the Blueprint may, in some cases, provide for a de 
facto like-kind exchange, this is not the case for land. Under the 
proposal, land, which can represent 15 percent to 25 percent of the 
cost of a typical multifamily deal, may not be expensed. Moreover, 
interest on land purchases may not be deducted. Thus, the tax treatment 
of land is materially worse under the House Republican tax plan than 
under current law that allows for interest deductibility. Although the 
Blueprint is silent on like-kind exchanges, members may wish to address 
this problem by retaining like-kind exchanges for land or continuing to 
allow interest deductibility on land.

Finally, while tax reform focuses on future investment, it is 
absolutely vital that policymakers do not diminish the value of current 
assets or adversely impact capital flows serving existing assets and 
the real estate industry. For this reason, transition rules to any 
future tax system will arguably be as essential as any new tax rules. 
This is especially true when it comes to how interest, depreciation and 
basis will be treated on existing multifamily debt.

According to the Federal Reserve, as of December 31, 2016, total 
multifamily debt outstanding was $1.19 trillion. The multifamily 
industry strongly believes that debt serving existing assets should 
continue to be fully tax deductible as an ordinary and necessary 
business expense. Depreciation deductions on existing assets should 
also continue to be allowed as under current law. Furthermore, owners 
of existing assets should be able to use current-law basis rules. Basis 
should not be reset to zero on the date of enactment as some have 
proposed. Any action to curtail interest deductions, diminish 
depreciation deductions or reduce basis attributable to existing assets 
has the capacity to greatly increase tax burdens and potentially lead 
existing multifamily investments to be uneconomic. This would greatly 
harm our industry's ability to house working Americans.

Conclusion

NMHC/NAA look forward to working with the Finance Committee, as well as 
the entire Congress, to craft tax reform legislation that would promote 
economic growth and the nation's multifamily housing needs. In 
communities across the country, apartments enable people to live in a 
home that is right for them. Whether it is young professionals starting 
out, empty nesters looking to downsize and simplify, workers wanting to 
live near their jobs, married couples without children or families 
building a better life, apartment homes provide a sensible choice. We 
stand ready to work with Congress to ensure that the nation's tax code 
helps bring apartments, and the jobs and dollars they generate, to 
communities nationwide.

                                 ______
                                 
              Puerto Rico Manufacturers Association (PRMA)

                            P.O. Box 195477

                           San Juan, PR 00919

                     Email: [email protected]

                          Tel: (787) 641-4455

Thank you, Chairman Hatch, Ranking Member Wyden, and distinguished 
members of the committee.

It is my pleasure to present this statement as President of the Puerto 
Rico Manufacturers Association (PRMA) and note that I also speak on 
behalf of the largest employer in Puerto Rico. The PRMA is a private, 
voluntary, non-profit organization established in 1928 to serve as the 
voice of manufacturing in the U.S.'s largest and most important 
Territory.

We recognize that the only solution is economic growth and Tax Reform 
will play a key role. Puerto Rico needs more jobs and taxpayers.

First, it's important to note that jobs in Puerto Rico are American 
jobs facing unique competitive challenges. Tax reform can make or break 
our economy and we wish to work with you to ensure Puerto Rico can 
compete with our foreign competition for jobs and investment.

As Congress considers moving forward on the issues of reforming the tax 
code we wish to provide some background on the importance of 
manufacturing to our overall economy, which, in a large part is the 
product of Federal Tax Code's unique treatment of U.S. companies 
operating in Puerto Rico. We also ask for your consideration and 
inclusion of our concerns during your deliberations over Tax Reform. We 
believe that you would agree that a net tax increase on products 
produced in Puerto Rico will have a detrimental effect not only on the 
economy of Puerto Rico but the entire U.S. supply and values chain.

Puerto Rico has been part of the U.S. Customs Zone since enactment of 
the Jones Act in 1917 and today, after a century of customized Federal 
policies, we are a key component of the U.S. supply and values chain 
due to the major role of American manufacturing in Puerto Rico.

We note that Puerto Rico struggles with an economy that has shrunk 15% 
since 2006, Tax Reform can make or break our ability to once again grow 
our economy and reverse the brain drain and massive population loss as 
our U.S. Citizens in Puerto Rico relocate elsewhere in search of better 
opportunities.

RECENT DECISIONS BY CONGRESS

Congress enacted the Puerto Rico Oversight, Management, and Economic 
Stability Act (PROMESA) and imposed a federally appointed Oversight 
Board to oversee a resolution to our local government's fiscal crisis. 
This places an even greater level of importance on the need for 
economic growth initiatives which jumpstart our weakened economy in 
order to generate new tax revenues to ensure the schools stay open and 
debts are repaid.

PROMESA also created a Bipartisan Bicameral Congressional Task Force on 
Puerto Rico to recommend measures to revitalize our economy and clearly 
Puerto Rico's manufacturing sector is best positioned to play the lead 
role. Notably, Tax Reform and its impact on Puerto Rico's vulnerable 
economy was given priority.

The Task Force makes the following recommendations in its report to 
Congress:

      The Task Force believes that Puerto Rico is too often relegated 
to an afterthought in congressional deliberations over federal business 
tax reform legislation.

      The Task Force recommends that Congress make Puerto Rico 
integral to any future deliberations over tax reform legislation. The 
Task Force recommends that Congress continue to be mindful of the fact 
that Puerto Rico and the other territories are U.S. jurisdictions, home 
to U.S. citizens or nationals, and that jobs in Puerto Rico and the 
other territories are American jobs.

      The Task Force is open to the prospect of Congress providing 
U.S. companies that invest in Puerto Rico with more competitive tax 
treatment as long as appropriate guardrails are designed to ensure the 
company is creating real economic activity and employment on the 
island.

TAX POLICY HAS DRIVEN PUERTO RICO'S ECONOMY SINCE THE 1920s

Puerto Rico has been part of the U.S. since 1898 and today is the home 
for 3.5 million U.S. Citizens. No jurisdiction of the U.S. is more 
dependent on manufacturing than Puerto Rico. In fact, manufacturing is 
currently the leading private sector employer and represents almost 
one-half of Puerto Rico's economy, far more than any State.

It's important to remember that manufacturing jobs in Puerto Rico are 
U.S. jobs employing U.S. citizens. And frankly, it's important to note 
that Puerto Rico is highly dependent on manufacturing due to 90 years 
of targeted Federal tax policy designed to foster and attract 
manufacturing. These policies were ended in 2006 and contributed to the 
depressed economy now suffered by Puerto Rico which has seen a 
contraction in our economy by 15% and over 500,000 U.S. Citizens 
residing in Puerto Rico have migrated elsewhere looking for economic 
opportunity.

Today, most subsidiaries of U.S. companies operating in Puerto Rico are 
organized as Controlled Foreign Corporations (CFCs) under the current 
tax code. However, they are treated as domestic in every other way as 
they operate under U.S. laws just the same as business operating 
elsewhere in the U.S. which in turn positions Puerto Rico in a non-
competitive position versus our foreign neighbors.

Approximately, 90% of products manufactured in Puerto Rico are included 
in the U.S. values and supply chain. Being within the U.S. Customs Zone 
since 1917 (and even before that) no tariffs or levies are imposed on 
U.S. products produced in Puerto Rico that are consumed in the domestic 
market.

