[Senate Hearing 115-342]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-342

                          BUSINESS TAX REFORM

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

                                HEARING

                               BEFORE THE

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 19, 2017

                               __________
                               
                               

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                          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

                     A. Jay Khosla, 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

                               WITNESSES

Hodge, Scott A., president, Tax Foundation, Washington, DC.......     6
Marron, Donald B., Ph.D., institute fellow, Urban Institute and 
  Urban-
  Brookings Tax Policy Center, Washington, DC....................     8
Lewis, Troy K., CPA, CGMA, immediate past chair, Tax Executive 
  Committee, American Institute of Certified Public Accountants, 
  Provo, UT......................................................     9
DeBoer, Jeffrey D., president and chief executive officer, The 
  Real Estate Roundtable, Washington, DC.........................    11

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

DeBoer, Jeffrey D.:
    Testimony....................................................    11
    Prepared statement...........................................    41
    Responses to questions from committee members................    50
Hatch, Hon. Orrin G.:
    Opening statement............................................     1
    Prepared statement...........................................    57
Hodge, Scott A.:
    Testimony....................................................     6
    Prepared statement...........................................    59
    Responses to questions from committee members................    64
Lewis, Troy K., CPA, CGMA:
    Testimony....................................................     9
    Prepared statement...........................................    69
    Responses to questions from committee members................    74
Marron, Donald B., Ph.D.:
    Testimony....................................................     8
    Prepared statement...........................................    75
    Responses to questions from committee members................    82
Wyden, Hon. Ron:
    Opening statement............................................     4
    Prepared statement...........................................    86

                             Communications

A Call To Invest in Our Neighborhoods (ACTION) Campaign..........    89
American Farm Bureau Federation..................................    92
American Forest and Paper Association (AF&PA)....................    96
Beer Institute et al.............................................    97
Biotechnology Innovation Organization (BIO)......................    98
BUILD Coalition..................................................   104
Business Roundtable..............................................   107
Center for Fiscal Equity.........................................   110
Coalition to Preserve Cash Accounting............................   113
CVS Health.......................................................   117
Davis, Dwight J..................................................   118
Enterprise Community Partners....................................   118
Like-Kind Exchange Stakeholder Coalition.........................   123
National Association of Realtors.................................   125
National Mining Association (NMA)................................   127
National Multifamily Housing Council and National Apartment 
  Association....................................................   129
National Retail Federation (NRF).................................   137
Nonprofit Data Project...........................................   138
Reforming America's Taxes Equitably (RATE) Coalition.............   140
R&D Credit Coalition.............................................   141
Retail Industry Leaders Association (RILA).......................   145
Small Business Council of America (SBCA).........................   147
Small Business Legislative Council (SBLC)........................   151
Tax Ag Coalition.................................................   154
Tax Innovation Equality (TIE) Coalition..........................   161

 
                          BUSINESS TAX REFORM

                              ----------                              


                      TUESDAY, SEPTEMBER 19, 2017

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:06 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. 
Orrin G. Hatch (chairman of the committee) presiding.
    Present: Senators Grassley, Crapo, Roberts, Thune, Portman, 
Toomey, Heller, Scott, Cassidy, Wyden, Stabenow, Cantwell, 
Carper, Cardin, Brown, Bennet, Casey, Warner, and McCaskill.
    Also present: Republican Staff: Mark Prater, Deputy Staff 
Director and Chief Tax Counsel; Tony Coughlan, Senior Tax 
Counsel; Eric Oman, Senior Policy Advisor for Tax and 
Accounting; and Jeff Wrase, Chief Economist. Democratic Staff: 
Joshua Sheinkman, Staff Director; Michael Evans, General 
Counsel; Tiffany Smith, Chief Tax Counsel; and Chris Arneson, 
Tax Policy Advisor.

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

    The Chairman. During this morning's hearing, we will 
discuss ways to improve the business provisions of the U.S. tax 
code with an eye toward creating jobs and boosting wages for 
American workers and improving our country's overall business 
climate.
    This hearing is part of our ongoing effort--following years 
of tax hearings and last week's hearing on individual reform--
to draft and report comprehensive tax reform legislation later 
this year. Members of both parties recognize the need to reform 
the way we tax businesses in the United States.
    As former President Obama noted when discussing his own 
framework for business tax reform, the current system, quote, 
``does too little to encourage job creation and investment in 
the United States while allowing firms to benefit from 
incentives to locate production and shift profits overseas,'' 
unquote.
    As we all know, many elements of a particular business's 
tax burden depend on the company's organizational form. For 
example, C corporations are taxed at the corporate tax rate. 
According to a recent report by the Congressional Budget 
Office, the top Federal statutory corporate income tax rate has 
been 35 percent since 1993, and with State taxes added, the 
United States' average corporate statutory rate is the highest 
in the industrialized world, at more than 39.1 percent.
    And, while some have noted that not all corporations pay 
the full statutory rate, the average effective tax rate of U.S. 
corporations is the fourth highest among G20 countries. 
According to a recent analysis by Ernst and Young, when you 
integrate corporate-level taxes and investor-level taxes, such 
as those on dividends and capital gains, U.S. tax rates are the 
second highest among developed countries. That last one is 
important, given that the United States taxes most corporate 
earnings that are distributed to shareholders twice--both at 
the corporate and the shareholder levels.
    For the past few years, I have been working on a corporate 
integration proposal that, among other things, would allow 
businesses to deduct their dividends paid to help alleviate the 
double taxation problem. I view this as a complement to a 
statutory corporate tax rate reduction, not a substitute.
    We held a few hearings on this topic last year, so I will 
not delve too deeply into the details at this time. For now, I 
will just say I continue to believe this idea, whether it 
applies fully or in some other limited way, can help address a 
number of the problems we are trying to solve with 
comprehensive tax reform. I look forward to continuing this 
conversation as the process moves forward.
    It is also important to note that, while the U.S. corporate 
tax rate has remained unchanged for decades, the trend among 
our foreign competitors has been to lower corporate rates, 
making American businesses increasingly less competitive. This 
is not just a Republican talking point. This problem is widely 
acknowledged on both sides of the aisle. Even former President 
Bill Clinton, who signed into law the rate increase to 35 
percent, recently argued the rate should now be lowered. I 
agree.
    Our current business tax system--and the disparity between 
the U.S. corporate rate and our foreign competitors' corporate 
rates--has created a number of problems and distortions. For 
example, the current system slows economic growth by impeding 
capital formation, hindering wage growth and job creation, 
reducing productive capacity, and lowering the standard of 
living in the United States, all of which directly harm middle-
class families and individuals.
    The current system lowers returns on investment, creating a 
bias against savings and investment. This hinders the creation 
of wealth for Americans across the economic spectrum, including 
the middle class. The current system encourages corporations to 
finance operations using debt rather than equity, which 
increases the risks, particularly during times of economic 
weakness. The current system gives corporations incentives to 
shift income production and intangible assets, like 
intellectual property, from the U.S. to lower-taxed foreign 
jurisdictions, thereby eroding our tax base.
    In tax reform, we need to address all of these problems and 
distortions, and many others as well. In particular, we need to 
lower the corporate tax rate to relieve the burdens the tax 
imposes on American workers, who, according to many economists, 
bear a significant part of the corporate tax.
    We also need to reduce the burden on pass-through 
businesses whose earnings are reported and taxed on individual 
tax returns. These types of businesses include sole 
proprietorships, limited liability companies, partnerships, and 
S corporations. And we need to fix our international tax system 
so that American businesses can compete in the global 
marketplace without facing significant disadvantages simply 
because they are headquartered in the United States.
    Each of these propositions is supported by people in both 
parties. Of course, when politics enter the equation, the story 
sounds much different. According to some, all Republicans want 
to do in tax reform is give tax breaks to the super-rich, have 
cushy portfolios for Wall Street bankers and more handouts for 
greedy corporations, all at the expense of middle-class workers 
and families. Those types of claims may play well to political 
bases, but they do not align with reality.
    As I noted in our hearing last week, virtually all of our 
current tax reform ideas are aimed squarely at helping the 
middle class as well as low-income families. Our chief goals, 
particularly in business tax reform, are to increase economic 
growth, create new jobs, grow wages for the employees of both 
large and small businesses, expand opportunities for all 
Americans, and improve standards of living for everyone in the 
United States.
    The proof, I suppose, will be in the pudding. As the 
committee works through this process with those goals in mind, 
I believe we will be able to demonstrate why those in the 
middle class should feel as though they have a stake in this 
discussion and how these ideas to reform our current system 
will help. Let us keep in mind that the status quo--sluggish 
economic growth, stagnant wages, and decreased workforce 
participation--has not exactly been doing the middle class any 
favors. The case for tax reform should therefore be easy to 
make.
    I want to reiterate what I said last week, namely that this 
committee will be the starting point for any tax reform 
legislation that is considered in the Senate. While I expect we 
will continue to hear more arguments about secret tax plans 
written behind closed doors, this committee is going to 
consider tax reform through regular order. That applies to both 
the drafting and the reporting of any tax reform bills.
    As I also said last week, I hope this process is 
bipartisan. As with individual tax reform, there are many areas 
of business tax reform where thoughts and interests of both 
Republicans and Democrats overlap. There is fertile ground for 
bipartisan agreement on this, and I hope we can take advantage 
of this historic opportunity together.
    I know that my friend Ranking Member Wyden shares these 
broad objectives, and I appreciate that. In fact, he has put 
forward his own tax reform proposals in the past, likely with 
these same goals in mind. And at the end of the day, we should 
all at the very least agree that the current tax system is 
broken and the current state of our economy should not be 
accepted as the new normal.
    I look forward to a robust discussion of these issues here 
today as well as some acknowledgments of the bipartisan 
agreement that exists on these matters.
    So with that, I will turn to 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. I am 
going to have to do a little committee-hopping here in the next 
hour, so I am going to be brief. And before I get to the 
substance of today's hearing, I just need to talk briefly about 
what is coming down the pike for this committee, both here and 
on the floor.
    And as I told you, Mr. Chairman, the remarks I am going to 
make now do not in any way affect my admiration for you, our 
friendship, and the fact that we just moved ahead on a very 
important CHIP bill, the Children's Health Insurance Program 
bill. I just want to set out my comments about what happened 
last night.
    Last night the majority announced, without consulting the 
minority, that the Finance Committee is going to hold a hearing 
on the Graham-Cassidy-Heller health-care bill. I want to make 
clear: I believe that this is an abomination. It is an 
abomination of the process, it is an abomination of the 
substance, and it is an abomination of the history of this 
storied committee.
    First of all, this bill is a prescription for suffering and 
disastrous consequences for millions of our people. Second, the 
Budget Office has informed Congress that it will be several 
weeks at the very least before it can provide real estimates 
for the bill. So this means the majority is going to charge 
ahead with a radical, destructive transformation of American 
health care with the American people in the dark.
    This bill is going to be a few roll-call votes away from 
the President's desk. And yet, Republicans here in the Senate 
do not have answers to the key questions: What is going to 
happen to the premiums paid by the American people? What is 
going to happen to their coverage?
    The idea, the proposition that a bill this destructive, 
this far-reaching, can swing through the Senate Finance 
Committee for a single hearing on a Monday morning and hit the 
Senate floor a day or two later makes a mockery of the 
legislative process that Senator McCain so eloquently urged us 
to return to.
    Furthermore, this abomination of a process stands in sharp 
contrast to what we have been able to achieve with respect to 
the Children's Health Insurance Program. What a sad commentary 
on the times, that when the committee ought to be celebrating a 
big victory for something like 9 million kids, for millions of 
families, the Graham-Cassidy-Heller bill threatens the health 
care of millions of children and families.
    Second point: reconciliation relies on secrecy, brute 
power, and speed to ram purely partisan bills through the 
Senate. And it is a train wreck to do it on health care.
    I think we have to note, as we start this hearing, that 
Leader McConnell is committed to Reconciliation Round Two on 
tax reform when we want, on this side of the aisle, to have 
colleagues working together in a bipartisan way. And as the 
chairman noted graciously, I have written two full bipartisan 
bills. Leader McConnell says we are going to have another 
partisan bill, another completely partisan bill, with respect 
to tax reform. And I think that too is a prescription for 
trouble.
    So the details that leak out of these ``Big Six'' meetings, 
in my view, suggest that what is under way is an unprecedented 
tax giveaway for the most fortunate and the biggest 
corporations in the country. The centerpiece could be a $2-
trillion loophole dealing with something called pass-through 
status.
    Now, pass-through status is supposed to be all about small 
businesses, you know, the person who is running a cleaners or 
running a restaurant. There is no question those small 
businesses fuel local economies and hire the most workers. They 
surely need a boost in tax reform. But any tax change that 
allows tax cheats to abuse pass-through status by self-
declaring to avoid paying their fair share and dodge Social 
Security taxes would be worse than what is on the tax books 
today.
    The day the pass-through loophole bill becomes law would be 
Christmas morning in America for the tax cheats. It would make 
a mockery of the Trump pledge that, quote, ``The rich are not 
going to gain at all with this plan.'' And that is just one 
element of what is on offer.
    The bottom line for me as we move to this crucial 
discussion is, it is time for the Congress to take the lies out 
of the corporate tax rate in America. Many of the biggest 
corporations in the country employ armies of lawyers and 
accountants who know every single one of the tax tricks. And 
they use them all to winnow down their tax rates to the low 
teens, to single digits, even zero. So the Congress cannot pair 
a big corporate rate cut with a plan to enshrine a vast array 
of loopholes that lets corporations off the hook for paying 
their fair share. That is, in my view, a surefire way to heap 
an even heavier burden on the middle class.
    So I look forward to discussing these issues, Mr. Chairman. 
As I indicated, I am going to have to be out for a few minutes, 
but I look forward to the discussion, and I thank you for the 
chance to make this statement.
    The Chairman. Well, thank you, Senator Wyden.
    [The prepared statement of Senator Wyden appears in the 
appendix.]
    The Chairman. Some of our committee members have requested 
a public hearing to examine details of the Graham-Cassidy 
health care proposal. A hearing will allow members on both 
sides to delve deeper into the policy and gain a better 
understanding of what the proposal is intended to achieve. So 
we are going to have a hearing next week on this matter. I 
believe that members will benefit from a public discussion and 
examination of these issues.
    Yet, even though their requests have been heard and a 
hearing is on the schedule, some members are still unsatisfied. 
I am not sure what else we can do on this matter to address 
every complaint. For today, our hearing is on business tax 
reform, and I hope we can focus these proceedings on that 
issue.
    Having said that, I would like to welcome each of our 
witnesses to our hearing today. We all appreciate your 
willingness to testify and answer questions today. Hearing each 
of your perspectives on tax reform will be critical to our 
process.
    First, we will hear from Mr. Scott A. Hodge, the president 
of the Tax Foundation in Washington, DC, where he has worked 
for the past 25 years. Before joining the Tax Foundation, Mr. 
Hodge was director of tax and budget policy at Citizens for a 
Sound Economy. He also spent 10 years at The Heritage 
Foundation as a fellow analyzing budget and tax policy. Before 
that, Mr. Hodge started his career in Chicago, where he helped 
found the Heartland Institute in 1984. He holds a degree in 
political science from the University of Illinois at Chicago.
    Second, we will hear from Dr. Donald B. Marron, an 
institute fellow and director of economic policy initiatives at 
the Urban Institute. From 2010 to 2013, Dr. Marron led the 
Urban-Brookings Tax Policy Center. Prior to joining Urban, Dr. 
Marron served as a member of the President's Council of 
Economic Advisers and Acting Director of the Congressional 
Budget Office. He has also taught at the Georgetown Public 
Policy Institute and the University of Chicago's Graduate 
School of Business. Dr. Marron studied mathematics at Harvard 
College and received his Ph.D. in economics from the 
Massachusetts Institute of Technology.
    Next, we will hear from Mr. Troy K. Lewis, the immediate 
past chair of the Tax Executive Committee of the American 
Institute of Certified Public Accountants in Washington, DC. 
Mr. Lewis currently teaches at Brigham Young University in 
Provo, UT. He is in practice as a managing member of Lewis and 
Associates CPAs, LLC in Draper, UT. He obtained his master's of 
accountancy and bachelor's of science in accountancy from 
Brigham Young University. He is also a certified public 
accountant and a chartered global management accountant.
    Last but not least, we will hear from Mr. Jeff DeBoer, the 
founding president and CEO of the Real Estate Roundtable, where 
he has served since 1997. Mr. DeBoer also serves as the 
chairman of the Real Estate Industry Information Sharing and 
Analysis Center as well as chairman of the National Real Estate 
Organizations. Mr. DeBoer has also served as co-chairman of the 
advisory board of the RAND Corporation Center for Terrorism 
Risk Management Policy and was a founding member of the 
steering committee of the Coalition to Ensure Against 
Terrorism. Mr. DeBoer holds degrees from Washington and Lee 
University School of Law and from Yankton College. He is a 
member of the Virginia Bar Association and the American Bar 
Association.
    We want to thank all of you again for coming today, and I 
look forward to hearing your remarks.
    Mr. Hodge, we will begin with you, so if you will please 
begin, that will be great.

            STATEMENT OF SCOTT A. HODGE, PRESIDENT, 
                 TAX FOUNDATION, WASHINGTON, DC

    Mr. Hodge. Well, thank you, Mr. Chairman and Ranking Member 
Wyden. It is good to see you and all the members of the 
committee.
    I commend you for taking on the challenge of reforming 
America's business tax code, especially the task of overhauling 
our corporate tax system. The most important thing that 
Congress and the administration can do to boost economic 
growth, lift wages, create jobs, and make the U.S. economy more 
competitive globally is overhaul our business tax system.
    The Tax Foundation's extensive economic research and tax 
modeling experience suggest that the committee should have four 
priorities in mind when you are reforming the corporate tax 
system. We call these the four pillars of corporate tax reform. 
First, provide full expensing for capital investments. Second, 
cut the corporate tax rate to a globally competitive level, 
such as 20 percent. Third, move to a competitive territorial 
system. And fourth, make all three of these priorities 
permanent.
    And while many of you and many in the business community 
may see some of these policies in conflict or competing for 
space in the tax plan, we see these pieces as complementary and 
essential, not in conflict. In our view, cutting the corporate 
tax rate and moving to a territorial system are essential for 
restoring U.S. competitiveness and reducing the incentives for 
profit-shifting and corporate inversions. These measures are 
also important for defining and reclaiming the U.S. tax base. 
Right now, the European Union and the OECD are proposing 
policies such as a new turnover tax on digital companies that 
are directly aimed at raising taxes on U.S. multinationals.
    Expensing, we believe, is key to reducing the cost of 
capital in order to revitalize U.S. capital investment, which, 
in turn, will boost productivity and wages. Thus, a good tax 
plan should include all three of these policies, because they 
will not only boost economic growth, but they will do so in a 
way that leads to higher wages and living standards for working 
Americans.
    However, these gains are not possible if the policies are 
made temporary. Temporary tax cuts deliver temporary results, 
whereas permanent tax reform delivers permanent economic 
benefits.
    It is hard to generate public support for corporate tax 
reform, I know, because most people do not see how it benefits 
them. Corporate tax reform may not put cash in people's pockets 
in the same way a tax credit might, but it can have a powerful 
effect on spurring economic growth while lifting after-tax 
incomes and living standards.
    As just an example, we used our Taxes and Growth Dynamic 
Tax Model to simulate the long-term economic effects of cutting 
the corporate tax rate to 20 percent and moving to full 
expensing for corporations. Our model indicates that these two 
policies combined would increase the level of GDP by 3.4 
percent, lift wages by an average of 3.8 percent, and create 
more than 860,000 new jobs. And when we account for all of 
these economic factors, we find that the lower corporate tax 
rate and full expensing combined would boost the after-tax 
incomes of all Americans by an average of 5.2 percent. Pretty 
good.
    And one last thing to consider about expensing. It does 
something that no rate cut can. It eliminates pages and 
sections from the tax code, saving businesses more than 448 
million hours of compliance time and more than $23 billion in 
compliance costs each year.
    The great economist Thomas Sowell once said that there are 
no solutions, there are only tradeoffs. And I am sure you are 
all discovering that now in looking at corporate tax reform.
    First, the math is very hard. Contrary to what some people 
believe, there are not as many loopholes in the corporate tax 
code as many think, and so you will likely have to think 
outside the box if you want corporate tax reform to be revenue-
neutral.
    Second, the economics of tax reform must be at the 
forefront of your decision-making. If you make the wrong choice 
in the base broadeners you choose to offset your tax cuts, you 
can neutralize all the benefits that you are trying to achieve 
through the reforms.
    These are the challenges, and there will be hard choices 
ahead of you. But corporate tax reform done right is key to 
growing the economy, boosting family incomes, and making the 
U.S. a better place to do business in and do business from.
    So remember the four pillars of corporate tax reform: full 
expensing, lower corporate tax rate, a territorial system, and 
permanence. Those are the right policies to make this tax 
reform effort a lasting success.
    So, Mr. Chairman, thank you very much for the opportunity 
to share these ideas. I look forward to any questions that you 
may have.
    The Chairman. Well, thank you.
    [The prepared statement of Mr. Hodge appears in the 
appendix.]
    The Chairman. Dr. Marron, we will turn to you.

 STATEMENT OF DONALD B. MARRON, Ph.D., INSTITUTE FELLOW, URBAN 
INSTITUTE AND URBAN-BROOKINGS TAX POLICY CENTER, WASHINGTON, DC

    Dr. Marron. Great, thank you. Chairman Hatch, Ranking 
Member Wyden, members of the committee, thank you very much for 
inviting me to discuss business tax reform.
    America's business tax system is needlessly complex and 
economically harmful. Thoughtful reform can make our tax code 
simpler, it can boost American competitiveness, it can create 
better jobs, and it can promote shared prosperity.
    But tax reform is hard. Meaningful reforms create winners 
and losers, and you will likely hear more complaints from the 
latter than praise from the former. I feel your pain. But at 
the risk of adding to it, my testimony today makes eight points 
about business tax reform.
    First, thoughtful reform can promote economic growth, but 
we should be realistic about how much. More and better 
investment boosts economic activity over time. The largest 
effects will occur beyond the 10-year budget window. If reform 
is revenue-neutral, 
revenue-raisers may temper future growth. If reform turns into 
tax cuts, deficits may crowd out private investment. Either 
way, the boost in the near term may be modest, and dynamic 
scoring will thus play only a small role in paying for tax 
reform.
    Second, the corporate income tax makes our tax system more 
progressive. The corporate income tax falls on shareholders, 
investors more generally, and workers. Economists debate how 
much each group bears. Workers are clearly the most 
economically diverse, but they include highly paid executives, 
professionals and managers, as well as rank-and-file employees. 
The bulk of the corporate tax burden thus falls on people with 
high incomes, even if workers bear a substantial portion.
    Third, workers would benefit from reforms that encourage 
more and better investment in the United States. In the long 
run, wages, salaries, and benefits depend on worker 
productivity. Reforms that encourage investment and boost 
productivity would thus do more to help workers than those that 
merely increase shareholder profits.
    Fourth, taxing pass-through business income at preferential 
rates would inspire new tax avoidance. When taxpayers can 
switch from a high tax rate to a lower one, they often do so. 
Kansans did so when their State stopped taxing pass-through 
income. Professionals use S corporations to avoid payroll 
taxes. Investment managers convert labor income into long-term 
capital gains. Congress and the IRS can try to limit tax 
avoidance, but the cost will be new complexities, arbitrary 
distinctions, and new administrative burdens.
    Fifth, capping the top tax rate on pass-through business 
income would benefit only high-income people. To benefit, 
taxpayers must have qualifying business income and be in a high 
tax bracket. Creating a complete schedule of pass-through rates 
could reduce this inequity, but it would expand the pool of 
taxpayers tempted by tax avoidance.
    Sixth, taxing pass-through business income at the corporate 
rate would not create a level playing field. Pass-through 
income faces one layer of tax, but corporate income faces two, 
at the company level and again at taxable shareholders. Taxing 
pass-throughs and corporations at the same rate would favor 
pass-throughs over corporations. To get true tax parity, you 
could apply a higher tax rate on pass-through business income, 
you could levy a new tax on pass-through distributions, or you 
could get rid of shareholder taxes.
    Seventh, it is difficult to pay for large tax cuts and 
business tax rates by limiting business tax breaks and 
deductions. Eliminating all corporate tax expenditures, except 
for deferral, for example, might be able to get a corporate 
rate down to 26 percent. You could try to go lower by cutting 
other business deductions, such as interest payments, but 
deductions lose their value as tax rates fall. To pay for large 
rate reductions, you will need to raise other taxes or 
introduce new ones. Options include raising taxes on 
shareholders, a value-added tax or close variant like the 
destination-based cash-flow tax, or a carbon tax.
    Finally, making business tax cuts retroactive to January 1, 
2017 would not promote growth. Retroactive tax cuts would give 
a windfall to profitable businesses. That does little or 
nothing to encourage productive investment. Indeed, it could 
weaken growth by leaving less budget room for more pro-growth 
reforms. Another downside is that all the benefits would go to 
shareholders, not workers.
    Thank you again. I look forward to your questions.
    The Chairman. Thank you. Thank you so much.
    [The prepared statement of Dr. Marron appears in the 
appendix.]
    The Chairman. Okay. We will go next to Mr. Lewis.

 STATEMENT OF TROY K. LEWIS, CPA, CGMA, IMMEDIATE PAST CHAIR, 
TAX EXECUTIVE COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED PUBLIC 
                     ACCOUNTANTS, PROVO, UT

    Mr. Lewis. Chairman Hatch, Ranking Member Wyden, members of 
the Committee on Finance, thank you for the opportunity to 
testify on behalf of the AICPA.
    As the committee tackles this rare opportunity to enact 
bold, pro-growth business tax reform, we urge Congress to take 
a holistic approach to provide tax reform to all of America's 
businesses. Fair and equitable tax reform will drive economic 
growth and enhance the competitiveness of all types of American 
businesses, not only in the U.S., but also abroad.
    The AICPA is a longtime advocate for an efficient and pro-
growth tax system based on principles of good tax policy. We 
need a tax system that is fair, stimulates economic growth, has 
minimal compliance costs, and allows taxpayers to understand 
their tax obligations. These features of a tax system are 
achievable if principles of good tax policy are considered.
    Today I would like to highlight a few tax reform issues 
that directly impact businesses and their owners. First, we are 
concerned with and oppose any new limitations on the use of the 
cash method of accounting. The cash method is simpler in 
application, has fewer compliance costs, and does not require 
taxpayers to pay tax before receiving their income. Forcing 
businesses to switch to the accrual method unnecessarily 
discourages business growth, increases compliance costs, and 
imposes financial hardship on cash-strapped businesses.
    Next, tax relief should not mean a rate reduction for only 
C corporations. Congress should encourage or at least not 
discourage the formation of pass-through entities. Inequities 
would also arise from having significantly different income tax 
rates for business income based on an overly simplistic 
approach, such as one centered solely around the structure, 
sector, or the general nature of the business's activities.
    For example, excluding professional service firms from the 
benefit of a lower business rate reflects a view of the service 
industry that does not represent the current global 
environment. In today's economy, professional service firms are 
increasingly competing on an international level with 
businesses organized as corporations. They also require a 
significant investment and rely on the contribution of 
employees to generate a substantial portion of the revenue. 
Artificially limiting the use of a lower business rate, 
regardless of the industry, would penalize a business for 
operating as a pass-through entity. Professional service firms 
are an important sector in our economy and heavily contribute 
to the Nation's goals of creating jobs and better wages. 
Without the benefit of a fair and consistent rate reduction for 
all businesses, including pass-through entities, the incentive 
to start or grow a business is diminished, with a corresponding 
loss of jobs and reduction in wages.
    We recognize that providing a reduced rate on active 
business income will place additional pressure on the 
distinction between profits of the business and compensation of 
the owner operators. We recommend codifying traditional 
definitions of reasonable compensation and provide, if 
necessary, additional guidance from Treasury and the IRS.
    If Congress moves forward with a fixed percentage split for 
business income, such as treating 70 percent of pass-through 
earnings as employment income and 30 percent as return of 
capital, we recommend making the proposal a safe harbor rather 
than a hard-and-fast rule. A safe harbor would promote 
simplicity for many businesses without sacrificing fairness for 
others. It would also provide a uniform treatment among closely 
held business entity types.
    Another important issue is the ability to deduct interest 
expense. Business owners borrow to fund operations, working 
capital needs, equipment acquisition, and even to build credit 
for future loans. These businesses rely on financing to 
survive. Equity financing for many startup businesses is simply 
not available. At a minimum, we should not take away or limit 
this critical deduction for many small and mid-sized businesses 
that, with little or no access to equity capital, are often 
forced to rely on debt financing.
    Finally, we encourage you to enact mobile workforce 
legislation, such as the bill introduced by Senator Thune. The 
burden of tracking and complying with all the different State 
payroll tax laws is complex and costly, particularly for small 
employers. The mobile workforce legislation provides a uniform 
national standard for non-resident State income tax withholding 
and a de minimis exemption from State income tax for non-
resident employees.
    Thank you for the opportunity to testify, and I will be 
happy to answer any questions you may have.
    The Chairman. Well, thank you. We are grateful for your 
testimony.
    [The prepared statement of Mr. Lewis appears in the 
appendix.]
    The Chairman. Let us go to our final witness, Mr. DeBoer, 
and we will listen to you.

 STATEMENT OF JEFFREY D. DeBOER, PRESIDENT AND CHIEF EXECUTIVE 
      OFFICER, THE REAL ESTATE ROUNDTABLE, WASHINGTON, DC

    Mr. DeBoer. Good morning. Tax reform's impact on the 
commercial real estate industry will have wide-ranging effects 
on the economy, job creation, and the overall GDP. And I am 
honored to be here today to talk with you about this issue.
    But it is not the first time that our industry has been 
before this committee and talked about tax reform. In 1981, 
Congress provided our industry with very aggressive tax 
incentives. These tax incentives spawned a robust tax shelter 
industry and resulted in the development of millions of 
buildings that had no tenants.
    In 1986, Congress rightly eliminated these tax shelter 
provisions; however, the combination of these actions caused 
severe dislocation in real estate markets nationwide, caused 
great numbers of lost jobs, resulted in countless bankruptcies, 
and many people believe that it ultimately led to the demise of 
the savings and loan industry.
    It took years for the economic pain to work through the 
system. Our industry steadily has recovered. And with 
congressional assistance, the Federal taxation of real estate 
investment today is much closer to matching the economics of 
the investment. As a result, the commercial real estate 
industry today is estimated to provide about 20 percent of the 
Nation's GDP. Our industry now employees millions of Americans, 
provides local governments with their largest revenue source, 
and plays a key role in the retirement savings and wealth 
creation of Americans. Importantly, commercial real estate 
markets today are largely in balance, where supply only 
modestly exceeds demand.
    Now, despite our industry's relatively positive health, we 
know the underlying economy can and should grow more rapidly. 
Properly designed tax reform can spur overall job creation, 
encourage more robust business expansion, improve the standard 
of living for all Americans, and result in sustainable GDP 
increase.
    The first step should be reducing the tax on all job-
creating businesses. This action should not be limited to 
corporate income but should also include income from pass-
through businesses. And I want to pledge to Senator Wyden that 
our industry and our organization will work very hard to make 
sure that there are not games played on compensation earned.
    Pro-growth tax reform should also encourage and reward risk 
through capital gain. And capital gain should continue to 
recognize that it is not just cash that is put in an investment 
that should be rewarded. Some concepts, however, may have 
unintended consequences. For example, our capital markets today 
are the envy of the world. Entrepreneurs are able to access 
debt amounts needed to provide their businesses with 
flexibility to build, operate, and grow their businesses. We 
should continue that and not end the deduction for business 
expenses.
    The proposal to expense assets is troubling to us, because 
it is suggested to apply to structures. We think that carries 
great potential negative consequences. Expensing structures 
would obviously encourage a lot of development, but we are 
concerned that this development would not be supported by 
underlying demand. And such un-economic development is a false 
indicator of economic strength and will badly distort markets.
    This is not to say, however, that the current cost recovery 
system is correct for our industry. We think it should be 
shortened. And MIT has reviewed a wealth of data regarding 
buildings, and their findings suggest that the proper economic 
life of buildings is 20 years. We believe a 20-year life 
twinned with the continuation of the interest deduction will 
spur sustainable development and sustainable GDP expansion.
    The deduction for Federal, State, and local property tax 
payments should continue. We think that repeal will cause many 
businesses to leave our urban areas, and we reject that idea. 
We believe the like-kind exchange rules also should be 
continued. We think they are a positive part of the economy.
    I would like to say that in 2015 Congress took a very 
positive step in the PATH Act regarding the taxation of foreign 
investment in U.S. real property. We urge you to now take 
another step and repeal that entirely.
    There is one final item that I would like to add, and that 
is that we would urge you to consider an infrastructure 
initiative of some type in tax reform. Action in this area is 
badly needed. It would create jobs. And if it is done 
correctly, and by correctly I mean to understand the 
transportation revolution that is going on in our country and 
where we will be going as far as transportation needs and 
mobility in the future, and if we do it, if Congress and 
policymakers do it the correct way, it not only would create 
jobs but increase productivity for workers and our businesses.
    We have submitted a detailed statement, and I would be 
happy to respond to any questions about it or my comments 
today. Thank you.
    The Chairman. Well, thank you.
    [The prepared statement of Mr. DeBoer appears in the 
appendix.]
    The Chairman. Thank you so much, all four of you. We really 
appreciate you taking the time and putting in the effort to 
come and testify to us today. And we will pay strict attention 
to your statements.
    I might add that today is Senator Tim Scott's birthday. I 
do not think he looks a day over 29 and makes the rest of us 
look pretty old, I will tell you.
    Senator Scott. I am very appreciative, sir.
    The Chairman. Well, we are grateful to have you on the 
committee. You add a great deal to our committee, as do the 
other members.
    Well, let me start with you, Mr. Hodge. In your testimony, 
you note that the Tax Foundation is generally supportive of 
corporate integration. Of course, corporate integration is an 
idea that I, along with my staff, have been exploring for 
several years now.
    In your written testimony, you note that reducing the 
corporate tax rate to 20 percent increases economic growth in 
the long run by 3.1 percent and results in 592,000 full-time-
equivalent jobs. And corporate-only expensing achieves a very 
similar result: an increase in economic growth by 3 percent, 
resulting in 575,000 full-time-equivalent jobs. Now, these 
projections are impressive.
    What struck me as very interesting is that in the Tax 
Foundation's 2016 book Options for Reforming America's Tax 
Code, almost identical economic growth and job projections 
occur with corporate integration, that is, allowing a 
corporation to deduct dividends.
    The Tax Foundation estimated economic growth of almost 3 
percent in the long run, 2.9 percent to be precise, and 535,000 
full-time-equivalent jobs. And of course, corporate integration 
would eliminate the two levels of tax on corporate earnings and 
bring the tax treatment of debt and equity closer into 
alignment, which would reduce, if not eliminate, a lot of the 
distortions and inefficiencies of the current system.
    Would you share with us the Tax Foundation's views on 
corporate integration in general and the dividends paid 
deduction approach in particular?
    Mr. Hodge. Well, thank you, Mr. Chairman. You know, I was 
looking through the Tax Foundation's archives and came across a 
1977 Tax Foundation publication by Marty Feldstein--whom I 
think you know well--on corporate integration. And since that 
time, there have been no fewer than a dozen corporate 
integration proposals that have come out of either Congress or 
the White House. And this is an issue of longstanding study 
and, unfortunately, we have yet to see the kind of action that 
I think is necessary to remove the double taxation of corporate 
income and make business taxation more equitable.
    We believe that business income should be taxed only once 
and at the same rate. And as you noted, in our analysis it has 
the dramatic effect of lowering the effective corporate tax 
rate and having a substantial impact on long-term economic 
growth. But as you mentioned, rightly I think, it also improves 
or equalizes the treatment of debt and equity financing and, as 
a result, makes the economy much, much more efficient.
    And I think a dividends paid deduction is a very thoughtful 
way to approach this. After all, companies get to deduct their 
interest costs; why should they not get to deduct the dividends 
that they pay to shareholders?
    And I think it is certainly an approach that ought to 
deserve the attention and consideration of the committee, but 
also, as you move forward on fundamental tax reform, ought to 
be a nice complement to the broader corporate tax reform 
efforts.
    The Chairman. Well, thank you.
    Mr. Lewis and Mr. DeBoer, you both included in your written 
statements concerns regarding limitations on the deductibility 
of interest expense. Mr. Lewis, your testimony laid out 
concerns for small businesses and services businesses. Mr. 
DeBoer, your testimony laid out the potential and significant 
negative effects on the real estate industry of such a 
limitation.
    However, we frequently hear how the current tax treatment 
of debt and equity financing leads to overleveraging of 
businesses, and limiting the deductibility of interest expense 
brings the tax treatment of the two more in sync.
    I would like your respective thoughts on that, Mr. Lewis 
and Mr. DeBoer, if you could do that for us.
    Mr. Lewis. Okay, I will take a crack at it first. Equity 
financing for many startups and small, mid-sized businesses is 
simply not available. I think you have to start with that 
notion. So, while the points that you just made are there, the 
combination of those and taking away an interest expense 
deduction will put more burden on those small businesses.
    I mean, the reality is that large businesses have access to 
the equity markets, the capital markets, and small businesses 
do not. So many of our businesses, particularly the growth 
businesses, the entrepreneurial businesses, are those 
businesses that rely on debt financing.
    Tax laws should not discourage the formation of businesses. 
The formation of new businesses is one of the best aspects that 
we have in the U.S. economic system, and I think it should 
continue.
    The Chairman. Thank you.
    Sir?
    Mr. DeBoer. Mr. Chairman, the issue of overleverage, I 
think, is really one that should be examined on an individual-
by-
individual basis. If there is overleverage, it is a problem 
with the regulators who were supposed to be determining whether 
someone had too much leverage, and we would prefer that the 
issue be dealt with there, not through the tax code.
    The use of debt is very, very important for all businesses, 
not just startup businesses and not just small businesses, but 
all businesses that need this kind of flexibility to use debt.
    Debt, by the way, allows entrepreneurs to retain more 
control over their business operation. If they have equity, 
they give up control of some of their business. They retain 
more control over their business operations by using debt. It 
is something that historically has been recognized as a cost of 
doing business, like other costs of doing business. And we 
really see no reason to adjust it through the tax code.
    That is not to say that we think that people should be 
overleveraged or that businesses should be overleveraged. They 
should not be. There should be governors on that. And there are 
other parts where the government should act.
    By the way, in the real estate industry, from a macro point 
of view, I believe our industry is now levered at about 60 
percent. Publicly traded REITs, for example, are levered at 
even lower amounts, 40 or 45 percent on average.
    So we are very mindful of the problems with overleverage, 
but it is really a problem of whether the borrower itself is 
able to repay the amount, and it might be a low amount of 
leverage that they cannot handle while others can handle higher 
amounts.
    Thank you for the question though, sir. It is very, very 
important to have access to debt for the economy to continue to 
grow.
    The Chairman. Well, thanks to both of you.
    Senator Grassley?
    Senator Grassley. For anybody or all of you: as part of a 
pro-growth tax reform, there has been considerable debate over 
what is more important, lower rates or expensing.
    Mr. Hodge and Dr. Marron, especially you two, could you 
both elaborate on how you see the tradeoff between expensing of 
depreciation and lower rates? For example, do you view it as 
acceptable to lengthen depreciation to help finance lower 
rates?
    Mr. Hodge. Well, I will start out with the first part of 
that, Mr. Grassley. We see expensing as the most powerful 
policy change that you can make to improve economic growth. 
And, on an apples-to-apples basis, our models show that full 
expensing delivers twice the economic growth than a comparable 
rate cut, and that is because it really affects new investment 
whereas a rate cut, a corporate rate cut, affects both new and 
old capital, new and old investment, and so its benefits get 
distributed a little more broadly.
    But to the second point, I think we have to look back at 
the tax reform proposal that Chairman Camp put forward a few 
years ago, which lengthened depreciation lives in order to 
finance or offset the revenue lost from a corporate rate cut. 
And what we found--all the models, the Joint Committee on 
Taxation model, the Tax Foundation model, showed that 
lengthening depreciation lives raised the cost of capital to 
such an extent that it offset the benefits of a lower corporate 
tax rate on the other hand. And it ended up as an economic 
wash.
    And I think you need to be extremely careful in looking at 
your offsets when you are looking to offset the corporate rate 
cut.
    Dr. Marron. So my thoughts are going to be very, very 
similar, that if you focus on expensing, what you are doing is, 
you are providing incentives for new investment, which is the 
thing that is going to be most beneficial for the economy--and 
I want to emphasize it is also going to be most beneficial for 
workers.
    The research that my colleagues at the Tax Policy Center 
have done suggests that if you focus on reductions that 
encourage investment, you get more of the benefits flowing to 
workers and relatively less of it being focused on 
shareholders.
    That said, with a 35-percent top rate, you could make very 
good arguments for bringing that down as well, as part of the 
concerns about the competitiveness of our tax system.
    But as Scott just said, if your strategy is to reduce the 
corporate rate and then make depreciation and write-offs less 
favorable, what you are going to see in all the macro models is 
that that is going to very much limit any growth benefit you 
get.
    Senator Grassley. Okay. I am going to ask the same two 
people something that Senator Hatch discussed with the others, 
because I want your opinions on it, and that is consideration 
of restrictions, whether they should be imposed on the ability 
to deduct interest.
    As you know, the House Blueprint generally eliminates 
interest as a business expense in exchange for going to a full 
expensing on capital assets.
    So for the two of you, should any restriction on the 
deductibility of interest be considered to finance lower rates 
or faster depreciation?
    Dr. Marron. I will go first on this one. There are two 
great schools of how you should tax, right? There is the income 
tax school and the consumption tax school. So in the income tax 
school, interest is an expense--you ought to be able to deduct 
it--and then depreciation ought to follow the economic 
depreciation of assets over time. In the consumption tax view 
of the world, you should be able to expense everything 
immediately, and you should not get any write-off for interest.
    We have a system that is somewhere in between those, where 
we have accelerated depreciation, but we allow interest 
deductibility. And the challenge you have there is that you can 
actually over-
encourage investment. You can create negative effective tax 
rates on investment. You can have some of the problems that 
Jeff mentioned that happened in the 1980s. If you go too far in 
making investment favorable, but allow full deduction of 
interest, you can end up with excessive investment in certain 
sectors.
    And so I am very, very open to reducing interest 
deductibility if it is being paired with making depreciation 
more favorable. That moves in the direction of a consumption 
tax; that is a logical and consistent way to design a tax 
system.
    Mr. Hodge. I would echo much of what Donald has said. And I 
think that our models show that when you eliminate interest 
deductibility, it not only raises about $1.2 trillion, but it 
does so in perhaps a less-harmful way than other options. And 
thus, when paired with a corporate rate cut or full expensing, 
you get the maximum amount of benefits from those policies with 
the least amount of harm on the other side.
    There are also other advantages to eliminating the interest 
deductibility when it comes to perhaps reducing the amount of 
earnings stripping that we see, where foreign multinationals 
load up debt here on their domestic subsidiaries and then strip 
income out of the U.S. tax base.
    There are other issues that we have talked about in terms 
of overleveraging and so forth, so there are many advantages to 
it. But we do understand that some industries are perhaps over-
reliant on it and it could be disruptive. But it is one of the 
tradeoffs that will have to be made in order to get economic 
growth on the other side of the equation.
    Senator Grassley. Thanks to both of you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Carper?
    Senator Carper. Thanks, Mr. Chairman.
    I want to add to your birthday wishes to Tim Scott. It is 
great to serve with you, Tim, and happy, happy birthday.
    You are too young to remember a great song by Conway 
Twitty, and this last weekend I just happened to be listening 
to the radio driving around, and I heard a song by Conway 
Twitty I have not heard in years. It goes, ``It's only make 
believe.'' And I was trying to think what he was singing about. 
He was singing about a relationship with another person, but it 
could just have easily been dynamic scoring. [Laughter.]
    I just want to say, we have been down this road before. We 
did it in early 1981 with tax cuts for the higher-income 
people; it did not work. We did it in 2001; we ended up with 
more debt and, frankly, not the kind of economic growth that we 
had hoped for.
    And the idea of trying it again--there is a saying that 
says, ``third time's a charm.'' I am not sure the first two 
times were charmed, and I would have us be careful about going 
down this road again.
    So my question is, Dr. Marron, could you just lay out for 
our committee what effect a largely debt-financed tax cut would 
have on long-term economic growth for the U.S. and on our 
deficits? Thank you.
    Dr. Marron. Sure; my pleasure. Thanks. So if you look at 
the CBO baseline forecasts of where we are in fiscal terms 
today, we are on track over the next decade in round numbers to 
spend around $50 trillion and to bring in tax revenue around 
$40 trillion, and therefore to have deficits that accumulate 
over the decade of about $10 trillion. So that will build the 
debt from around 75 percent of GDP today up to around 90 
percent of GDP by the end of the budget window.
    That is problematic in its own way. We ought to be on a 
trajectory where the debt is not rising faster than the 
economy, right? We want it to flatten out and eventually come 
down.
    If you did deficit-financed tax cuts today, what you would 
have is--we would have more of that. So you would have, 
depending on the scenario people have discussed, you would have 
another $1 trillion, $2 trillion of additional debt over the 
decade. So adding, say, $12 trillion to the debt over that 
period.
    And the financing of that would have to come from 
somewhere. And one way it might be financed is by reducing the 
amount of private investment we see in the United States, and 
that would, therefore, weaken the amount of growth you would 
get from a tax reform.
    You should always think about these tax reform proposals as 
being a race between the effects you get from the tax changes 
you are doing and any effect they have on the budget balance. 
And if you are increasing deficits over this time period, there 
is going to be an offset. And in the models I have seen, 
typically the offset ends up overwhelming eventually, so you 
end up losing your growth effects.
    There are some scenarios in which that does not happen, 
where foreign capital is very widely available. It comes in and 
offsets the hit to private investment, but then you are left in 
a situation where, yes, the U.S. economy is being more 
productive, but more of the benefits are going overseas rather 
than staying here. And so either way, there is a cost to debt 
financing.
    Senator Carper. All right. Let me ask a related question, 
again of you, Dr. Marron, if I could.
    Can you lay out for us what the evidence shows regarding 
who really bears the cost of corporate tax and your assessment 
of the assumptions used in models claiming that a rate cut 
would allegedly help workers?
    Dr. Marron. Certainly. So this is an area that economists 
have studied a lot in recent decades. I would say the consensus 
that you see--from CBO and JCT and the Office of Tax Analysis 
and what my friends at the Tax Policy Center do--is that, 
clearly, workers pay some of the corporate income tax. The one 
unfortunate side effect of the corporate income tax is to 
discourage investment in the United States: workers have less 
capital to work with, they are less productive, wages are 
lower.
    The mainstream estimates of that are around 20 percent, 
kind of in the 20- to 25-percent range for the corporate tax 
system as a whole.
    At the Tax Policy Center, my colleagues emphasize that it 
differs depending on what tax provision you look at. And if you 
are talking about just provisions focused really directly on 
investment, you can make an argument that about 50 percent of 
that is borne by workers. But for the corporate tax system as a 
whole, kind of the mainstream view is around 20, 25.
    Senator Carper. All right. Let me just say I am all for 
reducing the corporate tax rate. We are not competitive with 
the rest of the world. There needs to be a reduction. I hope 
that as we address that concern, we will keep in mind four 
questions as we address more broadly comprehensive tax reform.
    Number one, the proposal that has come before us, is it 
fair? Number two, does it foster economic growth or impede it? 
Number three, does it make the tax code more complex or less 
complex? And number four, what is the fiscal impact?
    We are 6, 7 years into the longest-running economic 
expansion in the history of our country. And usually at this 
point in time, I would think we would be interested in 
addressing the corporate tax problem so we are competitive with 
the rest of the world, but do so in a way that is fiscally 
sustainable.
    This year's deficit is going to exceed $700 billion, that 
is 7 years into an economic expansion. The economics I studied 
as an undergraduate and graduate student said you deficit-spend 
when you are trying to stimulate the economy, deficit-spend 
when you are in a recession or something like that, or in a 
war.
    But when you are 6, 7 years into an economic expansion, the 
idea of somehow doing it all over again and increasing the 
deficit further, I do not think we should do that. I do not 
think we should do that.
    Thank you so much.
    The Chairman. Thanks, Senator.
    Senator Toomey?
    Senator Toomey. Thank you very much, Mr. Chairman.
    I just want to follow up briefly on the Senator from 
Delaware's comments. But let me start with a question.
    Is there anybody on the panel who believes that economic 
growth and output are completely unaffected by all incentives 
and penalties in the tax code, that they are completely 
independent and the economy is uninfluenced by good or bad tax 
policy? Does anybody hold that view?
    Okay, nobody holds that view. So does it not follow 
logically that if you have better incentives and fewer 
penalties and you have a tax code that creates the right 
incentives for growth, you have more growth than you would 
otherwise?
    And if we achieve that, then it is not a question of 
whether or not the economy grows more, it is a legitimate 
question about how much. And I think we all agree that if we 
have a bigger economy than we would otherwise have, then there 
is more economic activity to tax. So the logic behind 
dynamically scoring tax policy, it seems to me, can only be a 
question of the extent, but not whether or not we do it.
    Now, if you think that the tax reform is actually 
counterproductive to growth, if you think it is going to create 
disincentives and penalties for growth, then it should be 
scored accordingly.
    But isn't there a basic--Mr. Hodge, I will throw it to 
you--is there not a fundamental kind of unavoidable logic that, 
if you get the incentives right, you will have more growth, and 
if you have more growth, you can generate more revenue and it 
is just a question of magnitude?
    Mr. Hodge. That is correct. And what we try to tell people 
about dynamic scoring is that, by and large, most tax cuts do 
not pay for themselves. But depending on the type of tax cut, 
it can have macroeconomic effects which will have feedback 
effects on revenues and will minimize their long-term costs.
    Senator Toomey. Thank you.
    There are a couple of other things I want to get to 
quickly.
    Mr. DeBoer, you seem to be skeptical about the wisdom of 
allowing full expensing for structures, but that skepticism, I 
did not hear that applied to other kinds of assets like 
vehicles, equipment, machinery, other sorts of things. And you 
acknowledge that expensing of those types of things, non-
structures, can be beneficial for economic growth, is that 
correct?
    Mr. DeBoer. Well, I do not necessarily disagree with that. 
But the facts are, I believe, that under the current law of 
depreciation and bonus depreciation that is in place, I believe 
roughly 60 percent of all business investments today are 
recovered within 18 months.
    Senator Toomey. Yes; I have very limited time, and I 
appreciate that.
    Mr. DeBoer. And so I am a little skeptical about the bump 
that you would get from that.
    Senator Toomey. I appreciate your skepticism. Okay, that 
was not my question, though. I appreciate that, sir.
    Mr. DeBoer. And the Tax Foundation's own study does show 
that 70 percent of the increase in GDP would come from 
expensing structures.
    Senator Toomey. It would be nice if we could move on, sir. 
Thank you very much.
    Mr. Lewis, you had made a point about the accrual method 
versus the cash method of accounting. Is it true that a fast-
growing company that is investing significantly in capital and 
maybe growing its inventory could be in a position where their 
tax liability actually exceeds their free cash flow under an 
accrual system?
    Mr. Lewis. Certainly, they could.
    Senator Toomey. And so allowing companies to take the cash 
method has the great virtue of tremendous simplicity, but it 
also tends to align their cash flow better with their tax 
obligations. Is that true?
    Mr. Lewis. Yes. Cash method accounting tends to be simpler, 
like you said, and it does provide a lot of incentive, fewer 
compliance costs, and they put more money into doing what they 
do best, which is not accounting, but growing their business.
    Senator Toomey. Yes. Would you be supportive of raising the 
threshold that is currently in law that allows for a cash basis 
for tax purposes?
    Mr. Lewis. Yes. The AICPA has supported Senator Thune's 
INVEST Act that had a provision in there to increase it, to 
make it more available to smaller businesses.
    Senator Toomey. Thanks.
    Mr. Hodge, you had mentioned that dollar-for-dollar 
expensing has more impact on growth than lower marginal rates, 
maybe than most of the other ideas we have been talking about. 
Could you briefly explain how that benefit translates to 
workers? How does that help average workers? How does that help 
wages?
    Mr. Hodge. The key point here is, by lowering the cost of 
capital, you are improving the opportunities for businesses to 
invest in tools which make their workers much more productive. 
Much more productive workers earn more over their lifetimes, 
and their standard of living rises as a result. So the key here 
is to incentivize new investment, to increase productivity, 
which ultimately makes everyone better off in the long run.
    Senator Toomey. Thanks very much.
    Thank you, Mr. Chairman.
    Senator Roberts [presiding]. Senator Cantwell?
    Senator Cantwell. Mr. Chairman, thank you.
    I know my colleagues and the panel have been discussing 
dynamic scoring and the deficit. So I guess I definitely 
believe, as we had our last hearing, that dynamic scoring does 
not definitely lead to dramatic growth. It might, it might not.
    And, Mr. DeBoer, one of the things that I am most 
interested in is, before we launch into this discussion about 
the tax code, just as any businessperson would do--they take an 
assessment of the environment and what are the needs and 
opportunities of that company and what are the needs and 
opportunities of our Nation.
    One of those things that I think has been missing in this 
equation as it relates to our discussion is, what are those 
needs and opportunities as it relates to housing? Could you 
comment on that as it relates to the tax code and what we need 
to be doing?
    Mr. DeBoer. Certainly. I think, you know, most people, most 
businesspeople who operate certainly in urban areas, recognize 
that there is a tremendous and growing shortage of what we 
would call workforce housing. And so people who are middle-
American citizens--firemen, teachers, what have you, combined 
incomes, working very, very hard--are being priced out of our 
Nation's cities.
    And we need to focus on ways to incentivize affordable 
housing, not just low-income housing, which is obviously 
needed, but workforce housing as well. And we should not lose 
sight of that.
    I do not have any solutions to share with you, but it is 
certainly a growing and troubling problem. And as we go 
forward, that part of our Nation has to be included in whatever 
is done in economic growth.
    Senator Cantwell. So do you think just cutting the 
corporate tax rate gets us affordable housing?
    Mr. DeBoer. Well no, I do not think it really will have 
anything to do with affordable housing. It would put, 
hopefully, more people to work, and it would provide more money 
in people's paychecks, and perhaps they would have more money 
to buy workforce housing, but it would not directly stimulate 
workforce housing.
    Senator Cantwell. Do you think affordable housing is a 
crisis in America?
    Mr. DeBoer. I am not sure I would call it a crisis. I think 
there is an awful lot of multifamily housing being constructed 
today, meeting a demand for it, but it is not meeting that 
segment of the economy. And people need to understand, land is 
land, and it is going to cost the same thing regardless of its 
use almost. And construction costs are quite high.
    And so when people construct assets--multifamily, retail, 
office buildings, what have you--they are paying roughly the 
same cost to construct them. And so it is hard to understand 
why they would then provide low-income housing or workforce 
housing, because it does not pencil out for them from an 
economic point of view. So there does have to be assistance 
there, we think, whether that is zoning assistance or local tax 
break assistance or something from the Federal Government.
    Senator Cantwell. Or expansion of the Low-Income Housing 
Tax Credit?
    Mr. DeBoer. Well, keep in mind, as tax reform goes forward 
and rates lower--and I certainly am not suggesting that we do 
not want lower rates--but the market for the low-income tax 
credit is made more robust and more positive because of what 
rates are. As rates go down, those will become less valuable.
    And again, I am not suggesting that rates should not come 
down. I am simply suggesting that if you keep the low-income 
housing program as it is, the incentive will naturally be 
reduced, and perhaps a rethinking of that incentive is in 
order.
    Senator Cantwell. Well, I think you said something very 
important there, but I am not sure everybody understood it. 
Basically, what you said----
    Mr. DeBoer. I may not have understood it, but it was fun 
saying it. [Laughter.]
    Senator Cantwell. I think what you said is technically 
correct. But the translation is that, basically, because a lot 
of people who have invested in affordable housing as we have 
given them incentives for investing in it through the LIHTC 
program, as they are sitting there waiting to see what is going 
to happen with the corporate tax rate or tax rates overall, 
they are sitting on capital and we are actually suppressing the 
amount of available investment in affordable housing at the 
same time that we have a crisis.
    So to me, as we ponder this big question, particularly as 
it relates to this issue of dynamic scoring and whether you are 
going to get dynamic growth from it, I want to make sure 
everybody clearly understands that housing somehow has lost its 
way.
    It used to be in the 1960s, 1970s, 1980s you would say, 
when you wanted to stimulate our economy, the cheer would go up 
for housing, but you have not heard that cheer in a long time. 
And it is time for us to focus on the fact that affordable 
housing is a crisis, and it is certainly a crisis in my State; 
it is certainly a crisis in Seattle. And we need to make sure 
that we are putting the right incentives in place. This is just 
as important as the rest of the discussion we are having here.
    So thank you, Mr. DeBoer.
    Mr. DeBoer. Senator, if I may just add one thing. It was 
referenced how long we are into the economic recovery--forget 
about affordable or low-income housing--and home-building in 
general is off where it typically would be at this point in the 
recovery anyway. And if it was only where it should normally 
historically be, our GDP would be a point higher, some suggest. 
And I just throw that out.
    Senator Cantwell. Thank you.
    Mr. DeBoer. And again, those solutions----
    Senator Cantwell. Thank you. No, I call that growth. Thank 
you.
    Thank you, Mr. Chairman.
    Senator Roberts. I appreciate that.
    Senator Scott?
    Senator Scott. Thank you, Mr. Chairman.
    I will make my questions quick, because I have to go vote 
before we close that vote out.
    I was a small business owner for about 15 to 16 years. And 
I will tell you that the question that seems to be unanswered--
I thought Senator Toomey did a very good job of delineating the 
importance of, from a competitive perspective, how lower rates 
equal a better competitive position against folks in other 
countries.
    A lower rate also will encourage economic activity in a way 
that can be scored dynamically. The question is, can we score 
dynamically accurately? The fact of the matter is, there is no 
question that the dynamic impact will be measurable, which 
means that it will be positive.
    Another very important factor is the complexity of the code 
and the amount of time that small business owners spend 
preparing for the dreaded season of March 15th to August 15th 
and the times when the extensions run out.
    Can you, Mr. Lewis and Mr. Hodge, speak for a few minutes 
on the compliance costs borne by U.S. small businesses under 
the current code and what that means long-term for our 
competitive position and the ability to grow jobs and make 
future investments?
    Mr. Hodge. Well, I can just give you some overviews. We 
have looked at the overall complexity of the U.S. code and 
tried to measure it. Americans spend close to 9 billion hours 
complying with the U.S. tax system. The corporate part of that 
code is the most complex and the most costly. Things like 
depreciation schedules among that, as I mentioned earlier in my 
testimony, cost U.S. businesses about $23 billion a year in 
compliance costs. This is money that is not only drained from 
businesses, but it is time taken away from entrepreneurs.
    So instead of writing computer code, they are complying 
with the tax code. This is wasted energy, wasted time, wasted 
resources that go to, well, complying with the IRS rather than 
trying to build a business, and that is simply unfair.
    Senator Scott. Thank you, sir.
    Mr. Lewis?
    Mr. Lewis. Thank you for the question. The AICPA has 12 
guiding principles that we believe should be considered as part 
of any tax reform discussion. There are many of them, but you 
hit on a couple of them that I think are important. The first 
one is equity and fairness on the one side. On the other side 
is simplicity.
    The thing about it is, often one principle in these 12 
guiding principles has to be compromised at the expense of 
another to achieve the common objective. So it is that tradeoff 
that you all are debating now where the rubber hits the road. 
Reconciling the competing interests of each of the guiding 
principles can be difficult.
    You know, the thing about it is, the code will probably 
never be simple, but, man, it sure could be a lot less complex. 
And so anything that you can do along those lines to make it 
less complex would benefit all businesses in our country.
    Senator Scott. Thank you, sir.
    Thank you, Mr. Chairman.
    Senator Roberts. Unlike Shane in the movie sometime back--I 
realize that two-thirds of the audience do not even know what I 
am talking about--but at least Shane never came back, but 
Chairman Hatch will come back. [Laughter.]
    I remember 1986, the last time we did tax reform. We have 
pictures of the gentlemen who were in charge: Senator Packwood, 
Senator Dole, others. When I reviewed the tax proposal at that 
particular time, farmers in my district--I was then a member of 
the House--said they were going to take a pretty big hit. Real 
estate also said, listen, this is really not what we think is 
appropriate.
    And then the S&L business was very worried, rightly so--
they went out of business. One of my very best friends went 
broke who had a cow/calf operation.
    So I listened to those people, and I voted ``no.'' I was 
the only one in a several-State area who did that. I think the 
most important thing that happened in that regard was that Bob 
Dole did not speak to me for 6 months. That was not all bad, 
but that was probably a very good relationship. [Laughter.]
    I have a theory. We are all wrapped around the axle with 
regards to offsets and revenue, so on and so forth. You all 
have been talking about expensing, depreciation, State and 
local taxes. You have not mentioned--I am surprised you have 
not--the deduction of interest for various things, your health 
insurance, so on and so forth.
    When you do that, I have a red ant theory. Every time you 
touch something that is in the tax code, it has been there on 
purpose even though it is 9 feet tall, and we have to do 
something. But I would prefer to see us do the big things, not 
worry so much about the dynamic scoring--although that is a big 
issue for many--just for my personal preference.
    Lower the corporate rate, we have to do that, the business 
rate, but I would prefer we call it a business rate. And then 
also go from 7 to 3 on the brackets, same with the middle 
class.
    I would fix AMT. I would do something with the estate tax. 
There is one more that I am missing. Oh, repatriation; but 
obviously, if you lower that rate, why, that supposedly takes 
care of that. And call it good and not go into all these other 
details.
    I know some members in the House do not buy that argument 
at all, but it sure would save us a lot of time. And all these 
other things that I have mentioned--you have various interest 
groups coming in, and it is the red ant theory, based on an 
experience when a Senator from Kansas tried to give a speech 
when he was standing on a hill of red ants. That did not work 
out very well. They crawl up your leg and bite you pretty good.
    How do you feel about that, more especially with the 1986 
example? Does anybody want to take that on?
    And the chairman is back, and I will yield to him, but I 
will listen. But not for very long, because I have to go vote.
    Mr. Hodge. Very quickly.
    Senator Roberts. Very quickly.
    Mr. Hodge. The 1986 act has gotten a lot of mythology over 
the years. We actually went back and modeled the economic 
effects of the 1986 act. We found that it actually raised the 
cost of capital, mainly by shifting the tax burden onto 
businesses at the expense of giving tax cuts to individuals. As 
a consequence, we found it had the effect of actually slowing 
economic growth, not boosting growth.
    Senator Roberts. Well, and 4 years later our friends across 
the aisle simply raised taxes, and there was a lot of blood on 
the ground. And I do not see the need for doing that again, so 
I hope we can stick to the big items.
    And I note that the distinguished chairman is back. Thank 
you.
    The Chairman. Thanks, Senator.
    Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman.
    I thank all the witnesses.
    Mr. DeBoer, I am sorry I was not here when you were talking 
about incentives for energy efficiency. We are strongly going 
to work to make sure we can preserve those issues.
    I want to ask a question about the pass-throughs, as to 
what is a fair way to handle this. Pass-through companies do 
not have to pay double taxation, that is true; however, when 
you look at global competition, they are still paying a much 
higher rate than their global competitors because of the 
marginal tax rates in the United States. And the overwhelming 
majority of American businesses do not pay the C rate. I think 
the C rate now amounts to about 5 percent of the companies, 
somewhere in that level.
    So as we look for reform in order to make our business tax 
structure more competitive, if that is one of our goals for 
growth, what do we do about making sure we do not have the 
unintended consequences of hurting those companies that have 
the current status as pass-throughs? How do we protect them if 
the rates do not change, if we just do the C rate? How do you 
deal with that issue?
    Mr. DeBoer. Senator Cardin, I will take the first swing at 
that. And we do appreciate your work on energy efficiency for 
buildings. It is a very, very important topic going forward, 
and hopefully it can be included.
    Pass-throughs--certainly for our industry, very, very few 
real estate businesses are operated in corporate format. Almost 
all are LLCs, publicly traded or privately traded REITs, or 
partnerships. In fact, real estate consists of almost half of 
all partnerships in America, so we are highly concerned and 
focused on how we can achieve a lower tax rate for those 
entities.
    Right now, there is a 5-percent spread between the 
corporate and the ordinary rate. We see no reason that if the 
corporate rate is coming down that a comparable spread should 
not be the result of tax reform this time, or you are going to 
put pass-through entities, which really drive the economy in 
many ways in the United States, at a disadvantage, not only 
globally, but vis-a-vis their competitors in the corporate 
world here. So we want to work on that very, very much.
    Senator Cardin. I agree with that.
    Mr. DeBoer. And I mentioned to Senator Wyden, Senator, that 
we share the concern about potential shifting of what is 
service-
related income in a pass-through into that lower bucket. And we 
have worked very, very hard internally to try to come up with a 
way to deal with that.
    Senator Cardin. Well, I thank you for that response. I 
think we all have to keep our eyes on this issue, because it 
could get lost in some of the proposals that are being made. 
And I agree with the point that you made: particularly in the 
real estate sector, the pass-throughs are critically important. 
I know they are in my State.
    I know that Senator Carper talked about being fiscally 
responsible. One of the worst things we could do is add to the 
deficit in deficit-financed tax reform, because that will be an 
anchor on our economic growth. And I know he talked about how 
we score, and I hope we will use the Joint Tax traditional 
scoring.
    But I also raise another issue, that one of the proposals 
that has been out there is talking about timing and the 
Rothification of the 401(k)s. That scores as a revenue gainer, 
even though over the long term it is neutral.
    And I think we are just going to have to be very careful, 
Mr. Chairman, as we look at these issues. There is also, of 
course, the retirement security issue, which is very important, 
to make sure that we not only maintain, but strengthen those 
needs.
    I want to get to the fundamental point, and that is, if you 
really want to deal with competitive rates, if that is your 
issue on the business side of tax reform, I think it is 
impossible to do unless you bring different revenues into the 
equation. Every industrial nation in the world except the 
United States uses consumption revenues in addition to income 
revenues. We are the only country that does not.
    How do we expect to have competitive business rates if we 
do not harmonize with the international community as to the 
source of our revenues? So I have introduced a progressive 
consumption tax, because one of my major objectives is to make 