MANUFACTURING GROWTH AND TRANSITION

Federal tax policy has traditionally recognized the unique relationship 
of Puerto Rico to the United States. Initially the provisions adopted 
as part of the Revenue Act of 1921 and later through the activities of 
the 1948 Operation Bootstrap (of which PRMA was a major participant) 
and the creation of IRC Section 936 as part of the Tax Reform Act of 
1976, the U.S. Congress has traditionally adopted targeted policies, 
particularly tax policies, towards Puerto Rico that were ``pro-growth'' 
and spurred the conversion of Puerto Rico from an agrarian economy to 
one based on manufacturing.

Although initially a largely agrarian economy, the decades after World 
War II saw manufacturing replace agriculture as the driving force of 
the economy of Puerto Rico. In the 1940s, direct employment by the 
manufacturing sector was approximately 56,000. That number dramatically 
increased in the late 1980s after the enactment of IRC Section 936 to 
approximately 106,000 and to a high of 155,000 by 1995. It was 
primarily due to the jobs offered by the manufacturing sector that 
living standards, wages and educational levels rose dramatically.

[GRAPHIC] [TIFF OMITTED] T2517.001


Thanks to congressionally driven tax policy, the economic ecosystem has 
grown from labor-intensive basic manufacturing to a capital-intensive 
industrialized sector to now a knowledge-based advanced manufacturing 
model. Because of these tax policies and in spite of the recent 
economic recession impacting our island for the past 9 years, Puerto 
Rico's manufacturing sector has shifted from one based on labor such as 
the manufacturing of food, tobacco, leather and apparel to the more 
capital-intensive industries of pharmaceuticals, chemicals, machinery, 
and electronics operating nearly 2,000 plants on our island.

By itself, Puerto Rico ranks the fifth in the world for pharmaceutical 
manufacturing with more than 70 plants. As of 2014, Puerto Rico based 
plants produced 16 of the top 20 best-selling drugs on the U.S. 
mainland.

Puerto Rico is also the world's third largest biotech manufacturer with 
more than 2 million square feet of dedicated plant space and is the 
seventh largest medical device producer hosting more than 50 plants on 
the island. Manufacturing accounts for 48.6 % of Puerto Rico's Gross 
Domestic Product (GDP) and directly employs 8% of the workforce or 
about 74,000 people. We estimate an additional 160,000 Puerto Rico 
residents are indirectly employed by our sector by enterprises 
providing services and inputs.

We also estimate an additional 80,000 stateside jobs supported by 
Puerto Rico's manufacturing companies (CFCs). Therefore, our 
manufacturing sector has the multiplier effect of contributing 320,000 
jobs (direct, indirect and induced) to the U.S. and Puerto Rico 
economies. For example, one of our member companies reports that it 
annually transports over $140 million worth of product from Puerto Rico 
just through the Port of Jacksonville, Florida. The Port of 
Jacksonville notes that one-half of its annual business volume is due 
to Puerto Rico.

Manufacturing companies paid $1.4 billion in income taxes in 2009 or 
57.9% of all corporate income tax collected. The role of CFCs in Puerto 
Rico's economy is of such importance that during the current fiscal 
year, seven (7) of these companies doing business in Puerto Rico 
represent close to 20% of the revenues of the Government of Puerto 
Rico's budget or $2 billion.

Manufacturing offers better wages for U.S. Citizens in Puerto Rico. 
Unfortunately, while approximately 42% of our population lives below 
the ``federal poverty threshold'' and the current unemployment rate is 
at 14%, workers in the manufacturing sector earn an average wage of 
$39,000, which is actually 30% higher than the per capita average. We 
are also proud to report that in an economy in which fully 40% of the 
workers earn minimum wage, manufacturing wages are a major factor in 
improving the standard of living for all of Puerto Rico's residents.

IRC SECTION 936 WAS KEY TO FOSTERING MANUFACTURING

In spite of these positive numbers, the overall economic picture for 
Puerto Rico generally and for manufacturing specifically must be 
balanced by the ``hard'' facts that manufacturing has lost a 
significant number of jobs particularly since the repeal of IRC Section 
936 in 1996.

[GRAPHIC] [TIFF OMITTED] T2517.002


In its 1993 report to the chairman of the Senate Finance Committee, the 
General Accounting Office (GAO) summarized the IRC Section 936 credit 
as follows:

        Under section 936, the tax credit equals the full amount of the 
        U.S. income tax liability on possessions source income. Firms 
        qualify for the credit if, over a 3-year period preceding a 
        taxable year, 80 percent or more of their income was derived 
        from sources within a possession and 75 percent or more of 
        their income was derived from the active conduct of a trade or 
        business within a possession. This provision effectively 
        exempts all possessions source income from U.S. taxation. 
        Dividends repatriated from a U.S. subsidiary to a mainland 
        parent qualify for a dividends-received deduction, thus 
        allowing tax-free repatriation of possessions income. In 
        addition, the provision exempts from U.S. taxation the income 
        earned on qualified investments made by section 936 firms from 
        their profits earned in the possessions. This income is called 
        qualified possessions source investment income, or QPSII. 
        Puerto Rico established rules to ensure that QPSII funds 
        invested through the island's financial intermediaries meet the 
        act's requirements.

The enactment of IRC Section 936 had a positive and direct impact on 
Puerto Rico's economy. In 1989, the GAO noted that 13 years after 
enactment of IRC Section 936, manufacturing firms in Puerto Rico 
employed 105,500 individuals directly comprising 11% of the total 
employment of 952,000. By 1997, that number stood at 155,000 Americans 
directly employed by the Puerto Rico manufacturing sector.

However, today the number of U.S. citizens employed directly by 
manufacturing has been reduced to approximately 74,000. It's fair to 
say that this drastic reduction is mostly due to the elimination of IRC 
Section 936 more than any other single factor. In fact, a number of 
corporate decision makers cited the loss of IRC Section 936 as the 
primary reason for either the closure or relocation of facilities to 
Mexico, China, and the Dominican Republic.

Unfortunately, as manufacturing jobs have disappeared, few other local 
employment opportunities remain. This has caused a sizeable ``brain 
drain'' as tens of thousands of skilled workers have left Puerto Rico 
in search of new employment. Over the past decade, an estimated 500,000 
U.S. citizens representing approximately 12% of the total population 
(mostly the young and those with higher educational levels) left the 
island for better opportunities on the mainland. This troubling trend 
suggests greater social consequences if the shrinking manufacturing 
sector were to continue. Economic circumstances are driving this 
``brain drain'' leaving many of our talented citizens with little 
choice but to immigrate to the mainland or remain on the island 
becoming dependent on social programs.

We believe Puerto Rico is the only jurisdiction in the United States 
where CFCs employ U.S. citizens, operating under U.S. law and on U.S. 
soil. This is truly a unique situation to consider during Congress's 
deliberations on tax reform.

RECOMMENDATIONS FOR TAX REFORM 2017

We urge full consideration of the impact of tax reform on Puerto Rico's 
economy and job base. We believe Congress shares a bipartisan goal of 
fostering manufacturing and encouraging investment in American jobs. 
Again, we note that Puerto Rico jobs are American jobs.

The GAO's 1993 report also reviewed the factors that U.S. corporations 
consider when they contemplate establishing a plant or similar facility 
in a foreign location. The GAO identified six primary considerations 
including energy costs, transportation costs, labor costs, stability, 
infrastructure, and tax structure.

Puerto Rico, by itself and with recent congressional action, has a 
stable government and excellent infrastructure given the millions of 
dollars invested in recent years on infrastructure improvements.

Conversely, the Island has a highly skilled and educated workforce but 
labor costs are the highest in the Caribbean. In addition, local and 
federal labor laws make Puerto Rico one of the most heavily regulated 
jurisdictions in the U.S. and certainly much higher than others in the 
Caribbean basin area.

Puerto Rico is an island and highly dependent on imports of raw 
materials, food, and oil, increasing costs for manufacturing and 
business operations. While there is a planned conversion over to higher 
efficiency energy production including liquefied natural gas (LNG), 
currently, energy is currently generated using imported oil in obsolete 
government run plants resulting in higher energy costs. A recent 
comparison with Florida found that energy costs in Puerto Rico are two 
times that of Florida: on average 23 cents per kilowatt-hour in Puerto 
Rico versus 9 cents in Florida. The average for the United States is 11 
cents per kilowatt-hour.

The bottom line is that we perform well with several factors that are 
commonly considered when we compete to foster investment in 
manufacturing operations in Puerto Rico. Our neighbors in the region as 
well as our global competitors are aggressively enticing our 
manufacturing company base so that they relocate their operations from 
Puerto Rico by offering more attractive tax treatment, lower labor 
costs, cheaper energy costs, less restrictive regulation and access to 
the U.S. market. Any actions taken by Congress that would adversely 
impact the Puerto Rico operations of U.S. based multinational groups 
are likely to result in a shift from manufacturing in Puerto Rico to 
foreign jurisdictions, not to the mainland U.S., thus taking jobs away 
from U.S. citizens both in Puerto Rico and in the U.S. This would be 
detrimental to the economy of Puerto Rico, detrimental to the economy 
of the U.S. and detrimental to the goals of the recently imposed 
PROMESA Fiscal Control Board. We would all lose in that scenario.

Therefore, the ability of Puerto Rico to remain economically 
competitive internationally and, thus to continue to provide employment 
to U.S. citizens may well depend on how the U.S. Congress treats U.S. 
companies operating subsidiaries in Puerto Rico under reforms to the 
tax code.

We note that the proposal included in the House Blueprint which 
provides for border adjustability regarding importation and exportation 
of products to and from the U.S. market. Further, other proposals may 
call for the implementation of a tariff also on the importation of 
products to the U.S. market. Since Puerto Rico has been included in the 
U.S. Customs Zone for the past 100 years, we would anticipate that the 
border adjustment provisions in the Blueprint or any other similar 
scheme not apply to products produced in Puerto Rico. Again, the 
contrary would produce a net loss both to the U.S. stateside and Puerto 
Rico economies and harm the U.S. values and supply chain.

Also, as part of our discussions with members of Congress, we have 
perceived potential interest in modifying the tax rules that currently 
allow Puerto Rico to be the only jurisdiction in the United States 
where CFCs employ U.S. Citizens, operating under U.S. law and on U.S. 
soil. While this seems to be a speculative initiative, we urge that 
careful consideration be taken in this regard as any such change could 
have the same detrimental repercussions as the applicability of border 
adjustment provisions. Until such initiatives become clear, it would be 
premature to assert any level of impact on Puerto Rico, but whatever 
the result is, there must be, at least, reasonable transition rules 
that do not penalize the choices made by companies that have invested 
in Puerto Rico and that are, in a very real sense, a large component of 
the fiscal plans that have been laid out for the recovery of Puerto 
Rico's economy. Again, not doing so, would only produce an unnecessary 
net loss situation where both the Puerto Rico and U.S. stateside 
employment base and economies would suffer.

We share your goal of giving U.S. manufacturing a competitive edge when 
tax reform is enacted. We also ask for the opportunity to work with you 
on this task while ensuring no harm to manufacturing jobs in Puerto 
Rico. Puerto Rico is a vital element of the U.S. manufacturing sector 
and we wish to continue fostering opportunity for U.S. citizens on our 
island as well as Stateside.

In conclusion, I would like to thank the committee for your 
consideration and ask that we be invited to appear before your 
committee during any upcoming hearings on tax reform. I'm looking 
forward to working with you as Congress deliberates the future of the 
Federal Tax Code.

Rodrigo Masses, President

                                 ______
                                 
          Reforming America's Taxes Equitably (RATE) Coalition

                             P.O. Box 33817

                          Washington, DC 20033

                              866-832-4674

                         www.RATEcoalition.com

                         [email protected]

Thank you, Chairman Hatch and Ranking Member Wyden, for receiving this 
testimony from the RATE (Reforming America's Taxes Equitably) 
Coalition, which is comprised of nearly 3-dozen corporations and 
associations, representing some 30 million workers in all of America's 
states and territories.

As the Senate Finance Committee begins to take action to reform our 
broken and outdated tax code for the sake of spurring growth, the RATE 
Coalition urges a prime focus on reform of the corporate income tax, 
which is routinely described as the single most detrimental aspect of 
our current tax system. Corporate tax reform is desperately needed for 
the sake of spurring growth and ensuring that all corporations are 
treated equally.

In particular, we wish to point out that for many years now, the United 
States has had the highest corporate tax rate among the leading 
economies of the world--a combined 39.1 percent. Here we are speaking 
of the 35 member-countries of the Organisation for Economic Co-
operation and Development (OECD). Surely, for the U.S., in a world 
characterized by ever more intense economic competition, this is a 
dubious, even dismal, distinction!

Still, many people do not see the connection between America's high 
corporate tax rate and her slow economic growth. One of the most 
frequent responses to this fact is, ``Yes, but nobody pays that high 
rate because there are so many loopholes.''

There are two big problems with that response.

First, many corporations--indeed, the vast majority, nationwide--
actually do pay at or near the high rate, because they are primarily 
based in the U.S. In fact, the RATE Coalition's member companies pay an 
average effective federal tax rate of 32 percent. And so, the tax-rate 
differential puts them at a severe disadvantage in the international 
arena.

We can quickly see that if our competitors can enjoy greater returns on 
capital due to their lower tax rate, then they have a significant 
competitive advantage relative to American firms. And that significant 
advantage for them translates into a significant disadvantage for our 
companies and, therefore, our workers.

Second, some companies--so far, only a few, but more and more companies 
are considering the option--are exercising the ultimate tax avoidance 
strategy and moving their headquarters to other countries where the 
corporate tax rate is lower. The spate of ``inversions'' in recent 
years is testament to the fact that the high corporate tax rate in and 
of itself is driving businesses and jobs away from America.

Thus we can see this anti-competitive U.S. corporate tax rate has 
handicapped us against our international competitors. The current code 
has made it more difficult to invest in our American employees and 
operations, while limiting the value that our member companies have 
been able to create for our shareholders and stakeholders.

This basic inequity in the tax code can be easily fixed by lowering the 
corporate tax rate so that it is more competitive with the average of 
our major trading partners--the OECD countries--which is around 24 
percent. (At the same time, RATE believes that other aspects of the 
code, too, might need adjusting, with an eye toward fairness and 
simplicity.)