sure that the new tax code is at least as progressive as the 
current code as it relates to middle-income families, and there 
is a way of doing it. But how do you get to competitive rates 
globally with industrial nations if we continue to be stubborn 
and use only income revenues to the exclusion of consumption 
revenues when the rest of the world is doing that?
    Dr. Marron. So I think you are left with a lot of bad 
choices, right? So you could run much bigger deficits as a way 
to get the rate down, but that is not going to be good in the 
long run.
    You know, I end up mentally in the same place where you 
are, which is, if you want to get down to rates below the high 
20s, if you want to get lower on that rate, you are going to 
need to go shopping for a new revenue source. The destination-
based cash flow tax is a species of consumption tax that has 
some of those attributes, can bring in some more revenue, but 
it seems to have gone by the wayside.
    There are still more traditional value-added taxes you 
could do. I personally am a fan of the idea of a carbon tax 
which could provide significant revenue, encourage clean 
energy, and help combat pollution. It would be one strategy.
    And then of course, another strategy is also to look to 
shareholders. If you are reducing corporate taxes, you should 
keep in mind that some of the beneficiaries are going to be 
taxable shareholders. And it is perfectly reasonable to look to 
them to think about ways of increasing taxes on shareholders to 
partly offset or fully offset the gain that they get.
    Mr. Hodge. And, Mr. Cardin, I will give you credit for the 
progressive tax reform that you have put forward. We modeled 
your plan and found it to be exceptionally pro-growth, and not 
only, I think, pro-growth, but I think it was revenue-positive. 
So it is possible. And you used an offset of a value-added tax 
to lower the corporate tax rate to, I believe, 17 percent, and 
that had a pretty powerful effect on boosting economic growth 
with that lower corporate rate.
    Senator Cardin. Yes, I appreciate that. My objective is 
that, since America, among industrial nations, is near the 
bottom on the percentage of our economy and government, we 
should have a competitive advantage, not disadvantage on our 
business taxes.
    The Chairman. Senator Brown?
    Senator Brown. Thank you, Mr. Chairman. Thank you to all 
four witnesses; good to see all of you.
    My question is for Dr. Marron.
    We have heard a lot of talk about what is good for large 
U.S. companies. We have heard, frankly, far too much talk about 
what is good for corporations and not enough talk about what is 
best for American workers. And it is American workers who have 
been hurt most by our tax policy and our trade policy in the 
last 20 years. We need to encourage companies to invest in 
their greatest asset, the American worker. We do it with a 
carrot and a stick.
    This month, along with Senator Durbin, I introduced the 
Patriot Employer Tax Credit Act. It simply says that businesses 
that pay good wages of $15 an hour and provide benefits and do 
not outsource their jobs and buy American, basically, that 
those companies would get a tax cut. Conversely, when 
corporations pay 
poverty-level wages, someone has to pick up the tab. It is 
American taxpayers. Food stamps, housing vouchers, paying for 
Medicaid, paying the Earned Income Tax Credit--taxpayers pick 
that up.
    So if you are a huge corporation under our proposal and you 
choose to pay your workers so little that they are 
disproportionately forced onto government assistance, you need 
to reimburse American taxpayers. That is our corporate 
freeloader act.
    The debate over tax reform is a chance for us to reconsider 
how we have been told to think about this economy. You do not 
build the economy by doing a tax cut for corporations and hope 
it trickles down. We know from comparing the 1990s to the next 
decade, that simply does not work. You build the economy by 
investing in the middle class and build the economy outward.
    So, Dr. Marron, offer suggestions, if you will, for other 
ways we safeguard against corporate tax reform that 
overwhelmingly helps corporate America at the expense of 
American workers.
    Dr. Marron. Sure. So, you know, I think you want to look at 
it through the lens of, if you are doing business tax reforms 
and tax cuts, do they encourage more investment here? Because 
that is the one channel that will have significant benefit for 
workers. And you want to de-emphasize the cuts that are just 
going to accrue to shareholders and not provide that sort of 
competitive advantage.
    I think the other thing is, you want to think about other 
aspects beyond the business tax code. You know, there has been 
a lot of discussion about worker credits, about expanding the 
EITC, the Earned Income Tax Credit, things like that that could 
provide support and encouragement to a broader array of 
workers, boost their take-home pay, make them more attractive 
to employers. And I think that is very worthy to consider as 
part of an overall tax reform package.
    Senator Brown. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Heller?
    Senator Heller. Mr. Chairman, thank you. Thanks for holding 
this hearing, and thanks to the ranking member also. And for 
those on the panel, thank you very much for taking time and 
being with us today.
    For too long, Nevadans and America's small-business 
companies have been at a competitive disadvantage due to our 
outdated and unfair tax code. A Nevada business owner recently 
told me that our tax system makes it difficult for him to 
compete. Another Nevadan wrote me and said that we need to fix 
our tax code in order to attract businesses to our country, 
drive up wages for American workers.
    Our current tax code distorts the marketplace, drags down 
the economy, prevents American job-creators from staying and 
hiring at home. Just last month, I hosted Treasury Secretary 
Mnuchin at a tax reform roundtable in my home State of Nevada. 
There we met with some of the silver State's top job-creators. 
And time and time again we heard the same thing: Nevada needs 
lower tax rates on its businesses.
    Lower rates mean a faster-growing economy, increased 
international competitiveness. Lower rates will also mean more 
jobs, better jobs, and higher wages, all of which the middle 
class desperately needs right now.
    Just last week, it was announced that Nevada leads the 
Nation in private-sector job growth at 3.6 percent. And imagine 
what our State, and for that matter the country, could do if we 
at least delivered on tax relief.
    So after 8 years of historically low growth under the 
previous administration, it is time to get our economy back on 
track, help our workers and small businesses win on the 
international playing field. So I look forward to working with 
all my colleagues here as we move forward on business tax 
reform and individual tax relief.
    I want to speak really briefly here on the corporate tax 
rate and its impact on labor. Mr. Hodge, I missed your opening 
testimony, but I assume you talked a little bit about this. The 
empirical evidence suggests that workers bear a sizable 
percentage, at least 45 percent, of the corporate tax burden. 
Is that an accurate comment?
    Mr. Hodge. Yes. In fact, we have a paper coming out in the 
next week or so surveying the economic literature. And it shows 
that a substantial portion of the corporate tax does fall on 
workers in some fashion, roughly about half. And in some cases, 
it can be as much as 100 percent.
    For instance, if the factory that I work for moves from 
Dublin, OH to Dublin, Ireland to take advantage of the Irish 
12\1/2\-percent corporate tax rate, I have borne 100 percent of 
that differential between the Irish rate and the United States 
rate. So corporate taxation can have an overwhelming influence 
on hiring and wages. And the economic literature shows that 
pretty clearly.
    Senator Heller. I have a table here that comes from your 
organization. And a quote on it shows that a 20-percent 
corporate tax rate would lift after-tax incomes by an average 
of 3.5 percent. Do you stand behind that?
    Mr. Hodge. Yes. Our model shows that, and it is because the 
combination of the economic growth and the increase in 
productivity will ultimately lift both wages and after-tax 
income.
    Senator Heller. Your model also estimates that the 
combination of a 20-percent corporate tax rate and full 
expensing would boost after-tax income by an average of 5.2 
percent. Do you still stand behind that?
    Mr. Hodge. Yes, absolutely.
    Senator Heller. Can you expand on any of this information? 
And what we are trying to do is get to individual tax relief. 
How can we boost an individual's income, take-home income, by 
perhaps a tax policy that works for all Americans? And starting 
here with these numbers that you show in this model.
    Mr. Hodge. Well, tax relief for individuals is important, 
but if you have not had a raise in more than a decade, a tax 
cut does not really benefit you. What we want to do is have 
policies that lift wages, lift productivity, and ultimately 
lift after-tax incomes, real living standards. And the kind of 
tax reform that we have outlined here, with the lower corporate 
tax rate and full expensing, will do that. And I think that 
that is the strongest approach to making people better off.
    Senator Heller. What would the average household prefer, a 
tax cut or a raise in income?
    Mr. Hodge. Well, I think, you know, most people want a tax 
cut. They do not really see the connection between corporate 
tax reform and the improvement in their daily lives. And we 
need to convince them that, ultimately, corporate tax reform 
will boost their standard of living in the long term. It is 
just a hard sell.
    Senator Heller. Yes. Mr. Hodges, thank you.
    Mr. Chairman, thank you for my time.
    The Chairman. Thank you, Senator.
    Senator Thune?
    Senator Thune. Thank you, Mr. Chairman. And I want to thank 
each of our witnesses for being here this morning.
    I think we have a historic opportunity with tax reform to 
reform our antiquated tax code and to address the concerns that 
I continually hear from South Dakotans on jobs and our economy.
    And last week, we had the opportunity to focus on 
individual aspects of tax reform and the importance of making 
sure it provides tax relief for middle-income taxpayers. And 
today we have an opportunity to look at the business aspect of 
tax reform, which is a critical component of this effort as 
well.
    There is significant overlap, I think, however, between the 
two hearings. Because if we can streamline and modernize our 
outdated tax code on the business side, it will enable 
corporations and pass-through businesses, both small and large, 
to reinvest, expand, create new jobs, and increase wages. And 
that means real benefits for middle-income families in South 
Dakota and across the country through the businesses that 
employ them and for many through the small businesses, farms, 
and ranches that they also own.
    This is a strong panel. I want to get into the questions 
here if I can.
    I will begin with you, Mr. Hodge. In your testimony, you 
make an important point when you note that corporate tax reform 
may not put cash in people's pockets in the same way as cuts in 
the individual rate, but that it can have a powerful effect on 
lifting after-tax incomes and living standards. And I am just 
wondering maybe if you could elaborate on that connection 
between business tax reform and tax relief for middle-class 
workers and families, especially if we assume that a reduction 
in the corporate tax rate would be accompanied by reductions in 
the individual tax rates that affect working individuals in 
this country.
    Mr. Hodge. When economists at the OECD studied which taxes 
were most harmful for growth, they found that the corporate 
income tax is the most harmful tax for economic growth, and in 
large measure because capital is the most mobile factor in the 
economy. So when we lower the tax on capital, we find that the 
economy becomes much more productive, people have better tools 
to work with, and their standards of living rise. And that 
ought to be the primary goal of tax reform, to lift people's 
real standard of living.
    And you can try to do it through just cutting their income 
taxes, but I think the right kind of business tax reform does 
the most to lift people's after-tax incomes and ultimately 
their standard of living.
    Senator Thune. Yes, thank you.
    Mr. DeBoer, in your testimony you make the case against the 
immediate expensing of real estate, given the unique nature of 
these assets. Your testimony also notes the recent MIT study 
that suggests the recovery periods for commercial real estate 
under the current tax code are out of sync with the economic 
recovery period of such property.
    Since we are trying to build a tax code that will promote 
sustained economic growth, would shortening the recovery period 
for commercial buildings from 39 years and rental housing from 
27\1/2\ years be a reasonable alternative to immediate 
expensing?
    Mr. DeBoer. Yes. We strongly believe that. And I do not 
disagree at all with what has been said about the power of 
expensing. I am simply saying that sustainability in our 
industry--it will incent our industry to build, but we see no 
benefit to building buildings that are ahead of the demand in 
the economy. It puts stress on local markets. It puts stress on 
lenders' balance sheets. And ultimately, it is not good for the 
long-term growth of the economy.
    And so we are, from our industry, more interested in 
economic lives of assets and real estate. As MIT has studied, 
real estate's proper economic life is closer to 20 years than 
39 or 27\1/2\ years.
    And by the way, there is some misunderstanding about real 
estate. Why would you depreciate a building that people see 
standing for many, many years? And these buildings are very, 
very capital-intensive. It is not just that they fall down. 
People invest money into these buildings to keep them a 
competitive part of our economy and allow these buildings to 
adapt and be flexible to accommodate business as it changes 
over time.
    And I do not think anyone here would want to move into an 
apartment or work in an office that has not been rehabbed and 
updated for 30 or 40 years. So that is what this depreciation 
is about. It is both physical wear and tear and economic 
obsolescence. So yes, I agree with what you are saying.
    Senator Thune. And you suggest, I think, a 20-year recovery 
period. Would you apply that to both residential and 
nonresidential property?
    Mr. DeBoer. I would, but there might be an argument based 
on what Senator Cantwell suggested earlier, that you may want 
to have a different life for residential versus nonresidential, 
which is in current law today. And that is there largely as an 
incentive for housing.
    Senator Thune. And lastly, should we consider expanding the 
15-year recovery period that applies to improvements to certain 
type of real property and/or shorten that period as well?
    Mr. DeBoer. Well, if tax reform adopts an expensing policy 
for all assets other than longer-lived--and that is how I would 
define it, a longer-lived asset like a structure--then I would 
say that lease-hold improvements to accommodate the business 
needs should be expensed like any other business investment, if 
that is the direction that Congress goes.
    Senator Thune. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Wyden?
    Senator Wyden. Thank you very much, Mr. Chairman.
    Let me start with you, Dr. Marron. As you know, there has 
been a lot of discussion about the President's proposal to 
create a special pass-through business income rate, which 
strikes me as a giant tax giveaway for the top 1 percent, 
masquerading under the guise of helping small businesses.
    I was trying to look through your various charts. We have a 
history in this committee of doing a lot of charts. In your 
view, how much of the benefit goes to the top 1 percent in the 
special pass-through?
    Dr. Marron. I do not have the chart right in front of me, 
but the result, as you say, was that if you do a maximum rate 
like that, by definition all the benefit has to go to folks of 
qualifying income who would be in a higher tax bracket. And so 
the overwhelming majority of it goes to people in the top 20 
percent and a very large portion goes to people in the top 1 
percent.
    Senator Wyden. Okay. Now, the administration has said--
although it has been months since they said they were going to 
get this corrected. I asked Secretary Mnuchin, who sat where 
you all are, about this. They have never done anything to 
correct it. I just would be curious what you think of this 
argument that there are ways to ensure unscrupulous individuals 
are not going to turn this particular tax break into a massive 
loophole.
    Dr. Marron. So it is a race. If you create a very large tax 
benefit to being able to declare your income in a certain 
favored form, you are going to create a lot of people all along 
the scrupulousness dimension--I am a scrupulous guy, but I 
would LLC myself if it were legal and gave the right incentives 
and did not remove my political viability--all the way to 
people who will, you know, bend the rules and break the rules.
    If you are talking about a tax gap that is 30-something for 
ordinary income and 15 for pass-throughs, that is a giant 
incentive for people to try to figure out how to get around it.
    The IRS, legislators, will write some rules to try to limit 
that. But my view of this is always that you should view it as 
an ongoing iterative game, and the folks out there in the 
business world who are looking for ways to get the lower rate 
are going to keep working on that, keep working on that, and 
over time you are going to have more of a problem.
    Senator Wyden. Well, you are right. And of course, they 
have vast arrays of talent to help them find those kinds of 
holes. And I think your point is especially important.
    Mr. Hodge, let us talk a little bit about some of the 
history on retroactive and temporary tax cuts. You all have 
done a lot of research on this. We have talked to you often on 
our bills. In 2001 and 2003, there were the Bush tax cuts. The 
advocates said, well, this is going to be a panacea of economic 
growth, and what we saw was really a mountain of debt and a 
windfall for the affluent.
    Now, there are some in Congress who want to bring back 
temporary debt-financed tax cuts, and they are making pretty 
much the same kind of grandiose promises. And my sense is, and 
you all have done a lot of work on this, that we have seen this 
movie before. You all have done a lot on this topic lately, 
demonstrating what I think really ought to be called the sugar-
high effect, where you get a small bump in the short term 
followed by a longer period of lagging economic growth.
    So if you would, tell me in your view, based on the work 
that you all are doing there, what happens when you go after 
another temporary tax cut? And I think your research shows most 
of the temporary tax cut goes to the corporate shareholders, 
people who are well-off. So why don't you give us your thoughts 
on that.
    Mr. Hodge. Sure; a temporary tax cut can be sort of the tax 
equivalent of cash for clunkers, where it can draw activity 
from the future to the present, and then ultimately future 
activity declines below baseline.
    We analyzed lowering the corporate tax rate for a short 
period of time, say even a 10-year window, and we found that it 
did have a boost in economic growth in the short term, but 
since it pulled activity from the future, long-term economic 
activity declined below baseline. So it ultimately slowed 
growth at the expense of having growth in the near term.
    Senator Wyden. And your colleagues do seem to suggest that 
most of the benefit from these temporary cuts goes to the 
corporate shareholders, a disproportionate number of whom are 
wealthy.
    Mr. Hodge. Yes, in part because, again, you are pulling 
activity forward that can have a temporary boost in corporate 
profits, and that, in the short term, will flow to shareholders 
and owners of capital rather than workers.
    Senator Wyden. I want to continue this discussion, because 
it seems to me retroactive, debt-financed tax cuts, 
particularly temporary ones, are a prescription for more 
trouble in the American economy in the long term. And that is 
why over the years what I have tried to do, most recently with 
a member of the President's Cabinet, then-Senator Coats, who 
sat over there, was to try to break that kind of cycle. So I 
appreciate the scholarship and your answers.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Warner?
    Senator Warner. Thank you, Mr. Chairman. And I appreciate 
the panel.
    I want to go back to the chairman's opening comments where 
he, I think, acknowledged, and I will acknowledge as well, that 
the United States corporate rates are some of the highest in 
the world. Now, our effective rates are not as high.
    But I guess I would like for the whole panel to comment, if 
there is any disagreement in at least the factual basis that I 
work on, that while America has statutorily the second-highest 
rate, all of our competitive countries that we compete against, 
all who have substantially lower corporate rates, all have a 
different revenue source structure than we do.
    When we look at, particularly, some of our European 
competitors that have dramatically cut rates and continue to 
cut rates, the way they make up for that is they have a VAT or 
a GST. And when you actually compare, within that same kind of 
corporate comparison, apples to apples and you look at where 
America ranks in terms of its total tax burden--State, local, 
and Federal, as a percent of our GDP--we actually rank 31st out 
of 34.
    So remarkably, the countries that have much lower corporate 
rates have actually raised a much greater share of their GDP in 
taxes, have a much higher tax burden.
    Does anyone want to counter or contradict that? I mean, I 
do not want to go down the whole list here, but I would think 
it is important when we are thinking about how we lower 
corporate rates, which I think makes sense, that you have to 
pay for it.
    And one of the things I am going to start with, Dr. 
Marron--I mean, I see today, because we are not part of this 
process yet, in The Wall Street Journal that the majority is 
talking about a $1.5-trillion tax cut. The question I have when 
you are talking about a $1.5-trillion tax cut in a country that 
already has $20 trillion in debt, accumulated debt created by 
both parties for a long time, when you also have, based upon 
some of the growth assumptions--the administration has been 
using a 3-percent growth rate while CBO has a 1.8-percent 
growth rate--the delta on just the growth rate differential 
creates an additional $3 trillion of potentially fictional 
revenue.
    If you have $3 trillion of fictional revenue there and you 
have $1.5 trillion of unpaid tax cuts, adding that $4.5 
trillion at a minimum of additional deficit-financed tax cuts, 
Dr. Marron, what effect do you think that would have on the 
economy?
    Dr. Marron. Right. So as you know, if you look at CBO's 
forecast, we are on track to add about $10 trillion to the debt 
over the next 10 years. So, adding another trillion, trillion-
and-a-half would obviously make that even a more severe 
challenge. Debt is rising faster than the economy at the 
moment. Despite the fact that we are well into an economic 
recovery, the unemployment rate is just below 5 percent. In 
normal times, this would be a period in which you would think 
about bringing deficits down, strengthening the fiscal balance 
sheet so that we will be well-positioned for challenges that 
come in the future.
    If you expanded deficits now with an unfinanced tax cut or 
only partly financed tax cut, you have the traditional problem 
that the money has to come from somewhere. The resources--it is 
really about the resources underlying that, right? The 
resources would have to come from somewhere. It would either 
crowd out private investment, or if it attracted a lot of 
overseas investment, what it would mean is that more of the 
economic output in the United States in the future would go to 
foreigners rather than Americans.
    And so either way you slice that, you end up in a situation 
where there is a significant economic drag from substantial 
increase in deficits.
    Senator Warner. And I guess what I would point out again to 
the majority is, back in 2013 when we thought about starting 
this exercise again, my Republican colleagues started with a 
unified letter saying that tax reform needs to be revenue-
neutral. And it is curious to me now, even before we get to 
dynamic scoring, that we are talking about different growth 
assumptions and somehow baking into a budget resolution the 
allowance for $1.5 trillion of unpaid tax cuts, the growth 
assumption numbers you add on some of the scoring issues.
    And when you think about one of the concerns I have--and I 
am not going to get to my other question--the challenge we 
have, as well as the aggregate amount of debt that has been 
created is, even if this was starting with a clean balance 
sheet, it would be problematic. But it is exponentially more 
problematic when you think about an era when I think most 
economists assume we are going to see a rising level of 
interest rates.
    So debt service payments alone will squeeze out our 
country's ability to make any other kind of significant 
investments. We will have entitlement programs and an Army and 
not much else.
    Comments?
    Dr. Marron. Yes, so we have been fortunate in that the 
dramatic increase in debt we have seen in the last decade or so 
has been accompanied by incredibly low interest rates. And so 
the immediate interest burden is relatively small or normal by 
historical standards.
    But if, as CBO anticipates, interest rates go back up to 
what we think of as a somewhat more normal level, right, you 
would see a dramatic increase over time as our debt rolls over 
and interest payments roll up.
    Senator Warner. And one last comment, since my time is up. 
But isn't it, I mean, roughly--and again, if anybody would 
counter this, I would be happy. But for every hundred-basis-
point increase in interest rates, with the accumulated debt we 
have now, and not even talking about some of these additionals, 
are we not talking roughly $150 billion to $160 billion a year 
of additional debt service per hundred-basis-point increase in 
interest rates, roughly?
    Dr. Marron. Yes, roughly, once it rolls over. Right. So we 
have $15 trillion in outstanding publicly held debt, right? 
Multiply that by 1 percent, and you get $150 billion a year, 
yes.
    The Chairman. Senator McCaskill?
    Senator McCaskill. Thank you, Mr. Chairman.
    Although pass-through businesses represent 95 percent of 
the businesses, the income is not so evenly distributed among 
the business owners. More than half of all pass-through income 
in the United States goes to the top 1 percent of all 
taxpayers. So the data would suggest that a simple rate cut for 
pass-throughs is a huge tax cut to the 1 percent; there is no 
question about that. It seems like this would just be an 
opportunity for more loopholes.
    You know, Dr. Marron, your testimony warned us that the 
changes to the pass-through rates could create incentives for 
gaming the tax system. Could you speak to that? And I 
appreciated the fact that Senator Warner mentioned that we are 
the only developed nation that has no kind of consumption tax. 
We are it. We are the only one. So if we are going to follow 
them down the path of a lower rate, not just for corporate, but 
also for pass-through, we are asking for a real hit on 
prosperity in this country in terms of debt. And I would like 
you to speak to that, Dr. Marron.
    And I particularly would like you to speak to--I remember 
the days when Kansas was going to be a mecca for job creation. 
They did this massive tax cut, and it was going to rain 
prosperity and wage increases. Could you explain how things 
went so awry in Kansas because of the pressures they felt in 
terms of funding public education and all the other needs they 
had in Kansas? And frankly, it has been an unmitigated disaster 
in Kansas.
    Dr. Marron. Right, so thank you. I guess I will do first 
first. So as you describe, if we go down the path of creating a 
new special pass-through business income tax rate that is lower 
than ordinary rates, just by construction that is 
systematically going to go to high-income folks, both because 
the business income is concentrated at the high end and because 
that maximum rate is, by definition, only going to help those 
people who are in higher tax brackets.
    And so mechanically, it is going to have exactly that 
effect of focusing on the high end. And it creates this 
loophole concern that people are going to restructure their 
activities to qualify for that lower rate. What we saw in 
Kansas----
    Senator McCaskill. So when you say restructure their 
activities to move to pass-through entities, that is why we 
have seen explosive growth in pass-throughs in the last decade.
    Dr. Marron. Absolutely. And there are a lot of good things 
about pass-throughs; I have nothing against pass-throughs. The 
challenge is, you do not want the tax code to over-reward them.
    Senator McCaskill. Right.
    Dr. Marron. The situation we saw in Kansas was so extreme 
that a lot of otherwise ordinary, normal people, high-income 
but otherwise normal people, would go out and restructure their 
activity solely to qualify for that, not to create any new 
economic activity. And so the net effect was, the State had 
less revenue and there was no benefit from that.
    And so what we have seen is, of course, the State is now 
walking back from that, because that is just a nonsensical 
approach to taxing and taxing pass-throughs at the State level.
    The larger point that both you and Senator Warner raised is 
about how our tax system compares to the rest of the world. 
Now, we do have States that have retail sales taxes, so we do a 
little layer of consumption tax spread across the States. But 
we are, as you described, very different from the rest of the 
world.
    The rest of the developed world has significant consumption 
taxes, value-added taxes. It is a tax rate you know how to 
administer; it is a very efficient way to raise revenue.
    People worry that those taxes are regressive. But the way 
the rest of the world deals with that is, they have substantial 
value-added taxes and then they spend some of the money in such 
a way that it offsets the regressivity.
    Senator McCaskill. Let us talk about complexity for a 
minute. How much--and any of you can address this--but how much 
more prosperity would we have, how much more economic activity 
would we have, if we could just agree on how to define a child 
and how to define a small business in the tax code?
    You know, it is unbelievable how complicated it is for 
small businesses, because there is not a consistency within the 
code in terms of what a small business actually is. I cannot 
imagine the productivity that is lost in terms of tax decisions 
that are being made just because of that added layer of 
complexity.
    Mr. Lewis. So, Senator, that is a great question. As I 
mentioned just a moment ago, the tax code will probably never 
be simple. We live in a complicated world. But it surely should 
be a lot less complex.
    The message that you just sent about how we define a child 
or how we do some of these other things, I think you have to 
look back historically how we got there. We have a situation 
where well-meaning legislators over time, for one reason or 
another, put something in, and we simply never take anything 
out. So the question is, how do we end up with so many 
retirement plans? That is confusing to the average American 
taxpayer.
    So I think that is why this opportunity today for tax 
reform is so wonderful. I mean, we are 31 years next month 
since the last time we did this. This is a time to look at it 
and clean it up, because American taxpayers need more time to 
worry about running their businesses and less time about how to 
comply with the code.
    Senator McCaskill. Do you think that it is realistic that 
Congress can do that part of it well in 60 days?
    Mr. Lewis. Well----
    Senator McCaskill. Come on, you know, let us tell the truth 
here. Can we actually provide permanency, stability, 
predictability, and less complexity out of this congressional 
body in 60 days?
    Mr. Lewis. I will say this. I will say that the effort for 
tax reform has been happening for a long time. I hearken back 
to Chairman Camp's H.R. 1 in 2014. There has been a lot of work 
that has gone into that effort and has got us to this point. 
Whether or not you are close enough to the finish line, I think 
that is something that you will have to decide. But in terms of 
effort, you know, 3 or 4 years of constant talking and going 
back and forth, I know is welcome relief for taxpayers. And I 
wish you well in that process.
    Senator McCaskill. Thank you.
    The Chairman. Thank you, Senator.
    Senator Stabenow?
    Senator Stabenow. Thank you very much, Mr. Chairman.
    First, let me say that I support tax reform that puts money 
in the pockets of hardworking people in Michigan and across the 
country. And I want to make sure that the tax code incentivizes 
American jobs.
    And, when we look at what we need to be doing, it is also 
important that we are critically analyzing subsidies that do 
not make any sense anymore. And at the top of the list for me 
are the subsidies provided to the top five big oil companies 
through the tax code. Those may have made sense 100 years ago 
when they were created; they make absolutely no sense now.
    In many cases, these tax breaks are really ridiculous, 
saying that oil companies are treated as manufacturers for 
purposes of the domestic manufacturing deduction, for example. 
Oil companies have enjoyed billions of dollars in special tax 
breaks totaling $470 billion. And while receiving those tax 
benefits, they have enormous profits. To keep the tax 
incentives, they then turn around, the top five companies, and 
spend a lot of money on lobbying to do that. And I am sure that 
they are doing that right now.
    So my question is, and, Dr. Marron, I would say to you, 
does the evidence show that these oil company subsidies provide 
benefits to consumers that would warrant keeping them in place 
as we do tax reform?
    Dr. Marron. I will say I have not seen any evidence that 
would suggest that.
    Senator Stabenow. Thank you. What should we be doing when 
we are talking about effective ways to target tax dollars to 
create American jobs and put more money back in the pockets of 
the majority of Americans?
    Dr. Marron. So on the business side, I think the key thing 
is that you want to encourage investment in the United States 
and you want to encourage the kind of investment that has the 
most benefits. So things like research and development can have 
spillover benefits to the rest of the economy, and you would 
like to encourage that.
    You know, basically, capital accumulation, equipment and 
whatnot, in the United States makes workers more productive. 
And over time--I know we have had issues with this in recent 
years--but over time the evidence is still very strong that if 
workers have more and better capital to work with, that 
eventually shows up in their wages, salaries, and benefits.
    Senator Stabenow. Well, my concern is, as we are debating 
right now, various proposals we have seen would actually do 
away with manufacturing incentives, cut interest deductibility, 
maybe cut cost recovery and use the money simply to reduce 
rates, and that is one of the big debates right now.
    And my concern is, that means you are incentivizing a new 
advanced manufacturing facility in Michigan the same way you 
would be if it was in Mumbai, or incentivizing an American job 
the same way that you would be incentivizing a job being 
created in China.
    And I think that is a big problem as we are having this 
debate right now. And so how would reducing the tax incentives 
that encourage companies to invest here impact their decision 
as to whether they would invest and create jobs in the United 
States?
    Dr. Marron. This goes a little bit back to Senator 
Roberts's discussion. I do not know if you all were here when 
he talked about the red ant problem. So there are a lot of 
moving parts that affect business decisions about where to 
invest and how to invest. And the challenge for you--and this 
is why I said in my opening remarks that I feel your pain, 
because it is very hard to balance all of those. The rate 
matters, the treatment of depreciation and expensing matters, 
the treatment of interest deductibility matters, and the things 
focused on particular industries like manufacturing all matter.
    And the challenge is, how do you put together a package of 
those that puts us on a trajectory of more growth? And I think 
the answer is that there are good arguments for bringing the 
top rate down, because it is so out of line with the rest of 
the world. There are good arguments for making some amount of 
depreciation even more favorable and treating investment in the 
U.S. more favorably. But then you are left with a situation of, 
how do you pay for that?
    Limiting interest deductibility is the first thing that 
comes to mind. And then we get into the discussion we were 
having previously about other potential revenue sources.
    Senator Stabenow. But when we are looking at things like 
cutting interest deductibility, we are actually seeing the 
possibility of raising taxes on small business and others that 
are actually growing and creating jobs in our country.
    Dr. Marron. Yes. And so one of the big challenges is that 
there are some portions of our economy, particularly small 
business, where we have already given them expensing. So they 
already have full expensing for their investments, and so a tax 
reform proposal that would move toward expensing but limit 
interest deductibility will not help them. So we are kind of--
this is one of the corners you find yourself painted into, that 
while a move towards expensing and limited interest 
deductibility could be attractive for many larger businesses 
and could encourage more investment in the United States, it 
does not do anything for the small businesses that already get 
to take advantage of expensing.
    Senator Stabenow. Thank you.
    Mr. Chairman, I hope we can come together and do something 
that actually does more than a trickle-down tax cut for the top 
1 percent and that would tackle the subsidies that do not make 
sense in the tax code and reinvest those in the incentives that 
are going to create jobs in America. Thank you.
    The Chairman. Well, thank you, Senator.
    This has been a particularly good panel. I have really 
enjoyed each and every one of you and your comments.
    And I have heard from my colleagues across the aisle the 
parade of horribles that will ensue if Congress enacts a 
proposal to provide a lower business income tax rate for pass-
through entities: that it will only benefit the rich and that 
it will, according to Dr. Marron, quote, ``inspire tax 
avoidance,'' which it may do.
    And yet, two of you today have come to the table with what 
I consider to be thoughtful approaches on how to address the 
concerns that compensation or wage income that is taxed at 
ordinary income tax rates will be inappropriately 
recharacterized as business income subject to a preferential 
business income tax rate.
    I would like to have Mr. Lewis and then Mr. DeBoer comment 
on their proposals, whether the concerns raised are legitimate, 
but perhaps overblown, and provide us with their thoughts on 
administrative issues associated with their proposals, if they 
would.
    Mr. Lewis. Okay. So thank you for the question, Senator. 
First of all, our laws should encourage and not discourage the 
formation of pass-through entities. The reality, and I think 
the panel has indicated this today, is that so much of our 
business is conducted through pass-through form in this 
country. And we are competing globally with companies that are 
structured in different ways.
    One thing to keep in mind is that a pass-through entity has 
the same kind of demands that a C corporation has. They have to 
have the investment in tangible and intangible property, real 
estate, technology, intellectual property, and, most 
importantly, human capital. All businesses have uncertainty and 
risk, and there should be a consistency and fair treatment of 
all.
    So now to your point about the gamesmanship and the 
potential here. There are a lot of different issues that 
entrepreneurs consider when they make the decision as to what 
entity to form. Income tax is important, and I do not want to 
diminish that, but the reality is, as I have worked with 
individuals, that is only one of about a dozen. They also 
consider implications of losing one's tax benefits, like fringe 
benefits, losing unemployment coverage, covering one's own 
health insurance now because they have gone out to form their 
own business, and then also the costs of managing a business: 
malpractice insurance, training, technology, software. This is 
not just a flip-the-switch and walk-across-the-street-type 
proposal.
    So that is why we have proposed an anti-abuse-type regime, 
because I think you are right. And the proposal we have come up 
with is, for once, codifying the reasonable compensation 
standard that is now just administered through the courts.
    And then we should go further, as some of the proposals 
do--H.R. 1 from Chairman Camp, for instance--and come up with 
some sort of, I think some have called it a rough justice, but 
a split between earnings as an employee versus earnings from 
investment, and make that a safe harbor so that it is more 
administrable.
    So I think what you want to focus on is to create some sort 
of a rule into the law to make sure that we try to get at the 
gamesmanship, but then also provide an easily administered 
provision for the IRS.
    The Chairman. Well, thank you.
    Mr. DeBoer. A couple of maybe bigger-picture points first, 
if I may, Mr. Chairman. Senator Stabenow talked about how we 
can help Americans and American businesses. I think the first 
thing to keep in mind is not to do any harm to them. And some 
of the proposals, particularly on the revenue offset side, 
dramatically impact domestically based, capital-intensive 
industries that are conducted in pass-through format. And that 
is why we are so interested in this pass-through rate.
    I understand Senator McCaskill's concern on the income to 
the top 1 percent. I would like to look at that data. I think 
that may include compensation for services to the entity, and 
we are very, very interested, as Mr. Lewis is, in making sure 
that that income does not come down and be taxed at a new lower 
rate.
    We have done a significant amount of work here to try to 
look at the relationship between partners in a pass-through 
entity and how much service is provided to the entity itself. 
And our proposal at first blush is a little bit complicated. We 
are starting to reach out to staff and flesh it out.
    And I guess for purposes of this hearing, I simply want to 
repeat what I said earlier in my opening statement. We are 
pledged to work with the committee, Senator Wyden, Senator 
McCaskill, and others, to make sure that with true compensation 
to the entity, there is no gamesmanship.
    But the fact of the matter is, these pass-through entities 
do earn income, and that income, whether it is from rents in 
the real estate business or development fees or what have you, 
that income should be taxed lower if in fact corporate taxes 
are going to come down.
    And one other thing that I would say: these pass-through 
entities are the vehicle of choice for startup businesses, they 
are the vehicle of choice for minority-owned businesses, and 
this is how most Americans who are interested in using their 
business acumen to develop jobs and expand our economy, this is 
the format that they do.
    So encouraging activity in this area is very much 
commendable, and thank you for looking at this. It is a 
complicated issue, but one that I have no doubt you and your 
staff can tackle.
    The Chairman. Well, thanks to all four of you. I think this 
has been a really interesting hearing. And I want to thank you 
all for your attendance and for your contributions here today.
    As I noted last week, this committee's approach to tax 
reform will be methodical and inclusive. That is why hearings 
like the one we have just had today will be critically 
important as we continue to evaluate the tax code and continue 
with marking up a bill that will enact meaningful, durable, and 
efficient reforms.
    My strong preference is that our evaluations and 
determinations and the final language of any bill we come up 
with will be bipartisan. And I intend to work towards that end. 
That means we have a lot of work to do, but I am optimistic 
that we can get it done.
    For any of my colleagues who have written questions for the 
record, I ask that you submit them by the close of business on 
September 28th.
    And with that, I again want to thank all four of you for 
being here and for your excellent testimony.
    And we will recess until further notice.
    [Whereupon, at 12:25 p.m., the hearing was concluded.]