Meanwhile, so long as our rate remains the highest, American employees, 
shareholders, and suppliers will all be suffering the consequences of 
our crippling corporate tax rate. Unfortunately, the results will also 
cripple job creation, dampen economic security, and overall reduce 
investment in the United States.

For years now, both Democrats and Republicans have supported lowering 
the corporate tax rate. Indeed, the RATE Coalition, and its allies, 
have long regarded the 1986 Tax Reform Act as a model of bipartisan 
problem-solving.

More than 30 years ago, House Democrats joined with Senate Republicans 
to produce a landmark piece of legislation that was enthusiastically 
signed into law by a Republican President, Ronald Reagan.

To this day, the Tax Reform Act stands as a testament to the good that 
can come when the two parties work together for the common good. That 
is, clean up the tax code by lowering the rate and broadening the tax 
base. It was good public policy then, and we believe that it's good 
public policy now.

Admittedly, much has changed over the last three decades, and yet 
interestingly, the same positive spirit of bipartisan cooperation has 
continued, albeit often below the radar. We know that Republicans and 
Democrats have long agreed--sometimes publicly, sometimes privately--
that rate-lowering corporate tax reform is a good idea.

Today, the RATE Coalition joins with many others in the hope that 2017 
will be the year that the legislative and executive branches can come 
together to create meaningful tax reform--for the sake of growth, jobs 
, and, yes, hope.

Members of the RATE Coalition are listed below in alphabetical order:

Aetna                               Liberty
Altria                              Lockheed Martin
Association of American Railroads   Macy's
AT&T                                National Retail Federation
Boeing                              Nike
Brown-Forman                        Northrop Grumman
Capital One                         Reynolds America
COX Enterprises                     Raytheon
CVS Health                          S&P Global
Edison Electric Institute           Southern Company
FedEx                               Synchrony Financial
Ford                                T-Mobile
General Dynamics                    UPS
The Home Depot                      Verizon
Intel                               Viacom
Kimberly-Clark                      Walmart

                                 ______
                                 

                   The Washington Times, May 16, 2017

               Cutting the Drag of Heavy Corporate Taxes
              By Elaine C. Kamarck and James P. Pinkerton
On Thursday, the House Ways and Means Committee will have a hearing 
examining how tax reform will grow our economy and create jobs.

It's an important issue, perhaps one of the most important topics to be 
decided by Congress this year.

There is ample evidence that if Congress would reduce the corporate tax 
rate, it would grow the economy. America leads the world when it comes 
to taxing its business sector and that leading position is stifling our 
economy.

We can't promise that slashing the corporate tax rate to make it more 
competitive with the rest of the world will lead to 4-percent growth, 
but there are plenty examples to point to where such a policy was 
implemented and did successfully yield such a result.

In Ireland, the growth rate was 7.2 percent. Their corporate tax rate 
is set at 15 percent and is scheduled to be cut to 10 percent. In the 
United Kingdom, the corporate tax rate is 19 percent while the economy 
grew at about double that of the United States.

Japan had a corporate tax rate similar to the United States and last 
year had anemic growth similar to ours. The Japanese government decided 
to join with the Irish and the English and slash their corporate tax 
rate to levels more competitive with their competitors.

Unless we get our own version of corporate tax reform, we will be left 
behind, in the dust.

For many years now, America has had the highest corporate tax rate in 
the world--35 percent. And yet, many people don't see the connection 
between the high corporate tax rate and America's slow economic growth. 
One of the most frequent responses to this fact is, ``Yes, but nobody 
pays that high rate because there are so many loopholes.''

That's wrong. Most corporations--indeed, the vast majority, 
nationwide--actually do pay the high rate, and this puts them at a 
severe disadvantage in the international arena. If our competitors can 
enjoy greater returns on investment thanks to their lower rate, then 
they have a significant advantage. And that significant advantage for 
them translates into a significant disadvantage for our companies, and 
our workers.

Now some companies--especially the larger ones, with more internal 
flexibility--do exercise the ultimate tax avoidance strategy and move 
their headquarters to other countries where the tax rate is lower. The 
spate of ``inversions'' in recent years is testament to the fact that 
the high corporate tax rate in and of itself is driving businesses and 
jobs away from America.

Thus, businesses that create jobs in America often find themselves 
taxed at higher rates than those that don't. The RATE Coalition's 
member companies employ one-third of America's private sector workers, 
and contrary to the conventional wisdom, our membership pays an average 
effective federal tax rate of 32 percent.

This anti-competitive U.S. corporate tax rate has handicapped us 
against our international competitors for too long. It has made it more 
difficult to invest in our American employees and operations, while 
limiting the value we're able to create for our shareholders.

So long as our rate remains the highest, American employees, 
shareholders and suppliers will all be bearing the consequences of our 
high corporate tax rate--and the result is anemic job creation, 
dampened economic security, and overall reduced investment in the 
United States.

For years now, both Democrats and Republicans have supported lowering 
the corporate tax rate. President Obama spoke about it in most of his 
State of the Union addresses. And in their first debate back in 2012, 
Mr. Obama and Republican candidate Mitt Romney agreed on the need to 
lower the rate.

Former President Bill Clinton is on the record supporting a lower rate. 
And, of course, President Trump has made it a centerpiece of his tax 
plan.

Lowering the rate is a simple and fair way to address the fact that 
America's jobs are disappearing. In this polarized era, it is one 
important step we can take to get the American economy growing in 
America again. America's workers need a win. Real tax reform starts 
with the rate.

Elaine C. Kamarck and James P. Pinkerton are co-chairs of the RATE 
Coalition

                                 ______
                                 
                         Real Estate Roundtable

                  801 Pennsylvania Ave., NW, Suite 720

                          Washington, DC 20004

As the Senate Committee on Finance meets to consider budget and tax 
priorities with the Secretary of the Treasury, the 21 undersigned 
national real estate organizations appreciate the opportunity to share 
our views on tax reform and commercial real estate. While the comments 
below broadly represent the views and perspective of the real estate 
industry, individual property types or investment structures may have 
unique tax issues and policy concerns more appropriately addressed in 
separate communications.

OVERVIEW

Real estate is deeply interwoven in the U.S. economy and the American 
experience, touching every life, every day. Millions of Americans share 
in the ownership of the nation's real estate, and it is a major 
contributor to U.S. economic growth and prosperity. Real estate plays a 
central role in broad-based wealth creation and savings for investors 
large and small, from homeowners to retirees invested in real estate 
via their pension plans.

Commercial real estate provides the evolving physical spaces in which 
Americans work, shop, learn, live, pray, play, and heal. From retail 
centers to assisted living facilities, from multifamily housing to 
industrial property, transformations are underway in the ``built 
environment.'' Investment in upgrading and improving U.S. commercial 
real estate is enhancing workplace productivity and improving the 
quality of life in our communities.

Among its vast economic contributions, the real estate industry is one 
of the leading job creators in the United States, employing over 13 
million Americans--more than one in every 10 full-time U.S. workers--in 
a wide range of well-paying jobs. Real estate companies are engaged in 
a broad array of activities and services. This includes jobs in 
construction, planning, architecture, building maintenance, management, 
environmental consulting, leasing, brokerage, mortgage lending, 
accounting and legal services, agriculture, investment advising, 
interior design, and more.

Commercial real estate encompasses many property types, from office 
buildings, warehouses, retail centers and regional shopping malls, to 
industrial properties, hotels, convenience stores, multifamily 
communities, medical centers, senior living facilities, gas stations, 
land, and more. Conservatively estimated, the total value of U.S. 
commercial real estate in 2016 was between $13.4 and $15 trillion, a 
level that matches the market cap of domestic companies on the New York 
Stock Exchange. Investor-owned commercial properties account for about 
90 percent of the total value, with the remainder being owner-occupied. 
Based on the latest data available from the Federal Reserve, U.S. 
commercial real estate is leveraged conservatively with about $4.2 
trillion of commercial real estate debt.

Industry activity accounts for nearly one-quarter of taxes collected at 
all levels of government (this includes income, property and sales 
taxes). Taxes derived from real estate ownership and transfer represent 
the largest source--in some cases approximately 70%--of local tax 
revenues, helping to pay for schools, roads, law enforcement, and other 
essential public services. Real estate provides a safe and stable 
investment for individuals across the country, and notably, retirees. 
Over $370 billion is invested in real estate and real estate-backed 
investments by tax-exempt organizations (pension funds, foundations, 
educational endowments and charities).

Commercial real estate is a capital-intensive asset, meaning that 
income-producing buildings require constant infusions of capital for 
acquisition and construction needs, ongoing repairs and maintenance, 
and to address tenants' ever-changing technological requirements.

Today's commercial real estate markets are grounded in strong 
fundamentals, as indicated by vacancy rates near historic lows, 
positive growth of rents and stable net operating income. By most 
measures, commercial real estate conditions accurately reflect market 
supply and demand.\1\ While certain policy reforms are clearly 
warranted (i.e., removing unnecessary barriers to construction lending, 
addressing Internet sales tax issue), sources of equity and debt 
capital are largely available for economically viable projects. A 
broad-based acceleration of economic growth through tax reform would 
boost real estate construction and development and spur job creation. 
However, Congress should be wary of changes that result in short-term, 
artificial stimulus and a burst of real estate investment that is 
ultimately unsustainable and counterproductive. In order to improve the 
economy's long-term trajectory, growth must be predicated on sound 
reforms that change underlying economic conditions.
---------------------------------------------------------------------------
    \1\ The Real Estate Roundtable, Sentiment Index: Second Quarter 
2017 (May 5, 2017), available at: http://www.rer.org/Q2-2017-RER-
Sentiment-Index.
---------------------------------------------------------------------------

TAX REFORM

The real estate industry agrees that tax reform is needed and overdue. 
We should restructure our nation's tax laws to unleash 
entrepreneurship, capital formation, and job creation. At the same 
time, comprehensive tax reform should be undertaken with caution, given 
the potential for tremendous economic dislocation. Tax policy changes 
that affect the owners, developers, investors and financiers of 
commercial real estate will have a significant impact on the U.S. 
economy, potentially in unforeseen ways.

We urge the Finance Committee to be mindful of how proposed changes in 
commercial real estate taxation could dramatically affect not only real 
estate investment activities but also the health of the U.S. economy, 
job creation, retirement savings, lending institutions, pension funds, 
and, of course, local communities.

Positive reforms will spur job-creating activity. For example, tax 
reform that recognizes and rewards appropriate levels of risk taking 
will encourage productive construction and development activities, 
ensuring that real estate remains an engine of economic activity. Tax 
reform can also spur job creation, and assist the nation in achieving 
energy independence, by encouraging capital investments in innovative 
and energy-efficient construction of buildings and tenant spaces.

Alternatively, some reforms might unintentionally be counter-productive 
to long-term economic growth. Of major concern are proposals that could 
result in substantial losses in real estate values. Lower property 
values produce a cascade of negative economic impacts, affecting 
property owners' ability to obtain credit, reducing tax revenues 
collected by local governments and eroding the value of retirees' 
pension fund portfolios.

Thus, as much as we welcome a simpler, more rational tax code--and any 
associated improvements in U.S. competitiveness abroad--we continue to 
urge that comprehensive tax restructuring be undertaken with caution, 
given the potential for tremendous economic dislocation.

As history illustrates, the unintended consequences of tax reform can 
be disastrous for individual business sectors and the economy as a 
whole. A case in point is the Tax Reform Act of 1986, which ushered in 
a series of over-reaching and over-reactive policies--in some cases on 
a retroactive basis. Significant, negative policy changes applied to 
pre-existing investments. Taken together, these changes had a 
destabilizing effect on commercial real estate values, financial 
institutions, the federal government and state and local tax bases. It 
took years for the overall industry to regain its productive footing, 
and certain aspects of the economy never recovered.

We believe the four principles below should guide and inform your 
efforts to achieve a significant, pro-growth overhaul of the nation's 
tax code:

      Tax reform should encourage capital formation (from domestic and 
foreign sources) and appropriate risk-taking, while also providing 
stable, predictable, and permanent rules conducive to long-term 
investment;

      Tax reform should ensure that tax rules closely reflect the 
economics of the underlying transaction--avoiding either excessive 
marketplace incentives or disincentives that can distort the flow of 
capital investment;

      Tax reform should recognize that, in limited and narrow 
situations (e.g., low-income housing and investment in economically 
challenged areas), tax incentives are needed to address market failures 
and encourage capital to flow toward socially desirable projects; and

      Tax reform should provide a well-designed transition regime that 
minimizes dislocation in real estate markets.

In short, rational taxation of real estate assets and entities will 
support job creation and facilitate sound, environmentally-responsible 
real estate investment and development, while also contributing to 
strong property values and well-served, livable communities.

A BETTER WAY--THE HOUSE REPUBLICAN TAX REFORM BLUEPRINT

Last June, House Ways and Means Committee Chairman Kevin Brady (R-TX), 
House Speaker Paul Ryan (R-WI), and the House Republican Conference put 
forward A Better Way, a bold tax reform proposal aimed at creating a 
modern tax code built for economic growth. The drafters made clear that 
this House Republican Tax Reform Blueprint (``Blueprint'') was the 
``beginning of our conversation about how to fix our broken tax code.'' 
Our industry has appreciated the open dialogue and opportunity to work 
constructively with Members and staff in the House and Senate to ensure 
that tax reform achieves its full potential.

We support the Blueprint's underlying objectives, including the desire 
to reform the tax system to promote economic growth, capital formation, 
and job creation. The comments below are based on our current 
understanding of the Blueprint, as gathered from meetings and 
conversations with Members and staff. Many of these perspectives have 
been transmitted to the tax-writing committees, formally or informally, 
in recent weeks. Our views and input will continue to evolve as 
additional information is made available. The comments are offered in 
the spirit of support for the tax reform effort, and they are aimed at 
ensuring the legislation successfully spurs economic growth without 
unintentionally discouraging entrepreneurship or creating unnecessary 
economic and market risks.

Cash flow taxation and real estate. The Blueprint would replace the 
existing system for taxing business income with a ``destination-based, 
cash flow'' tax system. Rather than taxing businesses on their net 
income, the Blueprint seeks to tax businesses on their net cash flow. 
For a domestic business, setting aside important aspects of the 
proposal that relate to cross-border transactions, the key conceptual 
change is that the full cost of a new investment would be recovered 
(deducted) immediately, rather than recovered (depreciated) over the 
economic life of the investment. The underlying expectation is that the 
shift to cash flow taxation will spur growth by reducing the tax burden 
on new investment.