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


Prepared Statement of Jeffrey D. DeBoer, President and Chief Executive 
                  Officer, The Real Estate Roundtable
    Chairman Hatch, Ranking Member Wyden, and members of the committee, 
my name is Jeffrey DeBoer, and I am president and chief executive 
officer of The Real Estate Roundtable. Thank you for the opportunity to 
testify this morning on business tax reform on behalf of Roundtable 
members and the real estate industry.

    The Real Estate Roundtable brings together leaders of the Nation's 
top publicly held and privately owned real estate ownership, 
development, lending, and management firms and leaders of major 
national real estate trade associations. Collectively, Roundtable 
members' portfolios contain over 12 billion square feet of office, 
retail, and industrial properties valued at more than $1 trillion; over 
1.5 million apartment units; and in excess of 2.5 million hotel rooms. 
Participating trade associations represent more than 1.5 million people 
involved in virtually every aspect of the real estate business.

    We agree with the members of this committee, House leaders, and the 
President that the time to reform the tax code is now. We share your 
commitment to pro-growth tax reform that will move our economy forward 
and help produce better jobs and bigger paychecks for all Americans. 
Our industry has appreciated the open dialogue and opportunity to work 
constructively with members and staff of this committee to ensure that 
tax reform achieves its full potential.

    My 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.
                      real estate and the economy
    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 many and varied economic contributions, the real estate 
industry is one of the leading job creators in the United States, 
employing over 13 million Americans--more than 1 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 $13 to $15 trillion, a level that 
roughly matches the market cap of domestic companies on the New York 
Stock Exchange. Investor-owned commercial properties account for 
roughly 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 conservatively leveraged with about $3.8 
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 its 
sale/transfer represent the largest source--in some cases approximately 
70 percent--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. Every 
homeowner in America who has had to repair a roof or to replace a 
furnace understands and appreciates that buildings are not a one-time, 
fixed expense. Real estate development, and the real estate 
improvements necessary for a building to avoid obsolescence, serves as 
a constant and powerful economic multiplier. Real estate capital 
expenditures ripple through the economy--creating jobs and generating 
economic growth.

    Real estate investment is a long-term commitment and involves time 
horizons measured in 5 to 10 year increments, or longer--not the 3-
month quarters that other industries and asset classes use to measure 
their performance. Consequently, from small towns to urban centers, 
real estate ownership in the United States represents a positive, 
bullish bet on America's economic future.

    At the same time, the health and stability of U.S. real estate is 
heavily dependent on broader trends in the economy. Debt and deficits 
matter to real estate because of their impact on interest rates, the 
cost of borrowing, and the availability of private capital for 
investment and job creation. On one hand, some tax policies may cease 
to be pro-growth if they are financed through an increase in the 
Federal deficit. On the other hand, some revenue-raising options under 
discussion would slow growth and put downward pressure on wages and 
employment, so revenue neutrality for its own sake is not desirable.

    Ultimately, the supply of real estate should be responsive to 
demand in order to support sustainable economic growth, and demand for 
real estate correlates with the overall level of economic activity. 
Thus, where goes the economy, so goes real estate. And where goes real 
estate, so goes the economy. The two are inextricably linked.
       principles for sustainable, pro-growth business tax reform
    The real estate industry agrees that tax simplification and reform 
is needed and long overdue. We should restructure our Nation's tax laws 
to unleash entrepreneurship, capital formation, and job creation. At 
the same time, Congress should undertake comprehensive tax reform 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.

    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. Real estate 
investment should be demand driven, not tax driven. In short, we should 
avoid policies that create a ``sugar high'' that is fleeting and 
potentially damaging to our future economic health.

    Because of the long-term commitment required in real estate 
investment, we are deeply concerned with how tax changes will affect 
jobs, wages, and economic activity not just tomorrow, but well into the 
future. In order to improve the economy's trajectory, growth should be 
predicated on sound reforms that change underlying economic conditions.

    Fortunately, today's commercial real estate markets are grounded in 
strong fundamentals, as indicated by generally low vacancy rates, 
positive growth of rents, and stable net operating income. By most 
measures, commercial real estate conditions accurately reflect market 
supply and demand.\1\ Sources of equity and debt capital are largely 
available for economically viable real estate projects. In some parts 
of the country and in certain markets, initial signs of oversupply are 
starting to emerge. These signs are typical and expected in a healthy 
real estate cycle.
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    \1\ The Real Estate Roundtable, ``Sentiment Index: Second Quarter 
2017'' (May 5, 2017), available at: http://www.rer.org/Q2-2017-RER-
Sentiment-Index.

    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 job growth, 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. 
Repealing the Foreign Investment in Real Property Tax Act (FIRPTA) 
would open up new sources of private capital for U.S. real estate and 
infrastructure projects. Authorizing States to impose sales tax 
collection requirements on remote sellers would end harmful tax 
discrimination against brick and mortar retailers and improve the 
economic well-being of local communities.

    Alternatively, some reforms might prove counter-productive to long-
term economic growth. Of major concern are proposals that could result 
in substantial losses in real estate valuation. Lower values could 
result from artificially stimulating excess supply, or adopting 
policies that increase the cost of capital through higher borrowing 
costs. 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 
over-reaching and over-reactive policies--in some cases on a 
retroactive basis. Significant, negative policy changes were 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.

    A nostalgia for the Tax Reform Act of 1986 has grown and spread in 
Washington over the years. The 1986 Act is frequently cited as the 
model that 21st-century tax reform should strive to mimic. The actual 
economic evidence is much less favorable.\2\ If there is a major lesson 
we can draw from the 1986 Act, perhaps it is this: revenue-raising 
policy changes tend to be much more enduring than reductions in tax 
rates, which are more easily undone to accommodate changing needs 
related to fiscal policy.\3\
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    \2\ Both economic growth and job creation slowed dramatically in 
the United States for a number of reasons after the Tax Reform Act of 
1986 took effect. In the 5 years before the legislation was adopted 
(1982-1986), the United States' real rate of economic growth averaged 
3.55 percent. In the 5 years after enactment of the 1986 Act (1987-
1991), the United States' economic growth rate averaged 2.64 percent. 
World Bank National Accounts Database (accessed September 14, 2017). 
Similarly, in the 5 years prior to its enactment (1982-1986), the 
United States created an average of 160,000 jobs per month. In the 5 
years after its passage (1987-1991), the United States created 130,000 
jobs per month, or 30,000 fewer than before its enactment. U.S. 
Department of Labor, Bureau of Labor Statistics, Current Employment 
Statistics Survey (accessed September 14, 2017).
    \3\ The 28 percent maximum individual income tax rate in the Tax 
Reform Act of 1986 lasted 3 years before increasing to 31 percent in a 
bipartisan budget agreement. Three years later, in 1993, the maximum 
income tax rate increased again to 39.6 percent. In contrast, the base 
broadeners, such as the lengthening of cost recovery schedules and 
limitations on passive activity losses, became permanent fixtures of 
the tax code.

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

    1.  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;

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

    3.  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

    4.  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.
  potential elements of business tax reform and their impact on real 
                                 estate
    In June of last year, 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. We support the blueprint's underlying 
objectives, including the desire to reform the tax system to promote 
economic growth, capital formation, and job creation. In addition, this 
committee has explored several tax reform options, including corporate 
tax integration. Senator Wyden has released a number of tax reform 
discussion drafts related to various issue areas. In April, the 
President's economic team released a one-page outline of the 
administration's tax reform priorities. In July, congressional leaders, 
the Treasury Secretary, and the Director of the National Economic 
Council issued a joint statement identifying several areas of 
agreement. While the details of tax reform remain uncertain, these 
events have shed light on the potential contours of comprehensive tax 
legislation. The remainder of my testimony will focus on specific 
elements of business tax reform under consideration. Of course, our 
views and input will continue to evolve as additional information and 
details are made available.
The Business Interest Deduction--An Ordinary and Necessary Expense 
        Critical to Real Estate Ownership, Development, and Financing
    The House Blueprint and other reform proposals have advocated 
limiting or repealing the deductibility of net interest expense for 
business-related debt. Restrictions on interest deductibility would 
cause enormous damage to U.S. commercial real estate by dragging down 
property values and discouraging new investment.

    Access to financing and credit is critical to the health of U.S. 
real estate and the overall economy. As a general matter, business 
interest expense is appropriately deducted under the basic principle 
that interest is an ordinary and necessary business expense. For real 
estate in particular, because the vast majority of real estate is held 
in pass-through form, the interest deduction does not result in a tax-
induced distortion in investment financing decisions.

    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. America's capital 
markets are the deepest in the world and provide our economy with a 
valuable competitive advantage.

    Borrowing is not limited to large companies--four out of five small 
businesses rely on debt financing. Businesses rely on credit for 
working capital and to weather shifts in demand. Limiting the 
deductibility of interest would increase the cost of capital, 
discouraging business formation and making it harder to grow into 
larger businesses. Over time, rising interest rates will magnify the 
harm, potentially leading to greater financial volatility and higher 
default rates.

    The notion that business interest should be deductible is deeply 
ingrained in our economic system and precedes the modern income tax 
itself. The corporate income tax of 1894 included a deduction for 
business interest. 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. Any economic bias in favor of debt-financed investment 
principally relates to the tax penalty on the shareholders of C 
corporations, who are double-taxed on their equity investments. Real 
estate is held typically in pass-through form, and the interest 
deduction does not result in a tax subsidy for debt-financed real 
estate investment.

    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. 
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.

    The burden of changing the deductibility of interest 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. 
Restrictions may also impede efforts to attract private capital for 
infrastructure investment.