The Blueprint proposes to deviate from cash flow taxation in two key 
ways that would have critical implications for real estate. First, land 
would not qualify for immediate expensing, only the value of 
structures. Second, businesses could not deduct currently their net 
interest expense. As a result, two major expenses associated with 
investing in real estate--the cost of the underlying land and the cost 
of borrowing capital to purchase the real estate--would be excluded 
from the basic architecture of the cash flow tax system.

      Treatment of land. Land represents a major share, on average 
roughly 30%, of the value of real estate. The Blueprint offers no 
express rationale for the exclusion of land from immediate expensing. 
The two suggestions offered informally to-date have been that land is a 
``non-wasting'' asset and ``we're not making any more of it.'' However, 
the actual economic life of an asset and its status as a manufactured 
good is irrelevant to a system that seeks to tax net cash flow. Under 
the Blueprint's own terms, land should qualify for expensing. Denying 
taxpayers' ability to expense land would create the very same economic 
distortions that the Blueprint is seeking to remove from the tax code. 
It would shift resources to other asset classes for reasons that are 
purely tax-motivated. In addition, it would create new geographic 
disparities and distortions based on the relative share of land in the 
cost of real estate.

      Treatment of net interest expense. Access to financing and 
credit is critical to the health of U.S. real estate and the overall 
economy. The ability to finance productive investment and 
entrepreneurial activity with borrowed capital has driven economic 
growth and job creation in the United States for generations. In both 
an income tax system and a cash flow tax system, business interest 
expense is appropriately deducted under the basic principle that 
interest is an ordinary and necessary business expense.

       The Blueprint states that allowing both expensing and interest 
deductibility ``would result in a tax subsidy for debt-financed 
investment.'' The Blueprint ``helps equalize the tax treatment of 
different types of financing'' and ``eliminates a tax-based incentive 
for businesses to increase their debt load beyond the amount dictated 
by normal business conditions.'' The Blueprint suggests less leverage 
is inherently preferable, ``A business sector that is leveraged beyond 
what is economically rational is more risky than a business sector with 
a more efficient debt-to-equity composition.''

       Repealing or imposing limits on the deductibility of business 
interest would fundamentally change the underlying economics of 
business activity, including commercial real estate transactions. This 
could lead to fewer loans being refinanced, fewer new projects being 
developed, and fewer jobs being created. Legislation altering the tax 
treatment of existing debt could harm previously successful firms, 
pushing some close to the brink of insolvency or even into bankruptcy. 
Congress should preserve the current tax treatment of business 
interest. By increasing the cost of capital, tax limitations on 
business debt could dramatically reduce real estate investment, 
reducing property values across the country, and discouraging 
entrepreneurship and responsible risk-taking.

Like-kind exchanges. Under current law, section 1031 of the tax code 
ensures that taxpayers may defer the immediate recognition of capital 
gains when property is exchanged for property of a like kind. In order 
to qualify, a like-kind exchange transaction must involve property used 
in a trade or business, or held as an investment, and all proceeds 
(including equity and debt) from the relinquished property must be 
reinvested in the replacement property. Section 1031 is used by all 
sizes and types of real estate owners, including individuals, 
partnerships, LLCs, and corporations. While the Blueprint does not 
expressly address like-kind exchanges, we understand some policymakers 
view immediate expensing as a viable replacement for section 1031 of 
the tax code. We disagree.

Real estate like-kind exchanges generate broad economic and 
environmental benefits, and Section 1031 should be preserved without 
new limitations on the deferral of gains. Exchanges spur greater 
capital investment in long-lived, productive real estate assets and 
support job growth, while also contributing to critical land 
conservation efforts and facilitating the smooth functioning of the 
real estate market. Without Section 1031, many of these properties 
would languish underutilized and short of investment because of the tax 
burden that would apply to an outright sale. Recent academic research 
analyzing 18 years of like-kind exchange transactions found that they 
lead to greater capital expenditures, investment, and tax revenue while 
reducing the use of leverage and improving market liquidity.\2\ Another 
study by EY concluded that new restrictions would increase the cost of 
capital, discourage entrepreneurship and risk taking, and slow the 
velocity of investment.\3\ As currently understood, the Blueprint would 
not fully replicate the benefits of section 1031, particularly to the 
extent that the land component of real estate remains ineligible for 
immediate expensing.
---------------------------------------------------------------------------
    \2\ Professors David C. Ling (University of Florida) and Milena 
Petrova (Syracuse University), The Economic Impact of Repealing or 
Limiting Section 1031 Like-Kind Exchanges in Real Estate (June 2015), 
available at: http://warrington.ufl.edu/departments/fire/docs/
paper_Ling-Petrova_EconomicImpactOfRepealingOrLimitingSection1031.pdf.
    \3\ EY, Economic Impact of Repealing Like-Kind Exchange Rules 
(November 2015), available at: http://www.1031taxreform.com/
1031economics.

State and local tax deduction. State and local taxes are the principal 
source of financing for schools, roads, law enforcement, and other 
infrastructure and public services that help create strong, 
economically thriving communities. Throughout the country, real estate 
is the largest contributor to the local tax base. Most state and local 
taxes, including real estate taxes, are deductible from federal income. 
Eliminating the deductibility of state and local taxes could disrupt 
demand for commercial real estate in many parts of the country while 
raising taxes on millions of Americans. It would shift power away from 
local communities in favor of the federal government. The deductibility 
of state and local taxes is grounded in the Constitution, federalism, 
and states' rights. The state and local tax deduction prevents an 
erosion of local governance and decision-making by prohibiting the 
federal government from double-taxing amounts already taxed at the 
state and local level. The burden of the change will fall 
disproportionately on those regions that generate the most tax revenue 
for the federal government--and the reduced demand for commercial real 
estate in certain regions could lower property values and limit the 
ability of the industry to continue creating jobs and driving economic 
---------------------------------------------------------------------------
growth.

Blueprint impact on real estate investment and development. Economic 
modeling suggests that the proposed shift to cash flow taxation under 
the Blueprint would create different results for different taxpayers--
even after all real estate has transitioned to the new regime. For 
investors with other income that can absorb the losses generated by 
immediate expensing, the Blueprint should increase after-tax returns. 
For others, as a general matter, the relative after-tax returns on new 
real estate investment, including construction, would depend heavily on 
the interest rate that applies to loss carryforwards. Under reasonable 
financial assumptions related to property costs, operating income, and 
project expenses, a loss carryforward interest rate of 5.0% would 
result in after-tax returns on real estate investment that are similar 
to current returns. In contrast, a loss carryforward interest rate 
equal to inflation would result in returns that are much lower than 
those under current law. As interest rates rise or debt-to-equity 
ratios increase, returns on real estate investment would decline 
further because of the change in the tax treatment of business 
interest.

Thus, under the Blueprint framework, the tax burden may fall 
disproportionately on entrepreneurs and small developers--those most 
likely to own properties in small and medium-sized markets--because 
they use greater leverage to finance their activities and lack the deep 
portfolio of assets to absorb the losses generated from expensing.