    Private-sector economists have modeled for the industry the impact 
that elimination of the deductibility of business interest would have 
on real estate investment and property values. They examined tax reform 
based on the rates and structure of the House Blueprint, but without 
the immediate expensing of structures. Their research suggests the 
negative impact on property values and the after-tax returns on real 
estate investment would be severe. For all of these reasons, Congress 
should ensure that tax reform preserves the current tax treatment of 
business interest.
Cost Recovery and the Expensing of Capital Investment--Tax Rules Should 
        Track the Actual Economics of Real Estate Ownership
    Rather than taxing businesses on their net income, the House 
Blueprint seeks to tax businesses on their net cash flow. For a 
domestic business, 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. While the joint statement in July appeared to move 
away from a complete cash flow business tax system, it did promise 
``unprecedented'' expensing of capital investment.

    Economic studies suggest that expensing in the abstract is a 
powerful, pro-growth tax policy. Personal property and certain real 
estate assets already benefit from accelerated and bonus depreciation. 
Today, 90 percent of the cost of an investment in 3-year property is 
recovered for tax purposes within the first 18 months of its use. Five-
year property is 78 percent recovered in the first 18 months. Even 7-
year property is nearly 70 percent recovered in the first 18 months.\4\ 
Expensing these short-lived asset classes makes sense. Current tax 
policy is already well on the way towards the expensing of equipment 
and machinery, and full expensing of these assets may offer significant 
tax simplification advantages. Alternatively, the committee could 
consider proposals aimed at simplifying cost recovery for short-lived 
assets, such as Senator Wyden's pooling proposal.
---------------------------------------------------------------------------
    \4\ David Mericle and Dan Stuyven, ``Corporate Tax Reform: Trading 
Interest Deductibility for Full Capex Expensing'' (Goldman Sachs 
Economics Research, November 30, 2016). See also Ryan Corcoran et al., 
``Understand Common Complexities When Applying Bonus Depreciation,'' 
RSM Insight Article (February 7, 2017).

    However, real estate is different from these other capital assets. 
Structures are long-lived, require constant infusions of capital, and 
typically sell for a gain. Thus, real estate is subject to much longer 
recovery periods and slower recovery methods. Expensing real estate 
would constitute a much more dramatic shift from current law with 
unknown consequences. The challenges associated with transitioning real 
estate to an expensing regime are immense and, likely, prohibitively 
---------------------------------------------------------------------------
costly.

    The Tax Foundation's own analysis of the economic impact of 
immediate expensing reveals that nearly 73 percent of the boost to 
economic growth generated from the full expensing of capital investment 
would come directly from new real estate construction, development, and 
investment.\5\ While real estate represents a large and important share 
of the U.S. economy, it is not \3/4\ of the overall pie. The Tax 
Foundation analysis suggests that the boost to GDP from immediate 
expensing would not drive a broad-based, demand-driven increase in 
economic activity. On the contrary, it suggests that any boost to 
short-term growth would stem from an untested tax policy that is likely 
to over-stimulate real estate markets.
---------------------------------------------------------------------------
    \5\ Stephen J. Entin, ``Tax Treatment of Structures Under 
Expensing'' (May 24, 2017).

    The industry concerns with expensing are based on historical 
experience. Accelerated depreciation of real estate in the early 1980s 
led to tax driven, uneconomic investment. Tax-motivated 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. No other major country in the world has immediate expensing of 
real estate. The market implications of expensing real estate are 
risky, untested, and unpredictable. 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).

    The House 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, as discussed above, 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.

    Land represents a major share, on average roughly 30 percent, of 
the value of real estate. The House 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.

    Current cost recovery rules do need reform. The real estate 
industry favors tax rules that closely reflect the economics of 
transactions. Existing depreciation schedules are too long. The 
Massachusetts Institute of Technology (MIT) recently conducted a 
comprehensive study on the rate of economic depreciation for commercial 
real estate.\6\ MIT analyzed over 120,000 actual transactions and 
13,000 land/development sites and developed a model of the entire life 
cycle of commercial property. For the first time, ongoing capital 
expenditures were added to the depreciation analysis. The research 
makes great strides in separating the value of land from the value of 
structures. The MIT study controlled for property and location 
characteristics much more extensively than any prior published 
research. The study is a tremendous improvement over prior government 
studies, which rely on data from the 1960s and 1970s. The bottom line 
is that the appropriate straight-line depreciations periods for real 
estate should be closer to 20 years, not 27.5 or 39 years. Shortening 
the straight-line depreciation of real estate to 20 years, rather than 
expensing, would spur investment that is sustainable and economically 
sound.
---------------------------------------------------------------------------
    \6\ Professor David Geltner and Sheharyar Bokhari, ``Commercial 
Buildings Capital Consumption in the United States,'' (MIT Center for 
Real Estate, November 2015); see also Andrew B. Lyon and William A. 
McBride, ``Tax Policy Implications of New Measures of Building 
Depreciation,'' Tax Notes (June 20, 2016).

    With respect to depreciation ``recapture,'' the tax law should 
continue to 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.
Pass-Through Reform: Tax Changes Should Promote Growth and 
        Entrepreneurship for All Forms of Business Activity
    Our pass-through regime is a competitive strength of the U.S. tax 
system, not a burden. Entity choice is a differentiator that 
contributes to our entrepreneurial culture. The expansion of the pass-
through sector has allowed American businesses to avoid the rigid 
nature of the corporate form and its many demands on legal structure 
and governance that are unrelated to tax considerations. Partnership 
tax rules promote job creation by increasing business flexibility and 
facilitating the pooling of expertise, capital, and know-how under one 
roof. Partnerships can allocate the risks and rewards of the enterprise 
as they choose, provided the distribution of profits and losses have 
substantial economic effect. The result is a more dynamic business 
environment that promotes innovation, productivity, and appropriate 
levels of risk taking that are responsive to the needs of both limited 
investors and general partners.

    Real estate investment, new construction and development, and 
rental income constitute a significant share of pass-through business 
activity. Half of the country's nearly 4 million partnerships are real 
estate partnerships. Pass-through entities (partnerships, LLCs, and S 
corporations), as well as real estate investment trusts (REITs), are 
ideal for real estate investment because they give investors 
flexibility in how they structure the risks and rewards of the 
business.

    These partnerships include a wide variety of arrangements that 
range from two friends who purchase, improve, and lease a modest rental 
property to a large private real estate fund that raises capital from 
sophisticated institutional investors. Similarly, listed REITs provide 
the opportunity for small investors to invest in large scale, 
diversified real estate operations using the same single tax system 
available to partners in partnerships.

    Recent tax reform proposals from congressional leaders and the 
administration would establish a special tax rate applicable to the 
business income of pass-through entities and sole proprietorships. Care 
should be taken when creating a new rate structure for pass-throughs, 
including REITs, to avoid an entity level tax or arbitrary rules that 
penalize general partners or raise the tax burden on carried interest.

    The pass-through rate should seek to spur economic growth and job 
creation by reducing the tax burden on business formation and 
entrepreneurship. With this in mind, a special tax regime for pass-
through entities should take into account the types of activity and 
income that most commonly arise in noncorporate form. The pass-through 
rate should avoid ``cliffs,'' phase-outs, and carve-outs that create 
new economic distortions, discourage business growth, or aim to steer 
investment to certain government-favored activities. Similarly, the 
pass-through rate should avoid asset or revenue tests that ignore 
differences in the capital intensity and financing structures of 
certain industries.

    Further, tax reform should maintain equivalence with respect to the 
taxation of rent and interest, whether the rent or interest is 
collected through a partnership, a limited liability company, an S 
corporation, or a REIT. Under current law, a dollar of rental or 
interest income, whether received through a REIT or a pass-through 
entity such as a partnership, has the same rate, character and timing 
for tax purposes. A shift away from equivalence would discriminate 
against REIT-based rent or interest received by owners of the REITs, 
even though REITs are not permitted to keep the rent or interest and 
must pay it out annually to owners.

    Lastly, the pass-through rate should avoid changes that 
unintentionally reduce incentives for entrepreneurial risk-taking and 
capital formation. For example, the pass-through rate should preserve a 
partnership's ability to extend participation in the capital 
appreciation of the business and its assets to a general partner who 
bears risk and contributes sweat equity. The character of income should 
continue to be determined at the partnership level.

    The Real Estate Roundtable's Tax Policy Advisory Committee has 
produced a white paper that suggests one possible approach for how to 
design a reduced tax rate applicable to pass-through business income.

    In short, rather than specifically seeking to measure reasonable 
compensation or create an arbitrary rule that taxes a specific 
percentage of pass-through income as ordinary and a percentage at the 
business rate, the proposal looks at the relationships between the 
partners. If a partner spends only a de minimis number of hours 
providing services, then all of the partner's income is taxed at the 
pass-through rate. If there are limited partners earning the same 
return as the partner providing services (i.e., providing a 
``benchmark''), then all the service partner's income is taxed at the 
pass-through rate. Finally, if there is no benchmark provided by 
outside investors, then the service partner would qualify for the pass-
through rate to the extent of a specified return on investment (perhaps 
12 percent). Amounts above the specified percentage would be taxed as 
ordinary income.

    This approach would provide greater certainty to taxpayers at the 
outset of a business venture. It would eliminate many of the 
administrative challenges associated with measuring reasonable 
compensation and create fewer opportunities for abuse. The white paper 
acknowledges that there may be situations where an approach based on 
reasonable compensation or other factors may be appropriate and more 
equitable. The proposal only relates to the operating income of a pass-
through business.
Capital Gains and Entrepreneurial Risk-Taking--A Key Differentiator 
        That Encourages Vibrant and Dynamic Economic Growth
    The tax code has historically encouraged and rewarded risk-taking 
and entrepreneurship, and our tax rules have recognized that risk can 
involve much more than the contribution of capital or cash. Low capital 
gains tax rates help stimulate economic growth, increase investment, 
and create jobs. In addition to encouraging risk-taking and 
entrepreneurship--core strengths of the American economic model--low 
capital gains rates reduce the tax-driven ``lock up'' of assets that 
prevents properties from being put to their best and most efficient 
use. Low capital gains taxes also minimize distortions that result from 
taxing inflation-induced, uneconomic gains.

    Because of the capital-intensive nature of long-lived real estate 
assets, real estate partnerships often bring together (1) a general 
partner who manages the business in exchange for an annual management 
fee and a share of the profits and (2) investors who serve as limited 
partners and contribute capital. Incorporating ``carried interest'' 
into the partnership structure allows entrepreneurs to match their 
expertise and risk assumption with financial partners and aligns the 
parties' economic interests so that entrepreneurial risk taking is 
viable.

    Tax reform should preserve the longstanding rule that determines 
the character of partnership income at the partnership level. Changes 
to carried interest taxation would instill substantial uncertainty in 
the marketplace and have a chilling effect on capital investment. 
Congress should reject legislation that specifically targets capital 
gain on real estate sales (including carried interest), and any 
comprehensive tax restructuring should continue to encourage capital 
formation and appropriate entrepreneurial risk taking for the benefit 
of the broader economy and job creation.
Like-Kind Exchanges: A Valuable Tool for Business Expansion, Growth, 
        and Job Creation
    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 
for full tax deferral, 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 House 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 involving real 
estate found that they lead to greater capital expenditures, 
investment, and tax revenue while reducing the use of leverage and 
improving market liquidity.\7\ 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.\8\ 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.
---------------------------------------------------------------------------
    \7\ 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.
    \8\ EY, ``Economic Impact of Repealing Like-Kind Exchange Rules'' 
(November 2015), available at: http://www.1031taxreform.com/
1031economics.
---------------------------------------------------------------------------
State and Local Tax Deduction: Vital to Economic Health and Well-Being 
        of Local Communities
    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.
Transition Rules/Technical Adjustments: Tax Reform Must Avoid Past 
        Mistakes, Provide Well-Designed Transition Regime
    The $13-$15 trillion of existing commercial real estate stock and 
$3.8 trillion of commercial real estate mortgage debt creates immense 
transition challenges for tax reform. The stock of existing commercial 
real estate is more than 12 times the size of total annual private 
investment in equipment and machinery. Retroactive tax changes and 
poorly designed transition rules in the Tax Reform Act of 1986 
triggered a real estate depression and economic recession. Those 
reforms (primarily, the passive activity loss rules) were minor 
compared to the types of changes contemplated in the House Blueprint. 
Grandfathering existing investment under the current rules, alone, is 
not sufficient if new real estate investment is subject to a 
dramatically different regime. Tax reform should provide a well-
designed transition regime that minimizes dislocation in real estate 
markets.

    Additionally, care should be taken to adjust the REIT rules 
appropriately to ensure that the congressional intent to allow average 
investors to access high quality commercial real estate is not 
hampered.
Foreign Investment in Real Property Tax Act (FIRPTA): Reform Could 
        Boost 
        U.S. Real Estate and Infrastructure by Repealing Outdated 
        Barriers to Foreign Capital
    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 ubiquitous, it is easy to 
overlook its positive connection to the fabric of our Nation. 
Commercial real estate is where America lives, works, shops, plays, and 
invests. The right tax policy can, for the benefit of all Americans, 
help commercial real estate: create and maintain good jobs, lift 
retirement savings, reduce energy consumption, and improve the quality 
of life in local communities.

    The Real Estate Roundtable is fully committed to working with the 
Senate Committee on Finance to achieve a bold business tax reform 
outcome that serves the overall economy. We appreciate your 
consideration of these issues.

                                 ______
                                 
        Questions Submitted for the Record to Jeffrey D. DeBoer
               Questions Submitted by Hon. Orrin G. Hatch
    Question. Mr. DeBoer, in your testimony you cite the Tax 
Foundation's analysis of the economic impact of immediate expensing, 
which found that 73 percent of the gains in economic growth from full 
expensing would come from real estate construction, development, and 
investment. You raised some serious concerns about full expensing, 
indicating that it would ``over-stimulate'' real estate markets. Would 
you tell us more about the impacts of full expensing on the real estate 
industry?

    Answer. Senator, today, economic fundamentals are driving real 
estate investment decisions. Following a period of healthy markets with 
low vacancies, rising rents, and stable operating income, some early 
signs of oversupply are emerging in certain markets. While there are 
important exceptions (e.g., foreign investors and FIRPTA), the tax code 
is not inhibiting real estate activity.

    In an income tax system, cost recovery rules should align with the 
economic life of income-producing capital assets. Real estate is a 
long-lived asset. Full and immediate expensing of commercial real 
estate would distort the economics of real estate investment decisions. 
Expensing would encourage developers to construct new buildings, 
regardless of whether there is sufficient economic demand for the 
space, and lead to unsustainable, tax-motivated investment. In 
addition, full expensing would create large tax losses that create 
incentives for transactions that have nothing to do with the underlying 
commercial real estate needs of our property markets. Lastly, full 
expensing would generate enormous transition challenges with respect to 
the existing $13-15 trillion in commercial real estate in the United 
States.

    The Roundtable's concern with over-stimulative tax policy is well-
grounded and based on prior experience. The Economic Recovery Tax Act 
of 1981 contained significant new tax incentives for commercial real 
estate construction, including greatly accelerated cost recovery 
schedules. Not surprisingly, the private sector responded to these 
incentives. In just the 2 years between 1983 and 1985, the constant 
dollar value of commercial construction increased 50 percent (Lynn 
Browne and Karl Case, How the Commercial Real Estate Boom Undid the 
Banks, Federal Reserve Bank of Boston Conference Proceedings, vol. 36, 
57-113, 1992). The distribution of investment in the economy was 
artificially skewed toward commercial real estate. About 14 percent of 
total nonresidential investment was devoted to commercial construction 
in the mid-1980s, compared to 8 percent in the second half of the 
1970s. Id. While other factors also contributed to overbuilding, such 
as bank lending practices and the availability of tax shelters, 
accelerated cost recovery is widely regarded as a principal factor. See 
D'Ann Petersen et al., ``The Role of Tax Policy in the Boom/Bust Cycle 
of the Texas Construction Sector,'' Federal Reserve Bank of Dallas, 
Working Paper 94-13 (1994); Raymond E. Owens, ``Commercial Real Estate 
Overbuilding in the 1980s: Beyond the Hog Cycle,'' Federal Reserve Bank 
of Richmond, Working Paper 94-06 (1994).

    The surge in uneconomic, tax-driven investment was ultimately 
unsustainable, and Congress reversed the tax policies that contributed 
to the over-construction in the Tax Reform Act of 1986. The policies 
enacted in 1986 were over-reactive, and in some cases, applied 
retroactively. Policymakers should avoid making similar mistakes in 
2017. Tax reform should shorten real estate cost recovery rules to 
reflect the useful live of commercial real estate structures, which MIT 
research suggests is closer to 20 years.

    Question. I have heard from my colleagues across the aisle the 
parade of horribles that will ensue if Congress enacts a proposal to 
provide a lower business income tax rate for pass-through entities--
that it will only benefit the rich and that it will, according to Dr. 
Marron, ``inspire tax avoidance.'' And yet two of the witnesses came to 
the table with thoughtful approaches on how to address the concerns 
that compensation, or wage income, that is taxed at ordinary income tax 
rates will be inappropriately recharacterized as business income 
subject to a preferential business income tax rate. I'd like to have 
you comment on their proposals, whether the concerns raised are 
legitimate but perhaps overblown, and provide your thoughts on 
administrative issues associated with their proposals.

    Answer. Properly structured, a reduced pass-through rate has 
extraordinary potential to drive new investment and growth in 
entrepreneurial businesses. These businesses--start-ups, entrepreneurs, 
small and mid-sized firms and developers--represent the segment of the 
economy where access to affordable financing, capital, and credit can 
pose a real challenge. A reduced rate on pass-through income will not 
only spur entrepreneurial activity and job creation, it will provide 
small, mid-sized, and closely held businesses with a power tool to 
attract the outside investment they need to fuel their growth.

    Central to the committee's challenge is designing a reduced pass-
through rate that avoids tax abuses, such as disguising income as 
business income when it is properly treated as wages. Here, 
distinguishing an owner-operator's personal services income from his or 
her income attributable to a capital investment in the business is a 
very important issue. Fortunately, existing tax law provides rules that 
can readily be applied to this problem.

    First, for an owner who provides no services--or only de minimis 
services like hiring a full-time CEO or developing or approving a basic 
business plan to govern the entity--100% of that owner's income should 
qualify for the reduced rate. This is similar to a rule currently 
contained in longstanding proposed regulations applicable to defining 
what properly constitutes self-employment income (i.e., personal 
services income) as opposed to investment income for the owner-operator 
of a limited partnership or limited liability company.

    Second, for an owner who provides substantial services, such as a 
full-time CEO, who also invests capital in the entity on the same terms 
as limited investors, the return to capital that the owner-operator 
receives on that investment should qualify for the reduced rate. There 
cannot be ``disguised compensation'' if the owner-
operator is getting a return on his capital investment that is no 
higher, dollar for dollar, than the return passive investors are 
receiving. This is also similar to a well-accepted rule in the 
longstanding proposed regulations governing self-employment income of 
limited partners and limited liability company members. Those rules 
recognize that one can be both a ``general partner'' and a ``limited 
partner'' in the same entity, with different rules for those different 
streams of income.

    Third, where there is no third-party benchmark under the second 
rule, there are several options. The IRS could apply a ``reasonable 
compensation'' requirement. This is done currently for S corporations 
to ensure that they pay their owner-operators a reasonable amount of 
FICA wages. However, as many have suggested, this may prove cumbersome 
and difficult to enforce. Instead, we think that Congress could simply 
provide that a specified portion of the owner-operator's income--equal 
to a statutory rate of return (such as 12 percent) applied to his or 
her capital investment in the entity--would qualify for the reduced tax 
rate, with the rest all treated as personal services income. In effect, 
instead of measuring reasonable compensation, this approach looks to 
the hard facts of how much capital the taxpayer has invested, and 
applies a statutory rate of return to that amount.

    We would be happy to provide the committee with more detailed 
illustrations of how this approach might work with more complex 
examples involving, for example, debt-financed contributions, 
distributions of cash or property, temporary investments in reserves or 
portfolio assets and so forth. We are confident that the technical 
rules can be drafted so as to eliminate any realistic possibility of 
abuse, but also to be transparent and easily administered by taxpayers 
and the IRS.

    Question. Mr. DeBoer, you noted in your testimony that ``tax reform 
should provide a well-designed transition regime that minimizes 
dislocation in real estate markets.'' I would go even further and note 
that transition in this tax reform effort needs to consider all sectors 
of the economy. You've noted that grandfathering provisions may not by 
sufficient. Would you elaborate on the transition considerations that 
you think Congress should take into account?

    Answer. A well-designed transition regime is critically important 
to the success of tax reform. A new tax system may appear promising in 
concept, but fail to take into account the complexity of the U.S. 
economy, including the market structures and forces that have developed 
around existing tax rules. The Real Estate Roundtable estimates 
existing U.S. commercial real estate is worth between $13-15 trillion. 
Because commercial real estate has tax lives that are measured in 
decades, rather than years, poorly designed transition rules pose a 
greater risk to real estate owners and investors than other industries.

    Failing to provide a smooth transition from one set of rules to the 
next could cause significant financial loss and severe hardship for 
taxpayers who invested capital and sweat equity based on longstanding 
tax laws and principles. Moreover, because real estate is so interwoven 
in the U.S. economy, harm to property values or real estate markets 
could create a cascade of negative consequences for the broader 
economy--from retirement benefits and local communities to the 
financial system and job growth.

    Different tax treatment between new and old investment risks 
creates an un-level and unfair business environment. For example, if a 
newly constructed building was 100-percent expensed and an existing 
building remained subject to current depreciation schedules, the owner 
of the new building would have a government-created competitive 
advantage and could lease space at a lower cost while maintaining 
profitability. The government should avoid distorting markets by 
tipping the scale in favor of one taxpayer over another.

    Grandfathering provisions can prevent unnecessary harm to existing 
investments that were made based on a set of expectations regarding the 
tax law. However, depending on their design, grandfathering provisions 
can also have the unfortunate effect of locking in existing ownership 
structures and creating new economic distortions. Real estate is 
already an illiquid asset, relative to stocks and bonds. If tax reform 
reduces market liquidity even more, it could reduce net investment and 
put downward pressure on property values. The lock-up effect could 
prevent properties from getting into the hands of new owners with the 
time, resources, and desire to upgrade and improve the property. 
Healthy liquidity in the real estate marketplace contributes positively 
to capital expenditures as new owners look to increase the value of 
their investment by upgrading and improving the building. The result is 
job creation and economic growth.

    Tax reform transition rules should seek to put taxpayers on a level 
footing without penalizing business and investment decisions made prior 
to enactment. To the extent that tax reform rewards capital formation, 
the incentives should extend to both new and existing investment. 
Lastly, the rules should be permanent--thereby providing industries 
with long time horizons, such as real estate, with the policy certainty 
they need when putting capital at risk.

    Question. Mr. DeBoer, on page 7 of your written testimony, you say 
that some 
private-sector economists modeled for the real estate industry the 
House Blueprint, ``but without the immediate expensing of structures.'' 
You go on to cite the study showing that there would be a negative 
impact on property values. But if the economists' model did not allow 
the immediate expensing of structures, isn't that quite different from 
what the House proposed?

    Answer. The economic modeling referenced in my testimony examined 
the impact of reducing or eliminating the deductibility of business 
interest while maintaining current depreciation rules. The House 
Blueprint released in June 2016 would have provided for the full and 
immediate expensing of structures. The unified framework released last 
month excludes structures from immediate expensing. Extension of 
expensing to structures likely would have an impact on property values, 
particularly in the short term. Key considerations include: (1) whether 
the owner has other income to absorb the losses generated by immediate 
expensing, and (2) the parameters of the loss carryforward interest 
rate adjustment (the House Blueprint provided an interest rate 
adjustment to loss carryforwards to preserve their economic value going 
forward, but lacked sufficient detail to accurately model the 
provision).

    Industry concerns with the immediate expensing of real estate 
principally relate to the potential for over-stimulation of real estate 
construction that is ungrounded in economic demand. These concerns are 
not captured in the cash-flow model used to measure changes in internal 
rates of return and property values, or for that matter, in the outside 
macroeconomic models that estimate the impact of tax reform on overall 
economic activity. Macroeconomic models generally do not account for 
the negative consequences of excessive investment.

    Question. Mr. DeBoer, you said a lot of things about the State and 
local tax (SALT) deduction I would like to ask you about.

    You said that ``Eliminating the deductibility of State and local 
taxes could disrupt demand for commercial real estate.'' When I hear 
proposals to eliminate the SALT deduction, I usually take this to mean 
the itemized deduction for State/local taxes paid by residences. I have 
assumed that such proposals, if enacted, would still allow the SALT 
deduction as to SALT taxes paid in the business context or to the 
extent paid in the production of income. Is my assumption correct? If 
it is, it's not clear to me that eliminating the SALT itemized 
deduction could disrupt demand for commercial real estate. Please 
explain.

    Answer. Senator, we agree that any elimination of the deductibility 
of State and local taxes should not alter the deductibility of taxes 
paid in the context of a trade or business, or to the extent they are 
incurred in the production of income.

    We are concerned that elimination of the deductibility of State and 
local income and property taxes will lead to economic dislocation that 
reduces demand for commercial real estate in affected regions. While 
tenants and workers may be mobile and able to relocate, office 
buildings and shopping centers are not. The dislocation that results 
from repealing the State and local tax deduction will 
disproportionately hurt immobile assets, including commercial real 
estate and infrastructure. In these regions, economic development has 
relied, at least partially, on longstanding tax rules that allow 
taxpayers to offset a portion of the cost of State and local 
institutions and governance on their Federal tax return. Changing the 
rule now penalizes taxpayers, such as real estate owners, who deployed 
capital with an expectation that Congress would not change the 
fundamental precepts of Federal taxation.

    Question. You also write that, ``The deductibility of State and 
local taxes is grounded in the Constitution.'' Please explain that.

    Answer. When Congress enacted the income tax, it built the 
deductibility of State and local taxes into the tax system, from the 
outset, in recognition of the principle of federalism underlying the 
Constitution and the compact that formed the Nation. The original 
framers of our income tax understood and acknowledged that Washington, 
DC did not have a preemptive claim on the resources needed to sustain 
government. By making State and local taxes deductible on the Federal 
returns, Congress appropriately wanted to give State and local 
governments priority over the pool of available tax revenues.

    Question. You write that, ``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.'' When I hear about ``double 
taxation,'' I often think of the foreign tax credit. The foreign tax 
credit is often justified on the grounds of it preventing double 
taxation. So, would you think there should be a SALT credit? Is a 
credit necessary to alleviate double taxation? If not, then does this 
suggest that the foreign tax credit is not necessary for alleviating 
double taxation and that a foreign tax deduction would be sufficient?

    Answer. In States with an individual income tax, income is double-
taxed. However, the State and local tax deduction allows most taxpayers 
not subject to the AMT to reduce their Federal income by the amount of 
State and local income taxes paid. The effect is to reduce (but not 
eliminate) the amount of income that is subject to double taxation. A 
credit could eliminate the double taxation for most taxpayers, but we 
are not seeking a tax credit for State and local taxes paid (nor are we 
advocating that the foreign tax credit be replaced with a foreign tax 
deduction). Rather, in recognition of the importance of the existing 
State and local tax deduction to local communities and economic 
development in many regions of the country, we encourage Congress to 
retain the deduction in its current form.

    Question. Mr. DeBoer, I appreciated that in your testimony you 
state that ``C corporations . . . are double-taxed on their equity 
investments.'' I agree with you. That's why I have been working on a 
corporate integration project for some time now. Has the Real Estate 
Round Table taken a position on corporate integration?

    Answer. Real estate is largely held in pass-through form, either 
directly or through a partnership, LLC, or S corporation, or through a 
REIT, which is taxed like a pass-through entity. The Roundtable does 
not have a formal position on corporate integration, but generally 
supports the simplification and streamlining of our business tax 
system. Although REITs are organized as C corporations, they receive a 
100 percent dividends-paid deduction provided various requirements are 
met, and therefore represent a potential model for full corporation 
integration. However, the dividends-paid deduction for REITs serves a 
specific policy objective, providing smaller, retail investors an 
opportunity to invest in professionally managed commercial real estate.

    One potential concern with corporation integration is the policy 
changes necessary to finance the transition to an integrated system. We 
do not believe that Congress should raise taxes on real estate and 
other industries that operate in pass-through form to help offset the 
cost of integration. In addition, reducing the tax burden on equity 
investment should not come at the expense of higher taxes on debt-
financed investment. Interest is a cost of doing business and should 
continue to be fully deductible.

    Question. Mr. DeBoer, you write that, ``Lower property values 
produce a cascade of negative economic impacts.'' However, many policy-
makers, at all levels of government, pursue policies to allow for more 
``affordable'' housing. I interpret affordable to mean lower-priced. 
So, is the attempt to create affordable housing options a mistake? Does 
that have negative economic impacts?

    Answer. Adequate supply of affordable housing is critically 
important and lacking in many parts of the country, as Senator Cantwell 
noted during the hearing. While real estate generally should be taxed 
on an economic basis, affordable housing is one area where tax 
incentives fill an important void left unserved by market forces alone. 
The costs of building and providing new housing--obtaining financing, 
acquiring land, paying architects and engineers, constructing 
buildings, maintaining them, and servicing the loans--exceed what many 
low and even moderate-income renters can afford to pay. Provisions such 
as the low-income housing tax credit represent an efficient, market-
driven mechanism to increase the supply of affordable housing with 
minimal government interference. It should be preserved and potentially 
expanded in tax reform.

    The reference to the negative economic effects of lower property 
values relates to the potential damage caused by government policies 
that cause existing real estate values to decline. Affordable housing 
that is the result of new supply coming to the market and meeting an 
unmet economic need is desirable. In contrast, lower property values 
that result from policy changes that increase the tax burden on current 
property owners are counterproductive. Lower property values reduce the 
tax base for local communities. Lower property values result in less 
income for pension funds and education endowments that invest in real 
estate. Lower property values threaten the balance sheets of banks and 
financial institutions, increase the likelihood of defaults, and create 
the potential for new systemic economic risks.

                                 ______
                                 
                 Questions Submitted by Hon. Ron Wyden
    Question. Mr. DeBoer, real estate is a long-term investment, often 
stretching decades. So it stands to reason that the long-term health of 
the economy is critical for your industry to do well. Would you agree? 
So if the House Republican tax plan were enacted and the analysis by 
Dr. Marron's colleagues' analysis became reality--crippling Federal 
debt and skyrocketing interest rates--how would that impact the real 
estate industry?

    Answer. Senator, fiscal discipline in Washington is important to 
long-term economic growth and prosperity. Policies that temporarily 
increase the Federal deficit can serve an important purpose during 
periods of economic distress, but policies--tax or spending--that 
contribute to structural budget imbalances are fraught with risk. At 
the same time, revenue neutrality should not be an end in itself. 
Rather, in the context of tax reform, policymakers should carefully 
consider how proposed changes affect entrepreneurship, capital 
formation, and job creation, among other important factors. Tax policy 
should be stable, predictable, and permanent. In addition to the risks 
you have identified, if tax reform dramatically increases the Federal 
deficit, it is unlikely that the changes will be permanent, at least 
not in their current form.

    Question. Mr. DeBoer, the House Republican tax plan proposes to 
eliminate the deduction for business interest expense. While large, 
publicly traded corporations may be able to access additional equity 
from the stock market in order to dodge this new tax, that's not a 
choice for a lot of smaller businesses. Normally small businesses 
depend solely on small business loans from local banks. In addition, 
some businesses--particularly those that invest in real estate and 
infrastructure--depend on bonds as a way to finance long-term projects. 
I know your organization has been paying close attention to this issue. 
What do you think would happen if Congress voted to deny companies the 
ability to deduct interest?

    Answer. Today, capital markets in the United States are the envy of 
the world. Entrepreneurs are able to access debt amounts needed to 
provide the flexibility to build, operate, and grow their business. 
Responsible, appropriate leverage, as determined by lending regulators, 
is very positive for economic growth and job creation. Eliminating, or 
even limiting, the deduction for interest on business debt would cause 
great dislocation, slow economic activity, and lessen the unique 
importance of America's capital markets. The cost of debt is a 
necessary expense that must be accounted for in order to accurately 
measure the income from any business activity.

    Question. Mr. DeBoer, you've spoken about the need for 
infrastructure development. I've long said America needs an all-of-the-
above approach to infrastructure. The number one priority is more 
funding, and I, and several of my Democratic colleagues, have put 
forward a plan to do that. But this is a crisis that requires all hands 
on deck. That's why I have a bipartisan proposal, with Senator Hoeven 
of North Dakota, to give States more flexibility in how they finance 
infrastructure, including allowing them to tap the private sector. 
Private activity bonds are one key tool that local governments have to 
develop infrastructure projects in partnership with the private sector. 
Some Republicans want to eliminate these tools. Wouldn't it be better 
if Congress were providing more pathways for infrastructure investment, 
not eliminating an effective tool for financing infrastructure?

    Answer. The Roundtable agrees that an all-of-the-above approach to 
infrastructure finance is critical to meet our country's rapidly 
expanding and evolving needs for safe and reliable infrastructure 
across all types of asset classes--roads, bridges, transit, water, 
sewer, energy, telecommunications, etc. Public investment in 
infrastructure will always be critical, but receipts from the Federal 
gas tax are insufficient. As cars become more fuel efficient, and as 
the Nation is on the cusp of a ``transportation revolution'' trending 
toward driverless vehicles and ride-sharing platforms, more financing 
and funding sources are necessary beyond the Highway Trust Fund, which 
is perpetually on the brink of insolvency.

    We thus agree that Congress should enact policies that attract more 
private-sector co-investment to partner with public funds to finance 
infrastructure. Legislation like Senator Wyden's and Senator Hoeven's 
Move America Act (S. 1229) which expands eligibility for tax-exempt 
private activity bonds, should be part of the finance ``toolbox'' to 
encourage private entities to invest in U.S. infrastructure. The 
Roundtable also recommends that Federal policies should encourage 
``best financing practices'' that layer and sequence successful Federal 
programs with common State/local infrastructure finance platforms that 
have a track record of success. For example, projects that use Federal 
credit support and enhancement (like U.S.-DOT loans and guarantees 
under the Transportation Infrastructure Finance Innovation Act (TIFIA), 
and Railroad Rehabilitation and Improvement Financing (RRIF), should be 
encouraged to complement and leverage State/local infrastructure 
finance techniques (like tax increment finance (TIF) and special 
assessment districts (SADs)). Projects drawing a TIF-TIFIA connection, 
for example, can spread financing risks that will be attractive to draw 
private debt and equity markets into infrastructure projects, so that 
no single capital source bears undue risks. The Roundtable believes 
that these types of policies--bringing Federal, State/local, and 
private sector dollars to the table--are necessary to build the 
infrastructure we need to get people to work, enhance worker 
productivity, boost GDP, and enhance America's competitiveness 
globally.

                                 ______
                                 
               Question Submitted by Hon. Michael B. Enzi
    Question. Mr. DeBoer, your testimony mentions the tax rules related 
to foreign investment in U.S. real estate and how they can inhibit 
domestic investment and job creation. In 2015, I was a cosponsor of a 
bill that eliminated some of the burden associated with the Foreign 
Investment in Real Property Tax Act (FIRPTA). Have you seen an impact 
from the reforms we made in the PATH Act? What has it meant for real 
estate and infrastructure investment and job growth? Should we be going 
further, and if so, what do you recommend?

    Answer. Senator Enzi, The PATH Act reforms, including the new 
exemption from FIRPTA for foreign pension funds, have removed tax 
barriers to investment in the United States and allowed new real estate 
construction and development to attract foreign capital. Foreign 
institutional investors, and in particular pension funds, are a large 
and growing source of equity for capital-intensive real estate and 
infrastructure projects. Many foreign economies have high savings 
rates, and managers of those savings are looking to diversify their 
investments. Some foreign economies lack mature financial markets and 
offer few safe investment opportunities of their own. Pension funds are 
attracted to U.S. commercial real estate and infrastructure, in part, 
because it diversifies their investment portfolios, generates stable 
returns, and provides a hedge against inflation. After passage of the 
PATH Act, initial projections from Professor Ken Rosen of the 
University of California-Berkeley suggested it would generate $20-30 
billion in additional inbound investment. While it is still early and 
quantitative data is just starting to come in, anecdotal reports 
suggest foreign pension funds are responding to the FIRPTA relief, 
qualifying for the provision, and actively investing in new U.S. 
markets.

    The United States is well-positioned to attract foreign investors, 
assuming it provides a fair and nondiscriminatory set of tax rules. 
Real estate brokerage firm Cushman and Wakefield estimates that $435 
billion of total debt and equity funds were available globally for 
direct real estate investment in 2017, an increase of $100 billion 
since 2013. Unfortunately, for many non-pension investors, FIRPTA 
continues to impose a discriminatory tax on passive investment in U.S. 
real estate that does not apply to other asset classes. FIRPTA should 
be repealed in its entirety. Professor Rosen estimates that repealing 
FIRPTA will generate $65-125 billion in additional U.S. economic 
activity, create 147,000-284,000 jobs, and lift income by $8-16 
billion. Repeal would spur demand for real estate-related services, 
property renovations and development, and lending activities. Perhaps 
most importantly, it will create new economic demand that increases 
income and wages.

                                 ______
                                 
                Questions Submitted by Hon. Bill Nelson
    Question. What metric or considerations should Congress use to 
determine which tax breaks to eliminate in order to lower the rates?

    Answer. Senator, we believe four principles should guide and inform 
your efforts to achieve a significant, pro-growth overhaul of the 
Nation's tax code. First, 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. Second, 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. Third, 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. Finally, tax reform should 
provide a well-designed transition regime that minimizes dislocation in 
real estate markets. Tax reform that adheres to these principles will 
spur economic growth and job creation.

    Question. If you were king for a day, which tax breaks would you 
eliminate first to pay for a lower rate?

    Answer. A good place to start would be eliminating negative tax 
expenditures from the tax code. Negative tax expenditures deviate from 
an otherwise neutral income tax system and penalize specific types of 
business activities or investments. The largest negative tax 
expenditure in the tax code is the 39-year depreciation schedule for 
nonresidential structures. According to the Treasury Department, this 
tax penalty will cost taxpayers $105 billion over the next 10 years. 
Cost recovery rules should align with the economic life of assets. 
Leading, peer-reviewed research by MIT on the economic depreciation of 
structures suggests the appropriate recovery period for both 
nonresidential and residential rental property is closer to 20 years. 
Shortening the depreciation period for real property to 20 years would 
provide a sustainable boost to real estate investment and job creation.

    Second, policymakers should repeal the Foreign Investment in Real 
Property Tax Act (FIRPTA), which imposes a discriminatory tax penalty 
on foreign investment in U.S. commercial real estate. Professor Ken 
Rosen at the University of California-Berkeley estimates that repealing 
FIRPTA would generate $65-125 billion in additional economic activity 
and create 147,000-284,000 jobs.

    Question. Could immediate expensing lead to any negative 
consequences for the economy? If so, please provide some potential 
scenarios. If not, please explain why.

    Answer. Senator, expensing structures would encourage real estate 
development and boost the Nation's GDP, but we are concerned that 
underlying demand would not support much of the resulting development. 
Such uneconomic development would be a false indicator of economic 
strength and badly distort markets. As we witnessed in the 1980s, 
encouraging uneconomic development is not sustainable policy over the 
long term. That is not to say that the current cost recovery periods 
for structures are correct. They are not, and they should be shortened. 
MIT has reviewed a wealth of date regarding buildings, and their work 
suggests the appropriate depreciation period is roughly 20 years. 
Revising the tax rules to reflect this new and improved understanding 
of the economic life of structures would provide meaningful and 
sustainable lift to investment and job creation.

                                 ______
                                 
              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 on 
reforming the business tax code. The goal of the hearing is to examine 
ways to create a healthier economic environment that will encourage job 
creators to invest in the United States and increase their 
competitiveness in the global market.

    During this morning's hearing, we will discuss ways to improve the 
business provisions of the U.S. tax code, with an eye toward creating 
jobs and boosting wages for American workers and improving our 
country's overall business climate.

    This hearing is part of our ongoing effort--following years of tax 
hearings and last week's hearing on individual reform--to draft and 
report comprehensive tax reform legislation later this year.

    Members of both parties recognize the need to reform the way we tax 
businesses in the United States. As former President Obama noted when 
discussing his own framework for business tax reform, the current 
system ``does too little to encourage job creation and investment in 
the United States while allowing firms to benefit from incentives to 
locate production and shift profits overseas.''

    As we all know, many elements of a particular business's tax burden 
depend on the company's organizational form. For example, C 
corporations are taxed at the corporate tax rate.

    According to a recent report by the Congressional Budget Office, 
the top Federal statutory corporate income tax rate has been 35 percent 
since 1993 and, with State taxes added, the United States' average 
corporate statutory rate is the highest in the industrialized world, at 
more than 39.1 percent.

    And, while some have noted that not all corporations pay the full 
statutory rate, the average effective tax rate of U.S. corporations is 
the fourth highest among G20 countries. According to a recent analysis 
by Ernst and Young, when you integrate corporate-level taxes and 
investor-level taxes such as those on dividends and capital gains, U.S. 
tax rates are the second highest among developed countries. That last 
one is important, given that the United States taxes most corporate 
earnings that are distributed to shareholders twice--both at the 
corporate and shareholder levels.

    For the past few years, I have been working on a corporate 
integration proposal that, among other things, would allow businesses 
to deduct their dividends paid to help alleviate the double taxation 
problem. I view this as a complement to a statutory corporate tax rate 
reduction, not a substitute. We held a few hearings on this topic last 
year, so I won't delve too deeply into the details at this time. For 
now, I'll just say I continue to believe this idea--whether it applies 
fully or in some other limited way--can help address a number of the 
problems we're trying to solve with comprehensive tax reform. I look 
forward to continuing this conversation as the process moves forward.

    It is also important to note that, while the U.S. corporate tax 
rate has remained unchanged for decades, the trend among our foreign 
competitors has been to lower corporate rates, making American 
businesses increasingly less competitive.

    This is not just a Republican talking point. This problem is widely 
acknowledged on both sides of the aisle. Even former President Bill 
Clinton, who signed into law the rate increase to 35 percent, recently 
argued the rate should now be lowered. I agree.

    Our current business tax system--and the disparity between the U.S. 
corporate rate and our foreign competitors' corporate rates--has 
created a number of problems and distortions.

    For example, the current system slows economic growth by impeding 
capital formation, hindering wage growth and job creation, reducing 
productive capacity, and lowering the standard of living in the United 
States, all of which directly harm middle-class families and 
individuals.

    The current system lowers returns on investment, creating a bias 
against savings and investment. This hinders the creation of wealth for 
Americans across the economic spectrum, including the middle class.

    The current system encourages corporations to finance operations 
using debt rather than equity, which increases risks, particularly 
during times of economic weakness.

    The current system gives corporations incentives to shift income, 
production, and intangible assets like intellectual property from the 
United States to lower tax foreign jurisdictions, thereby eroding our 
tax base.

    In tax reform, we need to address all of these problems and 
distortions, and many others as well. In particular, we need to lower 
the corporate tax rate to relieve the burdens the tax imposes on 
American workers, who, according to many economists, bear a significant 
part of the corporate tax.

    We also need to reduce the burden on pass-through businesses, whose 
earnings are reported and taxed on individual tax returns. These types 
of businesses include sole proprietorships, limited liability 
companies, partnerships, and S corporations.

    And, we need to fix our international tax system so that American 
businesses can compete in the global marketplace without facing 
significant disadvantages simply because they are headquartered in the 
United States.

    Each of these propositions is supported by people in both parties. 
Of course, when politics enter the equation, the story sounds much 
different.

    According to some, all Republicans want to do in tax reform is give 
tax breaks to the super-rich, cushy portfolios for Wall Street bankers, 
and more handouts for greedy corporations, all at the expense of 
middle-class workers and families.

    Those types of claims may play well to political bases, but they 
don't align with reality.

    As I noted in our hearing last week, virtually all of our current 
tax reform ideas are aimed squarely at helping the middle class as well 
as low-income families. Our chief goals, particularly in business tax 
reform, are to increase economic growth, create new jobs, grow wages 
for the employees of both large and small businesses, expand 
opportunities for all Americans, and improve standards of living for 
everyone in the United States.

    The proof, I suppose, will be in the pudding. As the committee 
works through this process, with those goals in mind, I believe we will 
be able to demonstrate why those in the middle class should feel as 
though they have a stake in this discussion and how these ideas to 
reform our current system will help.

    Let's keep in mind that the status quo--sluggish economic growth, 
stagnant wages, and decreased workforce participation--hasn't exactly 
been doing the middle class any favors. The case for tax reform should 
therefore be easy to make.

    I want to reiterate what I said last week: namely, that this 
committee will be the starting point for any tax reform legislation 
that is considered in the Senate. While I expect we'll continue to hear 
more arguments about secret tax plans written behind closed doors, this 
committee is going to consider tax reform through regular order. That 
applies to both the drafting and the reporting of any tax reform bills.

    As I also said last week, I hope this process is bipartisan. As 
with individual tax reform, there are many areas of business tax reform 
where thoughts and interests of both Republicans and Democrats overlap. 
There is fertile ground for bipartisan agreement on this and I hope we 
can take advantage of this historic opportunity together.

    I know that my friend, Ranking Member Wyden, shares these broad 
objectives.

    In fact, he has put forward his own tax reform proposals in the 
past, likely with these same goals in mind.

    And, at the end of the day, we should all, at the very least, agree 
that the current tax system is broken and the current state of our 
economy should not be accepted as the new normal.

    I look forward to a robust discussion of these issues here today as 
well as some acknowledgement of the bipartisan agreement that exists on 
these matters.

                                 ______
                                 
    Prepared Statement of Scott A. Hodge, President, Tax Foundation
    Chairman Hatch, Ranking Member Wyden, members of the committee, I 
commend you for taking on the challenge of reforming America's tax code 
and especially the task of overhauling our outdated business tax 
system.

    The most important thing that Congress and the administration can 
do to boost economic growth, lift workers' wages, create jobs, and make 
the U.S. economy more competitive globally, is reform our business tax 
system.

    I'd like to focus my remarks on reforming the corporate tax system. 
The tax issues facing pass-through businesses could fill an entire 
hearing itself. The Tax Foundation generally supports the idea of 
corporate integration, so perhaps we can address the pass-through 
sector during questions.

    My testimony will first outline the policies that our research 
indicates will maximize economic growth and boost wages, what we call 
``The Four Pillars of Corporate Tax Reform.'' I will then address the 
challenges that you will face in crafting a successful tax reform 
plan--balancing the math with the economics.
                the four pillars of corporate tax reform
    The Tax Foundation's extensive economic research and tax modeling 
experience suggests that the committee should have four priorities in 
mind when reforming the corporate tax system:

    1.  Providing full expensing for capital investments;
    2.  Cutting the corporate tax rate to a globally competitive level, 
such as 20 percent;
    3.  Moving to a competitive territorial tax system; and
    4.  Making all three of these policies permanent.

    While many of you, and certainly many in the business community, 
may see some of these policies as competing for space in a tax plan, we 
see those pieces as complementary and essential, not in conflict.

    In our view, cutting the corporate tax rate and moving to a 
territorial system are essential for restoring U.S. competitiveness and 
reducing the incentive for profit-shifting and corporate inversions. 
Expensing, we believe, is key to reducing the cost of capital in order 
to revitalize U.S. capital investment which, in turn, will boost 
productivity and wages.

    Thus, a good tax plan should include all three of these policies 
because they will not only boost economic growth, but do so in a way 
that leads to higher wages and living standards for working Americans. 
However, these gains are not possible if the policies are made 
temporary, as some have suggested as a way of minimizing their revenue 
loss or complying with the Byrd Rule. Temporary tax cuts deliver 
temporary economic results; permanent tax reform delivers permanent 
economic benefits.
      the economic benefits of expensing and a corporate rate cut
    Let's look at the economics of expensing and the corporate rate cut 
in more detail. Both policies are very pro-growth and will ultimately 
lift workers' wages. But, on a dollar-for-dollar basis, expensing 
delivers twice the economic growth as a corporate rate cut.\1\
---------------------------------------------------------------------------
    \1\ For an excellent discussion of this issue, see Kyle Pomerleau, 
``Why Full Expensing Encourages More Investment Than a Corporate Rate 
Cut,'' Tax Foundation Blog, May 3, 2017, https://taxfoundation.org/
full-expensing-corporate-rate-investment/.

    The reason it does so is because expensing of new investment is 
focused on cutting the cost of growing the capital stock, while the 
rate reduction's benefits are spread over returns to existing capital 
and to other activities such as research, management, advertising, and 
---------------------------------------------------------------------------
other inputs that are already immediately deductible.

    For example, if I own a factory that makes appliances, a lower 
corporate rate will increase the amount of after-tax profit I earn on 
each toaster, but it will not necessarily incentivize me to produce 
more toasters. On the other hand, the only way that I can reap the 
benefits of full expensing is by adding a new toaster assembly line or 
building a factory. Thus, the corporate rate cut initially flows to my 
bottom line, whereas the new capital investment immediately benefits my 
workers and new employees.
      the combined benefits of expensing and a corporate rate cut
    The House GOP ``Better Way'' Tax Reform Blueprint combined 
expensing with a 20 percent corporate rate. Our scoring of the plan 
indicated that these policies created a powerful engine for economic 
growth and lifting after-tax incomes.\2\ They should provide the core 
of any pro-growth tax reform plan.
---------------------------------------------------------------------------
    \2\ Kyle Pomerleau, ``Details and Analysis of the 2016 House 
Republican Tax Reform Plan,'' Tax Foundation Fiscal Fact No. 516, July 
5, 2016.

    We used our Taxes and Growth (TAG) Macroeconomic Tax Model \3\ to 
simulate the long-term economic effects of these policies separately 
and combined to give you an idea of how they work together. The table 
below summarizes the long-term results of this exercise.
---------------------------------------------------------------------------
    \3\ For a full description of the TAG model, see https://
taxfoundation.org/federal-tax/taxes-and-growth-model-overview-
methodology/. We are also happy to give live demonstrations of the 
model upon request.

    Here we can see that cutting the corporate tax rate to 20 percent 
and moving to full expensing for corporations each boost the long-term 
level of GDP by 3 percent and increase the capital stock by more than 8 
percent. This has the effect of lifting wages by more than 2.5 percent 
and creating more than 575,000 full-time equivalent jobs. In this 
example, long term is generally about 10 years, once the policies have 
worked their way through the economy.\4\
---------------------------------------------------------------------------
    \4\ Over the long term, a 20-percent corporate rate is a bigger tax 
cut than expensing. That is why we are seeing comparable results from 
the policies.

    Combining the two policies does not double the results because of 
their interactive effects. However, we can see that the two policies 
together would increase the level of GDP by 4.5 percent and the capital 
stock by nearly 13 percent. These economic forces act to lift wages by 
---------------------------------------------------------------------------
an average of 3.8 percent and create 861,000 full-time equivalent jobs.


  Long-Term Economic Effects of Expensing and a 20% Corporate Tax Rate
------------------------------------------------------------------------
                                                            20% Rate and
                                     20%        Corporate       Full
                                  Corporate     Only Full     Expensing
                                  Tax Rate      Expensing     Combined
------------------------------------------------------------------------
GDP, long-run change in annual         3.1%          3.0%          4.5%
 level (percent)..............
GDP, long-run change in annual         $587          $571          $867
 level (billions of 2016 $)...
Private business stocks                8.5%          8.3%         12.8%
 (equipment, structures, etc.)
Wage rate.....................         2.6%          2.5%          3.8%
Full-time equivalent jobs (in           592           575          861
 thousands)...................
------------------------------------------------------------------------
Tax Foundation, Taxes and Growth Model.

          both policies boost after-tax incomes substantially
    There is typically little public support for corporate tax reform 
because most people don't see how it will benefit their lives. 
Corporate tax reform may not ``put cash in people's pockets'' in the 
same way as a cut in individual tax rates, but it can have a powerful 
effect on lifting after-tax incomes and living standards.

    As we saw in the modeling results above, both expensing and a 
corporate rate cut can boost wages because of the increased 
productivity generated by the growth in capital investment. Better 
tools make workers more productive. Workers who are more productive 
earn more over time. When these gains are combined with the overall 
growth in the economy, after-tax incomes and living standards will 
rise.

    Tax Foundation's TAG model factors these macroeconomic effects into 
our estimates of the change in after-tax incomes for taxpayers at 
different income levels. The table below shows that a 20 percent 
corporate tax rate would lift after-tax incomes by an average of 3.5 
percent. Expensing lifts after-tax incomes by 3.4 percent. The TAG 
model estimates that the combination of the 20 percent corporate tax 
rate and full expensing would boost after-tax incomes by an average of 
5.2 percent. Again, these gains represent the combination of wage 
growth, economic growth, and the distributed dollar value of the tax 
cuts.


              Long-Term Policy Effects on After-Tax Incomes
------------------------------------------------------------------------
                                                            20% Rate and
                                     20%        Corporate       Full
         Income Group             Corporate     Only Full     Expensing
                                  Tax Rate      Expensing     Combined
------------------------------------------------------------------------
0% to 20%.....................         3.5%          3.4%          5.2%
20% to 40%....................         3.3%          3.2%          4.8%
40% to 60%....................         3.4%          3.3%          5.0%
60% to 80%....................         3.4%          3.3%          5.0%
80% to 100%...................         3.6%          3.5%          5.3%
80% to 90%....................         3.4%          3.3%          5.1%
90% to 95%....................         3.5%          3.4%          5.2%
95% to 99%....................         3.6%          3.5%          5.4%
99% to 100%...................         3.7%          3.6%          5.5%
    Total.....................         3.5%          3.4%         5.2%
------------------------------------------------------------------------
Tax Foundation, Taxes and Growth Model.

        cutting the corporate tax rate will immediately improve 
                          u.s. competitiveness
    It is well-known that the 35-percent U.S. Federal corporate tax 
rate is the highest among the 35 member nations in the OECD. However, 
U.S. firms also pay State income taxes. When the average State rate is 
added to the Federal rate, American companies face an average U.S. rate 
of 38.91 percent tax on corporate earnings.

    In a recent study, Tax Foundation economists compared the corporate 
tax rates levied by 202 jurisdictions across the globe and found that 
the United States has the fourth highest statutory corporate income tax 
rate in the world.\5\ The only jurisdictions with a higher statutory 
rate are the U.S. territory Puerto Rico (with a population of 3.7 
million), the United Arab Emirates (population 9.4 million), and the 
tiny African island nation of Comoros (population 826,000).
---------------------------------------------------------------------------
    \5\ Kyle Pomerleau and Keri Jahnsen, ``Corporate Income Tax Rate 
Around the World,'' Tax Foundation Fiscal Fact 559, September 7, 2017, 
https://taxfoundation.org/corporate-income-tax-rates-around-the-world-
2017/.

    From a tax perspective, most other countries look much more 
competitive than the United States. The worldwide average statutory 
corporate income tax rate, measured across 202 tax jurisdictions, is 
22.96 percent. When weighted by GDP, the average statutory rate is 
---------------------------------------------------------------------------
29.41 percent--10 points lower than the U.S. statutory rate.

    Our major trading partners in Europe have the lowest regional 
average rate, at 18.35 percent (25.58 percent when weighted by GDP). 
Conversely, among our major trading partners, Africa and South America 
tie for the highest regional average statutory rate at 28.73 percent 
(28.2 percent weighted by GDP for Africa, 32.98 percent weighted by GDP 
for South America).

    While we frequently hear the excuse that ``nobody really pays the 
headline rate'' because of loopholes in the tax code, the fact is, the 
tax codes in other countries also have loopholes. This means that the 
effective corporate tax rate in those countries is typically well below 
our effective rate.

    Indeed, a recent Tax Foundation study compared the tax burden on 
new investment, the marginal effective tax rate (METR), among 43 
nations. After accounting for all the various deductions and credits in 
each tax code, the study finds that the METR in the United States is 
the fifth highest among the 43 nations at 34.8 percent.\6\ Were it not 
for bonus depreciation, our ranking would be even higher.
---------------------------------------------------------------------------
    \6\ Jack Mintz and Philip Bazel, ``Competitiveness Impact of Tax 
Reform for the United States,'' Tax Foundation Fiscal Fact 546, April 
20, 2017.

    Lowering the corporate tax rate to at least 20 percent would 
instantly make the U.S. more competitive while reducing the incentives 
for profit-shifting and inversions.
            moving to a territorial tax system is imperative
    One of the most challenging issues facing lawmakers is over the 
international aspects of tax reform: designing a territorial tax system 
and crafting the rules that determine when the foreign income of U.S. 
multinationals will be taxed and when it will be exempt from U.S. tax.