Moreover, depending on the structure of the transition rules, the 
Blueprint could result in substantially lower after-tax returns and 
reduced property values for existing real estate assets. The impact on 
existing properties is heavily dependent on the post-enactment 
treatment of tax basis, as well as the ongoing deductibility of 
interest on existing and refinanced real estate loans. The structure of 
any transition relief under the Blueprint is not yet clear.

Economic and market risks. In the past (1981-1986), the accelerated tax 
depreciation of structures contributed to unsustainable levels of 
uneconomic, tax-
motivated real estate investment and construction. Tax-driven 
stimulation of real estate construction that is ungrounded in sound 
economic fundamentals, such as rental income and property appreciation 
expectations, creates imbalances and instability in real estate 
markets. The negative consequences could harm state and local 
communities (through reductions in state and local property tax 
revenue), the financial security of retirees (through pension 
investments tied to real estate), and the banking system (through the 
declining value of real estate on bank balance sheets and systemic risk 
to the financial system).

Most capital assets other than real estate structures already are 
recovered on an extremely accelerated schedule. Therefore, the economic 
risks associated with immediate expensing are largely unique to real 
estate. According to Treasury Department economists, nearly half of all 
capital investment by U.S. corporations is in 3-year and 5-year 
property.\4\ According to Goldman Sachs, under current tax policy, 70% 
of total capital investment is recovered within the first 18 months of 
use.\5\ In addition to its longer life, real estate differs from other 
fixed capital assets because it is more likely to be sold for a gain. 
The income it generates often is treated as passive. In short, the tax 
attributes of real estate diverge greatly from other forms of capital 
investment.
---------------------------------------------------------------------------
    \4\ James Mackie III and John Kitchen, ``Slowing Depreciation in 
Corporate Tax Reform,'' Tax Notes (April 29, 2013), available at: 
http://www.taxnotes.com/tax-notes-today/budgets/slowing-depreciation-
corporate-tax-reform/2013/04/30/f2p4 (behind paywall).
    \5\ David Mericle and Dan Stuyven, ``Corporate Tax Reform: Trading 
Interest Deductibility for Full Capex Expensing'' (Goldman Sachs 
Economics Research, November 30, 2016), available at: http://
static.politico.com/c3/34/c99de58745b29f77b027a0f848d9/goldman-sachs-
analysis-of-net-interest-deductibility-and-expensing-provisions-of-tax-
reform.pdf.

Lastly, the stock of existing real estate dwarfs in size all other 
depreciable capital assets. And unlike equipment and machinery, only 
about 2 percent of the stock is replaced with new construction 
annually. The large existing stock relative to new construction means 
that transitioning existing real estate into a cash flow tax system in 
a manner that treats current owners fairly and avoids severe market 
disruption and systemic risk would be extraordinarily expensive from 
---------------------------------------------------------------------------
the standpoint of lost revenue to the Treasury.

Going forward--addressing the challenges of real estate taxation under 
the House Blueprint. In light of the unique status of real estate as a 
long-lived, fixed capital asset and the transition challenges generated 
by the large stock of existing properties, the tax-writing committees 
should consider excluding real estate from the basic Blueprint 
architecture of immediate expensing and interest non-deductibility. 
Congress should preserve like-kind exchanges, an effective, time-tested 
tool that helps taxpayers internally mobilize capital to grow and 
expand their businesses and create jobs. Tax reform legislation could 
promote investment in manufacturing and other capital-intensive 
industries through a modified incentive that provides for permanent, 
immediate expensing of shorter lived assets, such as equipment and 
machinery. Legislation could reduce the depreciation period for real 
estate to align more closely with its useful economic life, which is 
approximately 19 years, according to the Massachusetts Institute of 
Technology.\6\
---------------------------------------------------------------------------
    \6\ Professor David Geltner and Sheharyar Bokhari, Commercial 
Building's Capital Consumption in the United States, (MIT Center for 
Real Estate, November 2015), available at: https://mitcre.mit.edu/
research-publications/commercial-building-capital-consumption-us; 
Andrew B. Lyon and William A McBride, ``Tax Policy Implications of New 
Measures of Building Depreciation,'' Tax Notes (June 20, 2016), 
available at: https://www.pwc.com/us/en/tax-services/publications/
assets/pwc-tax-implications-of-new-measures-of-building-
depreciation.pdf.

Alternatively, if real estate is included in the cash flow tax system, 
it is critical that the legislation include carefully designed 
transition rules. The transition rules should ensure the new tax regime 
does not put the owners of existing real estate assets at an economic 
disadvantage compared to new construction and new investment; does not 
result in lower property values and new systemic economic risk; and 
does not create a lock-up of properties that distorts real estate 
---------------------------------------------------------------------------
commerce and undermines productive economic activity.

One approach to transition under consideration would grandfather 
current depreciation methods and schedules for existing assets. 
However, this approach would cement in law, for decades, two distinct 
tax systems for U.S. commercial real estate dependent on when the 
taxpayer acquired the property. This would result in two separate 
systems--one that is income-based for the $15 trillion of existing real 
estate and one that is cash flow-based for future investment. In so 
doing, Congress risks creating a cascade of new market distortions with 
unknown and potentially dangerous consequences. It would violate a 
fundamental principle of good tax policy--treating similarly situated 
taxpayers the same. It could cause a lock-up of properties that reduces 
market liquidity, drags down property values, and prevents properties 
from transferring into the hands of owners that would upgrade and 
improve the real estate, creating job s in the process.

In short, transition rules must address two powerful forces set in 
motion under the Blueprint--the loss of interest deductibility and the 
economic divergence that would result from the proposed acceleration of 
cost recovery for new investment. Both of these changes are challenges 
for the transition from one regime to the next.

In fairness to borrowers who made investment decisions in reliance on 
long-standing tax principles in place since the inception of our tax 
law, debt on existing real estate should be fully grandfathered for 
purposes of interest expense deductibility. This relief should extend 
to debt secured directly by real estate, as well as debt that is 
effectively backed by real estate, such as bonds issued by REITs. In 
addition, the transition rules should not discourage the refinancing of 
existing real estate debt, which accelerates reinvestment, economic 
activity, and job creation.

With respect to cost recovery, one viable option is to phase in 
immediate expensing over an extended period, while simultaneously 
accelerating the recovery of basis in existing assets. An alternative 
option would implement expensing immediately, but in contrast to the 
American Business Competitiveness Act (H.R. 4377, 114th Congress), 
would ensure that current owners get full recognition of their tax 
basis when selling an existing asset, thus avoiding a ``lump sum'' tax 
on all existing real estate.

The importance of a well-designed transition regime cannot be 
overstated. The stock of existing commercial real estate is more than 
12 times the size of total annual private investment in equipment and 
machinery. The risk of unintended consequences is real and past lessons 
should inform policymakers' decisions. Congress should approach 
transition as a primary focus and not a secondary concern.

Other real estate issues in the Blueprint. There are several other 
areas where policy decisions in the legislative drafting of the 
Blueprint will have enormous consequences for commercial real estate 
activity. In brief:

      The 50% capital gains exclusion should fully cover individual 
gains from real estate investment, including real estate that is 
directly owned or owned through a pass-through entity;
      With respect to depreciation ``recapture,'' the tax law should 
recognize that a portion of the income received on the sale of real 
estate reflects the appreciation of the underlying land and is 
appropriately taxed at the reduced capital gains rate;
      The reduced tax rate on pass-through businesses should fully 
extend to partnerships, to distributions from REITs, and to other pass-
through entities that generate real estate rental income;
      The new system should continue to encourage taxpayers to 
reinvest capital and earnings through provisions such as section 1031;
      In order to continue encouraging entrepreneurs and small 
developers to invest in U.S. real estate, the interest rate on loss 
carryforwards should include a real return that is sufficient to 
preserve the value of losses that cannot currently be used; and
      The character of real estate-related income, including carried 
interest, should continue to be determined at the partnership level and 
the new regime should continue to recognize that entrepreneurial risk-
taking often involves more than just the contribution of capital.

FIRPTA Repeal. The punitive Foreign Investment in Real Property Tax Act 
(FIRPTA) regime subjects gains on foreign equity investment in U.S. 
real estate or infrastructure to a much higher tax burden than applies 
to a foreign investor purchasing a U.S. stock or bond, or an investment 
in any other asset class. In addition to the tax burden, the 
withholding and administrative filing requirements associated with 
FIRPTA are frequently cited by foreign taxpayers as principal reasons 
for avoiding the U.S. real estate market. FIRPTA is a major impediment 
to greater private investment in both U.S. real estate and 
infrastructure.

In 2015, Congress passed the most significant reforms of FIRPTA since 
its passage in 1980. Congress should build on the recent success by 
repealing FIRPTA outright as part of tax reform. Unleashed by FIRPTA's 
repeal, capital from abroad would create jobs by financing new real 
estate developments, as well as the upgrading and rehabilitation of 
existing buildings. Architects, engineers, construction firms, 
subcontractors, and others would be put to work building and improving 
commercial buildings and infrastructure.

                                 * * *

Because commercial real estate is so ubiquitous, it is sometimes easy 
to overlook its positive connection to our nation. Commercial real 
estate is where America lives, works, shops, plays, and invests. The 
right tax policy can help commercial real estate: create and maintain 
jobs, lift retirement savings for Americans, reduce energy consumption, 
and improve the quality of life in local communities.

We are fully committed to working with the Senate Committee on Finance 
to achieve a bold tax reform outcome that serves the overall economy 
and appreciate your consideration of these issues. We appreciate your 
consideration of these comments and look forward to working with you, 
cooperatively, as tax reform moves forward.

            Sincerely,

                       The Real Estate Roundtable

    ADISA--Alternative and Direct Investment Securities Association

                 American Hotel and Lodging Association

                    American Institute of Architects

                    American Land Title Association

                American Resort Development Association

                  American Seniors Housing Association

                          Appraisal Institute

                Asian American Hotel Owners Association

   The Building Owners and Managers Association (BOMA) International

                             CCIM Institute

                  Federation of Exchange Accommodators

                  Institute of Real Estate Management

               International Council of Shopping Centers

                  IPA--Investment Program Association

                      Mortgage Bankers Association

       NAIOP, the Commercial Real Estate Development Association

                     National Apartment Association

              National Association of REALTORS'

                  National Multifamily Housing Council

                  REALTORS' Land Institute

                                 ______
                                 
             Sports and Fitness Industry Association (SFIA)

                     8505 Fenton Street, Suite 211

                        Silver Spring, MD 20910

                            p: 301-495-6321

                         https://www.sfia.org/

The Sports and Fitness Industry Association (SFIA) applauds the Senate 
Finance Committee for holding its hearing on budget proposals issued by 
the Department of the Treasury and Tax Reform. As the Committee 
explores bipartisan solutions for tax relief related to individuals and 
families, we encourage policymakers to broaden the use of health 
savings accounts and other flexible spending arrangements to promote 
preventative health care.

The Internal Revenue Service (IRS) currently uses an outdated 
definition of qualified medical expenses, precluding the use of 
physical activity as a form of prevention. Given the volume of medical 
research over the years, legislation has been introduced by Senators 
John Thune (R-SD), Chris Murphy (D-CT), Johnny Isakson (R-GA) and Joe 
Donnelly (D-IN), titled the Personal Health Investment Today Act (S. 
482), to update the definition and ultimately, put consumers back in 
control of their personal health aimed at disease prevention.

The legislation, which is commonly referred to as the ``PHIT Act,'' 
allows consumers to use their contributions in pre-tax medical 
accounts, such as health savings accounts (HSAs) and flexible spending 
accounts (FSAs), for the purpose of physical activity expenses. Not 
only does this allow Americans the opportunity to actively decide where 
they spend their hard earned dollars, it also promotes physical 
exercise as a form of preventive medicine to help reduce the prevalence 
of many chronic, preventable diseases.

Each year, our country spends billions of dollars on treating the 
health consequences that result from chronic medical conditions, many 
of which could be mitigated through physical activity. Research has 
consistently indicated substantial, positive health benefits are 
disproportionately attributed to individuals in a more physically 
active population. Likewise, better health status also results in 
positive economic benefits to both individuals, as well as our health 
system at large.

More specifically, a recent Cooper Institute study that utilized 
Medicare claims data found individuals who are physically fit at the 
mid-life point showed a 40 percent reduction in subsequent annual 
healthcare costs, as compared with those of their peers who were less 
physically active. These findings could mean an average annual cost 
savings of $5,242 for men and $3,694 for women. In addition, the Robert 
Wood Johnson Foundation issued a study finding that children who remain 
inactive are more likely to be inactive adults, whom are then six times 
more likely to have inactive children. The statistics are staggering 
and alarming considering we have the least active generation of 
children ever. With the help of the PHIT Act, however, we can reverse 
the cycle.

According to the Employers Council on Flexible Compensation (ECFC), the 
medium household income for an FSA participant is $57,060 and $57,860 
for an HSA participant. Despite these average income levels, most 
participants are within 300 percent of the Federal Poverty Limit (FPL) 
and eligible for health-care subsidies. HSAs and FSAs are valuable 
tools. Implemented effectively, they can help hard working families 
across America and in all income categories save for their health care 
needs.

Under the PHIT Act, contributions to FSAs, HSAs and other pre-tax 
arrangements would be limited to $1,000 for individuals and $2,000 for 
families annually. The current contribution caps on such accounts 
remain in place.

For families across America incurring increased sports and recreation 
fees associated with their children's activities, an updated definition 
of medical care would offer important financial relief. Similarly, a 
revised definition offers individual working adults wider consumer 
choice over one's pre-tax medical account as they too practice good 
preventative health care by staying physically fit.

Finally, the World Health Organization also has weighed in on the 
subject, finding that for every $1 spent on physical fitness in the 
U.S., more than $3 are saved in the health-care delivery system. The 
PHIT Act will help realize these savings and significantly reduce the 
incidence of costly and preventable disease needed to reverse the 
current healthcare crisis.

As the esteemed members of the Senate Finance Committee strive to 
improve our nation's tax system, now is an important time to review 
existing definitions with an eye toward current health trends. SFIA 
looks forward to working with the Committee on efforts to improve our 
nation's health status, including the PHIT Act and other vital tax 
relief initiatives.

We respectfully submit the enclosed statement. If you have any 
questions or need additional information, please feel free to contact 
Tom Cove, SFIA President, at [email protected]. or visit our website at 
www.sfia.org.


                                   [all]