    These rules are extremely complex, and the stakes are very high. 
Tax writers must design rules that protect the U.S. tax base and 
prevent tax avoidance, yet do so in a manner that is not burdensome and 
does not stifle capital flows and legitimate business transactions. The 
wrong choices could make U.S. firms even less competitive globally than 
they are today.\7\
---------------------------------------------------------------------------
    \7\ Kyle Pomerleau and Keri Jahnsen, ``Designing a Territorial Tax 
System: A Review of OECD Systems,'' Tax Foundation Fiscal Fact No. 554, 
August 1, 2017.

    The interesting aspect of this issue is that the U.S. already has a 
territorial tax system--but it only applies to foreign-owned companies. 
Foreign-owned companies only pay U.S. income taxes on their U.S. 
profits and, naturally, pay no U.S. tax on their foreign profits. This 
situation automatically makes U.S. firms less competitive in foreign 
markets. The only way to level the playing field is for lawmakers to 
repeal our worldwide tax system and move to a territorial system for 
all companies.
       expensing saves more than $23 billion in compliance costs
    One last thing to consider about expensing. A move to full 
expensing accomplishes something that no rate cut can: it eliminates 
pages from the tax code, thus saving taxpayers time and money. American 
businesses today spend more than 448 million hours each year complying 
with the Byzantine depreciation and amortization schedules, at an 
estimated cost of over $23 billion annually. Moving to full expensing 
eliminates the need for these complicated schedules, thus saving 
businesses the $23 billion in compliances costs, which is an added 
benefit to the impact the policy has on boosting wages and economic 
growth.\8\
---------------------------------------------------------------------------
    \8\ Scott A. Hodge, ``The Compliance Costs of IRS Regulations,'' 
Tax Foundation Fiscal Fact No. 512, June 15, 2016.
---------------------------------------------------------------------------
  temporary tax cuts produce (no surprise) temporary economic benefits
    Because of the procedural limitations associated with the Senate's 
Byrd Rule, some lawmakers have talked about the merits of a temporary 
tax cut plan, which would sunset after 10 years, much like the tax cuts 
enacted by President George W. Bush in 2001 and 2003.

    Tax Foundation economists used the TAG model to simulate the 
effects of a temporary corporate rate cut to 15 percent compared to the 
effects of a permanent rate cut, and the baseline estimates under 
current law. The results are shown in the nearby chart.\9\
---------------------------------------------------------------------------
    \9\ Alan Cole, ``Why Temporary Corporate Income Tax Cuts Won't 
Generate Much Growth,'' Tax Foundation Fiscal Fact No. 549, June 2017.

    A permanent corporate rate reduction reduces the cost of capital 
and makes new investments worthwhile that otherwise would not have 
been. Under the TAG model, a permanent cut to 15 percent boosts 
investment substantially, which allows a sustained period of higher 
growth. Such a policy adds about 0.39 percentage points to GDP growth 
per year over a decade, eventually resulting in a GDP that is 3.9 
percent larger than the baseline scenario after 10 years. This 
additional 3.9 percent level adjustment to GDP remains for as long as 
the policy stays in effect; more investments are profitable, and 
---------------------------------------------------------------------------
therefore, the Nation is richer.

    A temporary corporate rate reduction looks similar at first: it 
initially produces more investment and growth. However, the effect is 
never as strong as for the permanent cut. Worse, the improvements to 
growth fade considerably. The increase in GDP peaks in the 6th year, 
with a grand total of 1.37 percent added to GDP over all 6 years. Then, 
growth from the 7th year on is actually slower than it would have been 
with no tax cut at all. By the end of the 10th year and the sunset of 
the policy, GDP is only 0.14 percent larger than it would have been 
without the tax cut.

    The lesson is very clear: the only way to boost the economy for the 
long term is to make the business tax reforms permanent.

[GRAPHIC] [TIFF OMITTED] T1917.001

          the challenges and trade-offs of business tax reform
    The great economist Thomas Sowell once said that ``there are no 
solutions, there are only trade-offs.'' As I'm sure you are already 
discovering, you will face some big challenges in fixing the corporate 
tax system. First, the math is hard. There are not as many 
``loopholes'' in the corporate tax code as many people believe, so you 
will likely have to think outside the box if you want corporate tax 
reform to be revenue-neutral. Second, the economics of tax reform must 
be at the forefront of your 
decision-making. If you make the wrong choice in the base broadeners 
you use to offset the tax cuts, you can neutralize all the benefits you 
hope to achieve from the reforms. These challenges will require hard 
decisions and considerable trade-offs.
                            the math is hard
    Cutting the corporate tax rate to 20 percent and providing full 
expensing could reduce Federal revenues by as much as $3 trillion over 
10 years on a static basis. While our models show that the growth 
effects of the policies could recover as much as 46 percent of this 
revenue loss over a decade (and more beyond the budget window), finding 
the revenue offsets to make these policies revenue neutral will be a 
major challenge.

    For example, if your goal is to eliminate corporate tax 
expenditures to offset a rate cut, your options are limited. By our 
estimates, there are only enough ``loopholes,'' or nonstructural items, 
to eliminate in the corporate tax code to bring the rate down to about 
28.5 percent.\10\ If the consensus is to lower the rate to 20 percent, 
or even 15 percent as President Trump advocates, you will have to find 
offsets outside the corporate tax base.
---------------------------------------------------------------------------
    \10\ Scott Greenberg, ``To Lower the Corporate Tax Rate, Lawmakers 
Will Have to Think Outside the Box,'' Tax Foundation Blog, June 8, 
2017, https://taxfoundation.org/lower-corporate-tax-rate-think-outside-
box/.

    One of the larger offsets included in the House GOP Blueprint was 
the elimination of the net interest deduction for corporations. This 
policy has the advantage of raising more than $1 trillion with minimal 
impact on economic growth. Moreover, it also equalizes the treatment of 
debt and equity financing, thus reducing the amount of leveraging in 
---------------------------------------------------------------------------
the economy.

    Aside from the elimination of net interest and the controversial 
border adjustment proposal, there are very few politically palatable 
revenue raisers or base broadeners available that can be used to help 
reduce the corporate tax rate to 20 percent or below. A few of the 
options that could raise more than $1 trillion over 10 years include a 
$20 per-ton carbon tax, removing the Social Security Payroll tax cap, 
and enacting a value-added tax (VAT).\11\
---------------------------------------------------------------------------
    \11\ For a menu of options, see ``Options for Reforming America's 
Tax Code,'' Tax Foundation, 2016, https://taxfoundation.org/options-
reforming-americas-tax-code/.

    On the other hand, there are ways of reducing the cost of these 
proposals by either phasing them in or modifying them. For example, the 
cost of full expensing could be reduced substantially through the use 
of neutral cost recovery. This option maintains current depreciation 
schedules, but indexes them for inflation and a modest rate of return. 
This modification gives taxpayers the net present value equivalent of 
---------------------------------------------------------------------------
full expensing, but spreads the budgetary costs over time.

    Congress could also follow the example of other countries, such as 
Canada and the United Kingdom, who ratcheted down their corporate tax 
rate over a number of years. This option would reduce the cost of the 
policy within the 10-year budget window, but not during the second 10 
years.
                      getting the economics right
    In order to maximize the benefits of corporate tax reform, you must 
be very careful in choosing the offsets you need to make the plan 
revenue-neutral. You must avoid base broadeners that raise the cost of 
capital because they will neutralize the benefits of the pro-growth tax 
reforms.

    A good example of how the wrong mix of policies can neutralize a 
plan's economic growth potential is the draft tax reform plan proposed 
by former Ways and Means Chairman Dave Camp. The so-called Camp Draft 
cut the corporate tax rate to 25 percent, but largely offset the 
revenue loss by lengthening depreciation lives--moving from the current 
MACRS to ADS, the alternative depreciation system.

    As the tax models used by the Joint Committee on Taxation and the 
Tax Foundation showed, the longer depreciation lives raised the cost of 
capital to such an extent that it largely negated the economic benefits 
of the lower corporate tax rate.\12\ Revenue neutrality may be an 
important goal, but it should not be achieved at the expense of 
economic growth. That is self-defeating. To fully reach the goal of a 
lower corporate tax rate, you may have to relax the standard for 
revenue neutrality.
---------------------------------------------------------------------------
    \12\ Stephen J. Entin, Michael Schuyler, and William McBride, ``An 
Economic Analysis of the Camp Tax Reform Discussion Draft,'' Tax 
Foundation Special Report No. 219, May 14, 2014.

    One of the reasons that the House GOP ``Better Way'' Tax Reform 
Blueprint contained the controversial border adjustment was the 
recognition by its designers of the need to reach outside the 
traditional corporate tax expenditure base to find the necessary 
revenues to lower the corporate tax rate to 20 percent. The border 
adjustment also had a minimal impact on economic growth. Thus it raised 
more than $1 trillion over a decade in offsetting revenues while 
maximizing the economic benefits of the lower corporate tax rate and 
full expensing proposals.
                               conclusion
    Mr. Chairman, corporate tax reform done right is key to growing the 
economy, boosting real family incomes, and making the United States a 
better place to do business in, and do business from. The Four Pillars 
of Corporate Tax Reform--full expensing, a lower corporate tax rate, a 
territorial system, and permanence--are the right policies to make this 
tax reform effort a lasting success.

    Thank you. I'm happy to answer any questions you may have.

                                 ______
                                 
          Questions Submitted for the Record to Scott A. Hodge
               Questions Submitted by Hon. Orrin G. Hatch
    Question. Mr. Hodge, I appreciate that your testimony recognizes 
the difficult exercise that Congress has in front of it to make the 
tough choices and make the numbers work for comprehensive tax reform. 
You suggest that Congress, as part of comprehensive tax reform, provide 
for full expensing, and you identified in your testimony a potential 
method for reducing the cost of moving the tax system to such a 
proposal through indexing for inflation the current depreciation 
schedules and providing an appropriate rate of return. Would you 
elaborate more on your proposal and provide us a practical example of 
how it might work?

    Answer. As my colleague Kyle Pomerleau wrote in a recent Tax 
Foundation study, ``How to Reduce the Up-Front Cost of Full 
Expensing,'' https://taxfoundation.org/reduce-front-cost-full-
expensing/, ``One way to reduce the cost of full expensing during the 
transition is to enact something called `neutral cost recovery' (NCR). 
Under NCR, companies would get the benefit of full expensing: 
deductions for capital investments would get the full present value 
write-offs and bring the marginal tax rate on those assets down to 
zero, but the government would not suffer large transitional costs. 
This is how it would work: instead of providing a full write-off for 
capital costs, the Federal Government would keep the current law's 
depreciation schedule. However, depreciation allowances would be 
adjusted to an interest rate to offset both the effect of inflation and 
the time value of money.'' You can think of this as simply an enhanced 
indexing of depreciation schedules, not all that different than the way 
individual tax brackets are index to inflation.

    Under NCR, a company still needs to depreciate assets over time 
according to a schedule. However, annual deductions are adjusted by an 
interest rate to offset the declining value of deductions over time. In 
the first year, a $100 deduction is the same as it is under current 
law. But as time goes on, the deductions grow in nominal terms. The 
second year, the company deducts $104 and the next year $108. These 
larger annual deductions end up offsetting the impact of the declining 
value of money over time. Thus, the present value of the deduction 
remains constant.

    Question. Mr. Hodge, your written statement makes the case for 
permanent tax reforms as opposed to temporary tax reforms. So permanent 
is better than temporary. Is temporary better than nothing at all? 
You've noted the fact that the math is hard in comprehensive tax reform 
and complying with the Byrd rule in the Senate potentially provides 
boundaries on what can be done. Is comprehensive tax reform an all or 
nothing proposition, or would you recommend that Congress, if 
necessary, carefully identify those items that might be permanent and 
those that might be temporary in tax reform? What should Congress take 
into consideration in such an analysis?

    Answer. The decision to make a policy temporary or permanent should 
depend on: (1) its impact on economic growth; (2) how much it effects 
behavior and decision making; and (3) how much the temporary policy 
would draw activity from the future to the present. If you are looking 
to make any of the tax cuts temporary, I would restrict that to the 
individual tax provisions. As we saw with the Bush tax cuts of 2003, 
salaried workers can't generally shift income from the future to the 
present, so little of the growth effect was lost on the temporary 
nature of the policy.

    Corporate changes are different. Because corporations plan for the 
long-term, they need more stability in the tax code. They are also more 
adept at shifting activity from the future to the present. That is why 
temporary expensing may give you some economic growth today, but as the 
expense of lower economic growth tomorrow. Thus, the corporate tax 
provisions of any comprehensive package should be permanent.

    Question. Mr. Hodge, the President and his administration have 
indicated on many occasions that one of their primary goals in 
comprehensive tax reform is to grow the economy. I think many, if not 
all, of us in this room share that view. Would you provide us your 
thoughts on why policies like full expensing and cutting corporate 
income tax rates lead to higher economic growth? How would you rank the 
tax policies that contribute most to economic growth, and why?

    Answer. Dollar-for-dollar, tax changes that lower the cost of 
capital will do more for economic growth than any other policies you 
can enact. This is because capital is more mobile and, thus, more 
sensitive to tax changes than labor, which is less mobile. Cutting the 
cost of capital incentivizes new investment, which makes workers more 
productive, thus increasing their wages and living standards over time. 
Individual tax cuts may give people tax relief, but cutting the 
corporate tax rate and full expensing do more in the long run to boost 
wages and living standards. That should be the ultimate goal of any tax 
reform plan.

    Question. Mr. Hodge, you state that expensing delivers twice the 
economic growth as a corporate rate cut. While you are certainly in 
favor of a corporate rate cut, you note that a rate reduction's 
benefits are spread over returns to existing capital. So, my question 
is, would a delayed, or phased-in, rate cut significantly lessen this 
windfall effect of giving benefits to existing capital?

    Answer. Yes, every year following the first phase-in year would 
benefit new capital more than existing capital, thus diminishing the 
windfall for those old investments.

    Question. Mr. Hodge, you state that permanent tax reform is much 
better than a temporary tax cut. I agree with you. But my question is: 
Would it be better to do nothing than to have a temporary tax cut?

    Answer. Some temporary tax cuts can actually leave the economy 
worse off in the long run than doing nothing. For example, when we 
modeled the effects of a 5-year temporary expensing provision, we found 
that after 10 years GDP was only 0.18 percent higher than it would have 
been, but that the rate of growth was slower than trend. That is 
because the temporary policy pulled so much activity from the future to 
the present that it left the future with fewer resources.

    Question. Mr. Hodge, in your written testimony, you cite favorably 
the House GOP Blueprint's proposal to eliminate the deduction for net 
interest expense for corporations. But can you help me understand, why 
is that elimination focused on net interest expense? Why net? If we 
think interest in some circumstances shouldn't be deductible, why 
wouldn't that be across the board, whether or not one had interest 
income?

    Answer. Restricting the elimination of the interest deduction to 
net interest protects banks and lending institutions from the 
restriction. For them, borrowed money is their cost of goods sold and 
should be deductible. The idea is to restrict the deduction only to 
those who borrow as an end user.

    Question. Mr. Hodge, you cite, in your written testimony, as an 
option for raising over a trillion dollars annually, the possibility of 
removing the Social Security Payroll tax cap. I didn't see your 
testimony as endorsing that idea, but I did want to ask you about it. 
Under current law, the benefits one receives from the Social Security 
program are tied, somewhat, to the payments one makes into the Social 
Security trust fund, via one's FICA or Social Security taxes. But if 
the Social Security Payroll tax cap were eliminated, wouldn't this make 
the connection between payments in and benefits out even more tenuous 
than is currently the case? I'd be concerned about the healthiness of 
the Social Security system, and for its broad support, if that were 
done.

    Answer. Yes, if Congress were to lift the payroll tax cap while 
keeping the defined benefit, it would essentially have the same effect 
of funding Social Security out of general revenues, thus undermining 
the self-financing nature of the program. Social Security would then 
become no different than any other transfer program in government.

    Question. Mr. Hodge, you noted that the OECD has said that the 
corporate tax is the least efficient tax. You noted that this is mostly 
because of the high mobility of the corporate tax base. What did the 
OECD say was the most efficient tax? Is the tax base of the most 
efficient tax highly mobile?

    Answer. In their study, ``Tax and Economic Growth'' (https://
www.oecd.org/tax/tax-policy/41000592.pdf), OECD economists set out to 
determine which taxes were most conducive to economic growth. Or, 
conversely, they wanted to create a hierarchy or rule of thumb for 
thinking of which taxes were most harmful to growth, so that government 
would shift the composition of their tax systems to one that did the 
least harm to their economies.

    Here is that hierarchy:
      Corporate income taxes are most harmful for economic growth 
because capital is the most mobile factor in the economy.
      Personal income taxes are second-most harmful for growth. People 
are not as mobile as capital, but marginal tax rates influence their 
decisions to work, save, and invest.
      Consumption taxes are next-most harmful for growth. Taxes can 
influence decisions to consume, but the impact is less than taxes on 
income.
      Property taxes are least harmful for growth because property is 
the least mobile factor.

    Question. Mr. Hodge, both you and Dr. Marron favor expensing, and 
both of you believe it should be a higher priority for Congress than a 
reduction of the corporate tax rate. I understand one of the main 
arguments for such prioritization is that a corporate tax rate cut, 
while incentivizing new investment is, in large part, a windfall to old 
capital. That is, a corporate rate cut gives a benefit to income that 
would have been generated anyway. Expensing, on the other hand, only 
gives a tax benefit to new investments, so wouldn't be granting 
windfall benefits. Am I stating that argument correctly?

    Answer. Yes, that is a correct way of understanding the issue.

    Question. But I also want to ask, couldn't expensing also result in 
a windfall benefit? That is, if a business was going to invest $100 
million, say, in capital equipment under the Alternative Depreciation 
System (ADS), then to allow the $100 million to all be deducted in the 
first year of such investment, to allow it to be expensed, wouldn't 
that be giving a tax benefit for activity that would have happened 
anyway? Shouldn't that be considered a windfall benefit?

    Answer. It is not a windfall, because allowing a business to 
immediately deduct their expenses--capital or otherwise--is the proper 
way to measure net business profits. When you force a business to write 
that capital expense over a long period of time, you are actually 
taxing them closer to gross revenues, not net profits. Thus, they are 
being over-taxed.

    Question. Finally, would one way to address this problem be to 
allow full expensing for capital expensing that exceeds some base 
account, similar to how is done with the R&D credit. (With the R&D 
credit the point of that is that the R&D credit is targeted on research 
that would not have happened anyway, that would not have happened but 
for the credit.) Perhaps this could be a way to get most of the same 
growth effect from expensing, but while limiting the revenue costs.

    Answer. No. Remember, the R&D credit is in addition to whatever 
deductions that companies get for their R&D expenses. Thus it is giving 
them an extra deduction for whatever activity they are engaged in. As I 
mention above, companies should be able to immediately expense their 
expenses of any kind because that is the correct way of calculating net 
profits.

    Question. Some believe if tax reform loses revenue, the resulting 
deficits may crowd out private investment. Could you please explain 
that more?

    Answer. We are very skeptical of this argument. In our review of 
recent economic history, there is little or no relationship between 
deficits and interest rates. If anything, the relationship has been 
negative--interest rates have fallen as the deficit increased. Our 
reading of recent empirical studies confirms this lack of relationship.

    Congress is now considering a tax cut package in the range of $1.5 
trillion over 10 years. The global credit market is simply too big for 
a tax cut that would add about $150 billion to the deficit annually to 
move global interest rates. Besides, our model suggests that the 
economic benefits of such a tax cut would more than outweigh any 
downsides if interest rates were to tick up a few basis points.

    Question. You seem to think that a move towards expensing would be 
more helpful to the economy than would a corporate rate cut. But, I 
will tell you that from many corporations I hear from, they seem to 
prefer the corporate rate cut. Why do you think that is? How much of 
that has to do with financial accounting--and if so, how much should 
policymakers take that into account?

    Answer. Accountants and economists see the world differently, and 
good tax policy should be driven by economics not by accounting. 
Corporate CFOs tend to care more about their financial statements than 
cash-flow or economic incentives. Expensing does not benefit their P&L 
in the same way as a corporate rate cut. Thus, they don't see the 
benefit of expensing. Besides, many of these companies are contracting 
out the manufacturing of their products to foreign firms, thus 
expensing does not improve the return from that relationship as does a 
rate cut. But one reason that so much U.S. manufacturing has moved 
offshore is because of how poorly we treat capital investment. Moving 
to full expensing would reverse that trend.''

    Question. If investment in capital assets were allowed to be 
expensed, should there be exceptions to this for LIFO? For land? For 
real estate improvements?

    Answer. I tend to think that if we were to allow full expensing as 
a policy LIFO would be unnecessary because inventories would be 
expensed immediately. Same with real estate improvements, since they 
are a cost of doing business. Land generally does not depreciate 
(separate from the issue of minerals), thus it should not be expensed.

                                 ______
                                 
                 Question Submitted by Hon. Mike Crapo
    Question. Mr. Hodge, when talking about comprehensive tax reform, 
I've often said that if one tried to create a tax code that was more 
unfair, more complex, more costly to comply with and more anti-
competitive for American business, you couldn't do worse than the tax 
code we have now. One of the challenges is, then, if we are going to 
enact comprehensive tax reform that addresses each and every one of 
those problems with the current code, how can we actually measure our 
success in achieving all of those goals?

    I know you all have done a lot of work there at the Tax Foundation. 
So I was interested in your views. At our hearing last week, one of the 
witnesses suggested that the Joint Tax Committee's conventional 
analysis on the changes in after-tax income would be the most 
appropriate way to measure the effects of reform. If we were talking 
about just a traditional run of the mill tax cut bill, then maybe you 
can argue that traditional JCT analysis would be sufficient.

    But if we're going to completely reform the code in a way where we 
will be able to tell the typical American taxpayer that they no longer 
spend the hours every year saving their receipts and documenting their 
expenses and either doing their own taxes or spending hundreds of 
dollars to buy some software or pay someone else to do their taxes, 
that will be a real and meaningful benefit for them, but isn't 
necessarily going to be reflected in a typical JCT analysis.

    The same thing goes for when we reform the business and 
international tax codes, which won't just help the bottom line of those 
American businesses, but will also create more job opportunities and 
higher wages for American workers.

    Can you discuss any work you and the Tax Foundation have done, or 
any thoughts you have, about how we can best account for and then 
explain to the American taxpayer all of the benefits they will see from 
comprehensive tax reform, including those that are not reflected in a 
conventional JCT analysis, and those that are not necessarily so easily 
quantifiable?

    Answer. The success or failure of tax cuts are typically marked by 
how they impact the last line on a taxpayer's 1040. But whether or not 
people save on their tax bills is only part of the story. It is almost 
more important to know how a tax plan will effect the economy, capital 
investment, wages, and after-tax incomes. After all, wouldn't it be 
terrible to enact a tax reform plan that gave people a tax cut today, 
only to so depress investment and economic growth that wages fell and 
jobs were lost?

    Our Taxes and Growth (TAG) macroeconomic tax model takes all of 
those economic factors into account. Sure, the model can estimate how 
taxpayers' 1040s will be effected. But, the model also measures how a 
tax plan will impact their after-tax incomes once the economy finally 
adjusts to the tax changes. If their after-tax incomes go up, you know 
the plan was pro-growth. If their incomes go down, you know that some 
part of the tax plan undermined growth. That is the true value of 
dynamic scoring.

                                 ______
                                 
                Questions Submitted by Hon. Bill Nelson
    Question. In your opinion, did the 1986 Tax Reform Act solve the 
problems it was intended to fix? If so, please provide some examples of 
how. If not, why?

    Answer. To the extent that the goal of the 1986 Act was to simplify 
the tax system, I suppose it could be considered a success. But if the 
goal was to promote economic growth, our modeling of the 1986 Act 
suggests that it was a failure.

    My colleagues went back and modeled all the major tax bills over 
the past 50 years and found that the 1986 was actually bad for economic 
growth because it raised the cost of capital on businesses in order to 
provide tax cuts for individuals. Thus, we found that the albeit 
simpler post-1986 tax code slowed the economy.

    Question. Do you believe Congress should consider cutting 
entitlement and safety net programs--like Social Security, Medicare, 
TANF, and food stamps--to pay for tax reform? If so, why? If not, why 
not?

    Answer. I think that tax reform and entitlement reform are each 
hard enough on their own that they should not be tried at the same 
time.

    Question. President Trump has said he wants to lower the top 
business tax to 15 percent. Do you believe this can be done without 
significantly adding to the deficit? If so, please explain how through 
a detailed example (with budget estimates).

    Answer. I guess it depends upon what you mean by significantly add 
to the deficit. When we model a cut in the corporate rate to 15 
percent, we estimate that it would reduce Federal revenues by about 
$2.1 trillion over a decade on a static basis. After accounting for the 
growth effects from that lower rate, our model suggests that the cost 
of the rate cut would fall to about $1 trillion.

    As for offsets, eliminating numerous deductions in the corporate 
code and eliminating interest deductibility would get you about half-
way to revenue neutral. In order to get to full revenue neutrality, 
you'd have to look outside of the corporate code for offsets.

    Question. What metric or considerations should Congress use to 
determine which tax breaks to eliminate in order to lower the rates?

    Answer. Let economics be your guide. Start with the tax breaks that 
do most to distort the economy and those that inappropriately benefit 
certain industries at the expense of others. Then, you should ask, will 
repealing this provision do more economic harm than the benefits we 
expect to achieve from the tax provision it will offset? If so, then it 
is not a good tradeoff. If yes, then the tradeoff is worth it.

    Question. If you were king for a day, which tax breaks would you 
eliminate first?

    Answer. I'd start with the State and local tax deduction, followed 
by the exemption for credit unions, energy production credits, bio-
diesel credits, tax credits for clean-fuel burning vehicles, section 
199 manufacturing deduction, exclusion of interest for State and local 
bonds. Those are all good starts.

    Question. Do your economic and revenue scoring models account for 
things like ``Passive Loss'' and ``At-Risk'' rules, which would prevent 
many real estate investors, including many small businesses, from being 
able to use immediate expensing?

    Answer. No, our model doesn't account for that unless it is written 
into the policy that we are scoring. That is why lawmakers will have to 
take that into account by scaling up loss carryforwards. The House GOP 
Blueprint essentially indexed carryforwards to inflation plus a small 
rate of return in order to preserve the real value of the deduction.

    Question. Do your economic and revenue scoring models factor in how 
an elimination or decrease in interest deductibility would impact small 
businesses, banks, and access to affordable capital?

    Answer. Yes, our model takes into account the entire macroeconomic 
effect of the policy. When we scored the House GOP Blueprint, our model 
found that eliminating interest deductibility would only reduce the 
level of GDP by 0.4 percent over 10 years. That is a pretty small 
effect.

                                 ______
                                 
 Prepared Statement of Troy K. Lewis, CPA, CGMA, Immediate Past Chair, 
    Tax Executive Committee, American Institute of Certified Public 
                              Accountants
                              introduction
    Chairman Hatch, Ranking Member Wyden, and members of the Senate 
Committee on Finance, thank you for the opportunity to testify today on 
business tax reform. My name is Troy Lewis. I am an Associate Teaching 
Professor at Brigham Young University. I am also a sole tax 
practitioner and the Immediate Past Chair of the Tax Executive 
Committee of the American Institute of Certified Public Accountants 
(AICPA). I am pleased to testify today on behalf of the AICPA.

    The AICPA is the world's largest member association representing 
the accounting profession with more than 418,000 members in 143 
countries and a history of serving the public interest since 1887. Our 
members advise clients on Federal, State, local and international tax 
matters and prepare income and other tax returns for millions of 
Americans. Our members provide services to individuals, not-for-profit 
organizations, small and medium-sized businesses, as well as America's 
largest businesses.

    As the committee tackles this rare opportunity to enact bold, pro-
growth business reform, we urge Congress to take a holistic approach to 
provide tax reform to all of America's businesses. Fair and equitable 
tax reform will drive economic growth and job creation, enhancing the 
competitiveness of all types of American businesses not only in the 
United States but also abroad.

    The AICPA is a long-time advocate for an efficient and pro-growth 
tax system based on principles of good tax policy.\1\ We need a tax 
system that is fair, stimulates economic growth, has minimal compliance 
costs, and allows taxpayers to understand their tax obligations. These 
features of a tax system are achievable if principles of good tax 
policy are considered in the design of the system.
---------------------------------------------------------------------------
    \1\ AICPA, ``Guiding Principles for Good Tax Policy: A Framework 
for Evaluating Tax Proposals,'' January 2017, https://www.aicpa.org/
ADVOCACY/TAX/downloadabledocuments/tax-policy-concept-statement-no-1-
global.pdf.
---------------------------------------------------------------------------
                            aicpa proposals
    In the interest of good tax policy and equitable and effective tax 
administration, we appreciate the opportunity to address the following 
issues:

    1.  Cash method of accounting.
    2.  Tax rates for pass-through entities.
    3.  Distinguishing compensation income.
    4.  Interest expense deduction.
    5.  Cost recovery.
    6.  Definition of compensation.
    7.  Alternative Minimum Tax repeal.
    8.  Mobile workforce.
1. Cash Method of Accounting
    The AICPA supports the expansion of the number of taxpayers who may 
use the cash method of accounting.\2\ The cash method of accounting is 
simpler in application than the accrual method, has fewer compliance 
costs, and does not require taxpayers to pay tax before receiving the 
related income. Therefore, entrepreneurs often choose this method for 
small businesses.
---------------------------------------------------------------------------
    \2\ AICPA letter, ``Investment in New Ventures and Economic Success 
Today Act of 2017 (S. 1144),'' June 22, 2017, https://www.aicpa.org/
Advocacy/Tax/DownloadableDocuments/AICPA-Letter-to-Senator-Thune-in-
Support-of-the-INVEST-Act-S1144.pdf.

    We are concerned with, and oppose, any new limitations on the use 
of the cash method for any business, including those businesses whose 
income is taxed directly on their owners' individual returns (such as 
partnerships and S corporations). Requiring businesses to switch to the 
accrual method upon reaching a gross receipts threshold unnecessarily 
creates a barrier to growth.\3\
---------------------------------------------------------------------------
    \3\ A required switch to the accrual method affects many small 
businesses in certain industries, including accounting firms, law 
firms, medical and dental offices, engineering firms, and farming and 
ranching businesses.

     The AICPA believes that further restricting the use of the cash 
---------------------------------------------------------------------------
method of accounting for businesses would:

    a.  Discourage natural small business growth;
    b.  Impose an undue financial burden on their individual owners;
    c.  Increase the likelihood of borrowing;
    d.  Impose complexities and increase their compliance burden; and
    e.  Treat similarly situated taxpayers differently (merely because 
income is taxed directly on their owners' individual returns).

    Congress should not further restrict the use of the long-standing 
cash method of accounting for the millions of U.S. businesses (e.g., 
sole proprietors, personal service corporations, and pass-through 
entities) currently utilizing this method.
2. Tax Rates for Pass-Through Entities
    If Congress, through tax reform, lowers the income tax rates for C 
corporations, all types of business entities should receive a rate 
reduction. Our laws should continue to encourage, or more accurately--
not discourage--the formation of pass-through entities as these 
business structures provide the flexibility and control desired by many 
owners that is not available within the more formal corporate 
structure. The vast majority of America's businesses are structured as 
pass-through entities (partnerships, S corporations, limited liability 
companies, or sole proprietorships).\4\ Tax reform should not 
disadvantage these entities or require businesses to engage in complex 
entity changes to obtain favored tax status.
---------------------------------------------------------------------------
    \4\ See Census Bureau, ``County Business Patterns,'' https://
www.census.gov/programs-surveys/cbp.html; Census Bureau, ``Nonemployer 
Statistics,'' https://www.census.gov/programs-surveys/nonemployer-
statistics.html.

    Tax reform should recognize the importance of consistent tax rates 
on business income generated from all of America's pass-through 
entities, including professional service firms. Inequities would arise 
from having significantly different income tax rates based on an overly 
simplistic approach such as one based solely on the structure, sector, 
---------------------------------------------------------------------------
or the general nature of a business' activities.

    Professional service firms are an important sector in our economy 
and heavily contribute to the Nation's goals of creating jobs and 
better wages.\5\ For example, according to the current employment 
statistics from the U.S. Bureau of Labor, the Accountants and Auditors 
service industry has a job growth outlook of 11% (as opposed to the 
average growth rate of 7% for all occupations) for the years 2014-
2024.\6\ Furthermore, the jobs created by professional service firms 
are driving a more educated workforce for delivery of advanced services 
and products. These jobs are often coveted due to higher wages as well 
as health care, retirement, and other benefits.
---------------------------------------------------------------------------
    \5\ In 2014 (the latest data available), the U.S. professional 
services industry comprised about 883,000 firms and employed 8.6 
million Americans. The industry achieved combined annual revenues of 
$1.6 trillion in 2015. Selectusa.gov; Professional Services Spotlight, 
https://www.selectusa.gov/professional-services-industry-united-states.
    \6\ Bureau of Labor Statistics website, Publications, Business and 
Financial, ``Accountants and Auditors,'' https://www.bls.gov/ooh/
business-and-financial/accountants-and-auditors.htm.

    Excluding professional services reflects a view of the industry 
that may have applied in the 1950s, but certainly does not represent 
the current integrated global environment. In today's economy, 
professional service pass-throughs are increasingly competing on an 
international level with businesses organized as corporations, require 
a significant investment in tangible and intangible assets, and rely on 
the contribution of salaried, nonequity professionals to generate a 
significant portion of the revenue.\7\ Artificially limiting the use of 
a lower business rate, regardless of industry, would penalize a 
business for operating as a pass-through entity.
---------------------------------------------------------------------------
    \7\ The United States is the world's most desired location for 
professional services firms. In today's integrated global environment, 
businesses find it critical to access the talent, institutions, 
business processes, and client base offered in the United States; 
Selectusa.gov; Professional Services Spotlight, https://
www.selectusa.gov/professional-services-industry-united-states.

    All business owners have: uncertainty and risk to manage; increased 
administrative and reporting responsibilities at the State, local and/
or Federal level; a potentially significant investment in assets; \8\ 
and ultimately an obligation to their customers and employees. Without 
the benefit of a fair and consistent rate reduction for all pass-
through entities, the incentive to start or grow a business is 
diminished, with a corresponding loss of jobs and reduction in wages.
---------------------------------------------------------------------------
    \8\ Although professional service firms are not as heavily invested 
in tangible assets as manufacturing firms, they generally have a 
substantial investment in intangible assets. For example, accounting, 
legal, engineering, computer consulting, and other professional service 
practices require continuing and substantial investment in software, 
hardware, assembling, and training a workforce, marketing, 
cybersecurity, office facilities, and malpractice insurance.
---------------------------------------------------------------------------
3. Distinguishing Compensation Income
    If Congress provides a reduced rate for active business income of 
sole proprietorships and pass-through entities, we recognize that it 
will place additional pressure on the distinction between the profits 
of the business and the compensation of owner-operators. We recommend 
determining compensation income by codifying traditional definitions of 
``reasonable compensation'' supplemented, if necessary, by additional 
guidance from the U.S. Department of the Treasury and the Internal 
Revenue Service.

    The definition of reasonable compensation should reflect the type 
of business, the time spent by owners in operating the business, owner 
expertise and experience, and the existence of income-generating assets 
in the business (such as other employees and owners, capital and 
intangibles). Other relevant factors include available guidance (if 
any) used to help determine reasonable compensation for the geographic 
area and years of experience (such as, wage data guides provided by the 
U.S. Bureau of Labor Statistics), and the book value and estimated fair 
market value of tangible and intangible assets that generate income for 
the business.

    Former Ways and Means Committee Chairman Dave Camp's 2014 
discussion draft \9\ included a proposal to treat 70% of pass-through 
income of an owner-operator as employment income. While this proposal 
presented a simple method, it would result in an inequitable outcome in 
many situations. If Congress moves forward with a 70/30 rule, or other 
percentage split, we recommend limiting it to active owners and making 
the proposal a safe harbor option. For example, the proposal must make 
clear that the existence and the amount of the safe harbor is not the 
required amount permitted but that the reasonable compensation standard 
utilized for corporations will remain available to taxpayers. These 
rules will provide a uniform treatment among closely held business 
entity types.
---------------------------------------------------------------------------
    \9\ H.R. 1 (113th Congress), The Tax Reform Act of 2014, https://
www.congress.gov/bill/113th-congress/house-bill/1, section 1502; also 
see Section-by-Section Summary, pages 32-33, https://
waysandmeans.house.gov/UploadedFiles/
Ways_and_Means_Section_by_Section_Summary_FI
NAL_022614.pdf.
---------------------------------------------------------------------------
4. Interest Expense Deduction
    Another important issue for small businesses, as well as for 
professional service firms, is the ability to deduct interest expense. 
New business owners incur interest on small business loans to fund 
operations prior to revenue generation, working capital needs, 
equipment acquisition and expansion, and to build credit for future 
loans. These businesses rely on financing to survive. Equity financing 
for many start-up businesses is simply not available. A limitation in 
the deduction for interest expense (such as to the extent of interest 
income) would effectively eliminate the benefit of a valid business 
expense deduction for many small businesses, as well as for many 
professional service firms. If a limit on the interest expense 
deduction is connected with a proposal to allow for an immediate write-
off of acquired depreciable property, it is important to recognize that 
this combination adversely affects service providers and small 
businesses while offering larger manufacturers and retailers a greater 
tax benefit. As a result, business formations by small start-ups are 
hindered.

    Currently, small businesses can expense up to $510,000 of 
depreciable acquisitions per year under section 179 and deduct all 
associated interest expense. One tax reform proposal \10\ under 
consideration would eliminate the benefit of interest expense while 
allowing immediate expensing of the full cost of new equipment, and 
depreciable real estate, in the first year. However, since small 
businesses do not usually purchase large amounts of new assets, this 
proposal would generally not provide any new benefit for smaller 
businesses (relative to what is currently available via the section 179 
expensing rule). Instead, it only eliminates an important deduction for 
many businesses, which are forced to rely on debt financing to cover 
their operating and expansion costs.
---------------------------------------------------------------------------
    \10\ House Republican's Tax Reform Task Force Blueprint, ``A Better 
Way: Our Vision for a Confident America,'' June 24, 2016, https://
abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf.

    At a minimum, we suggest allowing small (and perhaps ``mid-size'') 
businesses to continue to deduct net interest expense.
5. Cost Recovery
    In general, the AICPA supports cost recovery legislation, such as 
Senator Thune's Investment in New Ventures and Economic Success Today 
Act of 2017, S. 1144, which would simplify, for businesses and their 
owners, certain accounting rules and key parts of the IRC.\11\
---------------------------------------------------------------------------
    \11\ AICPA letter, ``Investment in New Ventures and Economic 
Success Today Act of 2017 (S. 1144),'' June 22, 2017, https://
www.aicpa.org/Advocacy/Tax/DownloadableDocuments/AICPA-Letter-to-
Senator-Thune-in-Support-of-the-INVEST-Act-S1144.pdf.

    Many of the cost recovery provisions (such as, the expansion of the 
deduction for start-up and organizational expenses, the expensing of 
inventory by small and mid-sized businesses, and the exception for 
small and mid-sized businesses from capitalization of certain costs to 
inventory) would contribute to simplifying the tax rules and encourage 
economic growth and efficiency. We also appreciate that S. 144 updates 
the schedule of cost recovery periods for depreciable property under 
Revenue Procedure 87-56 to include a range of technology and other 
types of property that did not exist in 1987 would provide clarity, 
eliminate controversy, and provide a more accurate reflection of 
depreciation.
6. Definition of Compensation
    Tax reform discussions have considered whether the tax system 
should use the same definition for taxable compensation of employees as 
it does for the compensation that employers may deduct.

    We are concerned, particularly from a small business perspective, 
about any decrease of an employer's ability to deduct compensation paid 
to employees, whether in the form of wages or fringe benefits (health 
and life insurance, disability benefits, deferred compensation, etc.). 
We are similarly concerned about expansion of the definition of taxable 
income for the employees, or removal of the exclusion for fringe 
benefits. Such changes in the tax code would substantially impact the 
small and labor-intensive businesses' ability to build and retain a 
competitive workforce.
7. Alternative Minimum Tax Repeal
    The AICPA supports the repeal of the alternative minimum tax 
(AMT).\12\ The current system's requirement for taxpayers to compute 
their income for purposes of both the regular income tax and the AMT is 
a significant area of complexity of the tax code requiring extra 
calculations and recordkeeping. The AMT also violates the transparency 
principle because it masks the amount a taxpayer can deduct or exclude, 
as well as the taxpayer's marginal tax rate. Small businesses, 
including those operating through pass-through entities and certain C 
corporations, are increasingly at risk of being subject to the AMT.
---------------------------------------------------------------------------
    \12\ AICPA written testimony before the House Committee on Ways And 
Means, Subcommittee on Select Revenue Measures, March 3, 2011, 
``Hearing on Small Businesses and Tax Reform,'' https://www.aicpa.org/
Advocacy/Tax/DownloadableDocuments/FINALTESTIMONYFOR
THOMPSONMarch32011.pdf, and AICPA comments to the House Committee on 
Ways and Means on the Tax Reform Act of 2014, January 12, 2015, https:/
/www.aicpa.org/Advocacy/Tax/DownloadableDocuments/AICPA-Comments-on-
2014-Camp-Draft-General-Comments-Final
.pdf.

    The AMT was created to ensure that all taxpayers pay at least a 
minimum amount of tax on their economic income. However, businesses 
suffer a heavy burden because they often do not know whether they are 
affected by the AMT until they file their Federal income tax returns. 
Therefore, they must constantly maintain a reserve for possible AMT, 
which takes away from resources they could allocate to business needs 
---------------------------------------------------------------------------
such as hiring, expanding, and giving raises to workers.

    The AMT is a separate and distinct tax regime from the ``regular'' 
income tax. IRC sections 56 and 57 create AMT adjustments and 
preferences that require taxpayers to make a second, separate 
computation of their income, expenses, allowable deductions, and 
credits under the AMT system. This separate calculation is required for 
all components of income including business income for sole 
proprietors, partners in partnerships and shareholders in S 
corporations. Businesses must maintain annual supplementary schedules, 
used to compute these necessary adjustments and preferences, for many 
years in order to calculate the treatment of future AMT items and, 
occasionally, receive a credit for them in future years. Calculations 
governing AMT credit carryovers are complex and contain traps for 
unwary taxpayers.

    Sole proprietors who are also owners in pass-through entities must 
combine the AMT information from all their activities in order to 
calculate AMT. The computations are extremely difficult for business 
taxpayers preparing their own returns and the complexity affects the 
IRS's ability to meaningfully track compliance.
8. Mobile Workforce
    The AICPA supports the Mobile Workforce State Income Tax 
Simplification Act of 2017, S. 540, which provides a uniform national 
standard for non-resident State income tax withholding and a de minimis 
exemption from the multi-state assessment of State non-resident income 
tax.\13\
---------------------------------------------------------------------------
    \13\ For additional details, see AICPA written statement, ``AICPA 
Statement for the Record of the April 13, 2016 Hearing on `Keep it 
Simple: Small Business Tax Simplification and Reform, Main Street 
Speaks,' '' April 7, 2016, https://www.aicpa.org/Advocacy/Tax/
Downloadable
Documents/aicpa-comments-mobile-workforce-subcom-small-bus-hearing.pdf.

    The current situation of having to withhold and file many State 
nonresident tax returns for just a few days of work in various States 
is too complicated for both small businesses and their employees. 
Businesses, including small and family businesses that operate 
interstate, are subject to a multitude of burdensome, unnecessary and 
often bewildering non-resident State income tax withholding rules. 
These businesses struggle to understand and keep up with the variations 
from State to State. The issue of employer tracking and complying with 
all the different State and local tax laws is complicated and costly. 
The documentation takes extra time, adding to the loss in economic 
---------------------------------------------------------------------------
productivity for small businesses.

    S. 540 would provide long-overdue relief to all businesses from the 
current web of inconsistent State income tax and withholding rules on 
nonresident employees. Therefore, we urge Congress to pass S. 540 that 
provides national uniform rules and a reasonable 30 day de minimis 
threshold before income tax withholding is required.
                           concluding remarks
    The AICPA has consistently supported business tax reform efforts 
that are based on the principles of good tax policy, as we are 
convinced it will promote simplification, reduce business compliance 
costs and stimulate economic growth. As Congress drafts tax reform 
legislation, we encourage you to provide equality, certainty and 
clarity for all business owners. Businesses, regardless of entity 
structure, sector or the general nature of its activities, should 
similarly thrive under comprehensive tax reform.

    The AICPA appreciates the opportunity to submit this testimony and 
we look forward to working with the committee as you continue to 
address business tax reform.

                                 ______
                                 

          Questions Submitted for the Record to Troy K. Lewis
               Questions Submitted by Hon. Orrin G. Hatch
    Question. I have heard from my colleagues across the aisle the 
parade of horribles that will ensue if Congress enacts a proposal to 
provide a lower business income tax rate for pass-through entities--
that it will only benefit the rich and that it will, according to Dr. 
Marron, ``inspire tax avoidance.'' And yet two of the witnesses came to 
the table with thoughtful approaches on how to address the concerns 
that compensation, or wage income, that is taxed at ordinary income tax 
rates will be inappropriately recharacterized as business income 
subject to a preferential business income tax rate. I'd like to have 
Mr. Lewis and Mr. DeBoer comment on their proposals, whether the 
concerns raised are legitimate but perhaps overblown, and provide their 
thoughts on administrative issues associated with their proposals.

    Answer. Professional service providers face the same economic and 
legal challenges as other businesses. Any perceived tax savings of 
restructuring as an independent contractor, are unlikely to cover the 
incremental business cost of obtaining one's own employment benefits, 
losing unemployment coverage, providing for self-funded health care and 
incurring business-related costs (investment in technology, malpractice 
insurance, annual continuing education, office rental expense, etc.).

    Furthermore, employers are bound by case law in determining 
employment status, which would prevent them from contracting with 
former employees who impulsively changed their status to independent 
contractor. If an employer claims independent contractor status for a 
worker without a reasonable basis, both the worker and employer are 
subject to penalties and taxes.

    Question. Recently, Treasury Secretary Mnuchin commented on tax 
reform generally, and in particular on the potential for a lower rate 
for pass-through business income. He made a distinction between income 
that was generated from services businesses, which would be subject to 
ordinary income tax rates, and other income. Mr. Lewis, am I correct 
that your testimony suggests that not all returns in services 
businesses are returns on labor, so that some portion of the return 
should be subject to the pass-through business rate? Would you 
elaborate more on that point?

    Answer. Yes, you are correct. A portion of pass-through income is 
business income (or a ``return on capital'') and a portion is 
compensation-related (or a ``return on labor''). There is existing case 
law on the issue, and we recommend codifying the traditional 
definitions of ``reasonable compensation'' supplemented, if necessary, 
by additional guidance from the U.S. Department of the Treasury and the 
Internal Revenue Service.

    The definition of reasonable compensation should reflect the type 
of business, the time spent by owners in operating the business, owner 
expertise and experience, and the existence of income-generating assets 
in the business (such as non-owner employees and capital invested). 
Other relevant factors include available guidance (if any) used to help 
determine reasonable compensation for the geographic area and years of 
experience (such as, wage data guides provided by the U.S. Bureau of 
Labor Statistics), and the book value and estimated fair market value 
of tangible and intangible assets that generate income for the 
business.

    Former Ways and Means Committee Chairman Dave Camp's 2014 
discussion draft included a proposal to treat 70% of pass-through 
income of an owner-operator as employment income. While this proposal 
presented a simple method, it would result in an inequitable outcome in 
many situations. If Congress moves forward with a 70/30 rule, or other 
percentage split, we recommend limiting it to active owners and making 
the proposal a safe harbor option. The reduced rate should apply to 
owners who do not work in the business (i.e., none of their income 
should qualify as employment income). Congress should also avail the 
reasonable compensation standard (currently utilized for corporations) 
to all taxpayers. These rules would provide uniform treatment among 
closely-held business entity types.

    Question. Mr. Lewis, I understand some of your testimony to say 
that interest expense should remain deductible, but that some 
accelerated depreciation /expensing is a good thing. However, the House 
Blueprint saw those issues as tied together. That is, it connected the 
call for expensing with its elimination of net interest expense 
deductibility. Do you think those issues should not be seen as related 
to each other? Do you have a comment on the House Blueprint's 
elimination of net interest expense?

    Answer. Interest expense and accelerated expensing are both 
important issues. I am not suggesting that you tie the issues together. 
However, if they are tied together, it is important to note that small 
businesses can currently expense up to $510,000 of depreciable 
acquisitions per year under section 179 and deduct all associated 
interest expense. Also, since small businesses do not usually purchase 
large amounts of new assets, the Blueprint's proposal would generally 
not provide any new benefit for smaller businesses (relative to what is 
currently available via the section 179 expensing rule). Instead, it 
only eliminates an important deduction for many businesses, which are 
forced to rely on debt financing to cover their operating and expansion 
costs.

                                 ______
                                 
                Questions Submitted by Hon. Bill Nelson
    Question. I have a bipartisan bill with Senator Collins to make 
sure small business don't have to pay a higher tax on their business 
income than the largest corporations. The bill is called the Main 
Street Fairness Act (S. 707). Do you think a bill like ours would be a 
good place to start for tax reform?

    Answer. The AICPA does not currently have a position on your and 
Senator Collins' Main Street Fairness Act.

    Question. In your opinion, did the 1986 Tax Reform Act solve the 
problems it was intended to fix? If so, please provide some examples of 
how. If not, why?

    Answer. It would take an extensive analysis, which I have not 
performed, to determine if the 1986 Tax Reform Act solved the problems 
it was intended to fix. My personal thought is that it likely solved 
some problems but not all of them. For example, the 1986 Tax Reform Act 
resolved the prevalence of abuse of tax shelters by creating a new 
section 469 of the Internal Revenue Code which prevented taxpayers from 
offsetting income with passive deductions and credits.

    Question. Please provide suggestions on how Congress should 
determine which tax breaks to eliminate in order to pay for lower 
rates.

    Answer. The AICPA does not have a position on which tax breaks to 
eliminate in order to pay for lower rates; however, we encourage a 
holistic approach, based on the principles of good tax policy, that is 
both equitable and meaningful to drive economic opportunities for 
individuals and families while leveling the playing field for American 
businesses not only in the United States but also abroad.

    Question. If you were king for a day, which tax breaks would you 
eliminate first?

    Answer. The AICPA does not have a position on which tax breaks to 
eliminate first; however, the AICPA is a long-time advocate for an 
efficient and pro-growth tax system based on the principles of good tax 
policy. We need a tax system that is fair, stimulates economic growth, 
has minimal compliance costs, and allows taxpayers to understand their 
tax obligations. These features of a tax system are achievable if 
principles of good tax policy are considered in the design of the 
system.

                                 ______
                                 
   Prepared Statement of Donald B. Marron, Ph.D., Institute Fellow, 
         Urban Institute and Urban-Brookings Tax Policy Center
    Chairman Hatch, Ranking Member Wyden, and members of the committee, 
thank you for inviting me to appear today to discuss the opportunities 
and challenges in business tax reform. The views I express are my own 
and should not be attributed to the Tax Policy Center, the Urban 
Institute, the Brookings Institution, their boards, or their funders.

    America's business tax system is needlessly complex and 
economically harmful. Thoughtful tax reform can make our tax code 
simpler, boost American competitiveness, create better jobs, and 
promote shared prosperity.

    Business tax reform will boost long-run economic growth if it 
inspires more investment in the United States and if firms make 
investments with higher social returns. With high statutory rates, 
numerous tax breaks, and deferral of overseas profits, our current 
system creates many perverse incentives. Corporations sometimes see a 
more favorable investment climate abroad, multinationals hoard money in 
overseas affiliates, different types of investment face widely varying 
tax rates, debt financing is favored over equity, new and small 
businesses struggle under disproportionate compliance costs, and 
businesses big and small invest too much in tax planning. Thoughtful 
tax reform can reduce these distortions, encourage businesses to invest 
more domestically, and reorient investment to opportunities that yield 
higher returns for society.

    But as you know, tax reform is hard. Meaningful reforms create 
winners and losers--and you may hear more complaints from the latter 
than praise from the former. In hopes of making your job a little 
easier, my testimony addresses seven main points about business tax 
reform:

    1.  Policymakers should be realistic about near-term growth from 
business tax reform. The growth effects of more and better investment 
accrue gradually, with their largest effects beyond the 10-year budget 
window. If reform is revenue neutral, revenue raisers may temper future 
growth. If reform loses revenue--tax cuts mixed with reform--deficits 
may crowd out private investment. Either way, the boost to near-term 
growth may be modest, at least in the budget window. Dynamic scoring by 
the Joint Committee on Taxation, which reflects the mainstream economic 
view, will thus play only a small role in paying for tax reform.

    2.  The corporate income tax makes our tax system more progressive; 
corporate tax cuts would thus particularly help people with high 
incomes. Much of the burden from corporate income taxes falls on 
corporate shareholders and investors more broadly, people who tend to 
have high incomes. The rest of the burden falls on workers including 
executives, professionals, and managers as well as rank-and-file 
employees. Economists debate how much of the burden falls on workers, 
but overall it is clear that corporate tax reductions would 
particularly benefit those with high incomes. Workers will benefit most 
from reforms that encourage more and better investment in the United 
States.

    3.  Taxing pass-through business income at a preferential rate 
would create new opportunities for tax avoidance. When taxpayers see an 
opportunity to switch from a high tax rate to a lower one, they often 
take it. This is especially true when they can make the shift with a 
mere paper transaction, not a real change in economic behavior. 
Prominent examples include Kansas's experiment with eliminating taxes 
on pass-through income, S corporations' profits exemption from Medicare 
payroll taxes, and preferential rates for long-term capital gains. 
Taxpayers will react the same way if pass-through business income gets 
preferential treatment. Legislative and regulatory measures to limit 
tax avoidance will introduce new complexities, create arbitrary 
distinctions, and impose new administrative burdens.

    4.  Limiting the top tax rate on pass-through business income would 
benefit only people with high incomes. In the Better Way plan, House 
Republicans propose that pass-through business income be taxed at no 
more than 25 percent, well below the 33-percent rate they propose for 
wages, salaries, and other ordinary income. The only taxpayers who 
would benefit are those who have qualifying business income and have 
enough income to otherwise be in a higher tax bracket. Almost all tax 
savings would go to people in the top of the income distribution. 
Creating a complete schedule of pass-through rates could reduce this 
inequity, but it would also expand the pool of taxpayers tempted by tax 
avoidance.

    5.  Taxing pass-through business income at the corporate rate would 
not achieve tax parity. Owners of pass-through businesses face one 
layer of tax: individual income taxes on their share of business 
profits. Corporate shareholders face two layers. The company pays 
corporate income taxes on its profits, and taxable shareholders pay 
individual income taxes on their dividends and capital gains. Taxing 
pass-through business income at the corporate rate would thus favor 
pass-throughs over corporations. Tax parity requires either a higher 
tax rate on pass-through business income, a new tax on pass-through 
distributions, or elimination of shareholder taxes.

    6.  It is extremely difficult to pay for large cuts in business tax 
rates by limiting existing business tax breaks and deductions. A new 
Tax Policy Center analysis finds that eliminating all corporate tax 
expenditures except for deferral could pay for lowering the corporate 
tax rate to 26 percent. To go any lower would require cutting other 
business deductions, such as for interest payments. But deductions lose 
value as tax rates fall. The more you cut rates, the harder it becomes 
to raise offsetting revenue by limiting tax breaks and other 
deductions. To pay for large rate reductions, lawmakers will therefore 
need to raise other taxes or introduce new ones. Options include 
raising taxes on shareholders, a value-added tax, and a carbon tax.

    7.  Making business tax cuts retroactive to the start of 2017 would 
not promote growth and would benefit only shareholders. Retroactive tax 
cuts would give a windfall to profitable businesses. That does little 
or nothing to encourage productive investment. Indeed, it could weaken 
growth by leaving less budget room for more pro-growth reforms. 
Retroactive tax cuts do not help workers; the benefits would go solely 
to shareholders.

    I elaborate these points in the remainder of my testimony.
      1. policymakers should be realistic about near-term growth 
                        from business tax reform
    Thoughtful business tax reform will encourage more and better 
investment in the United States. But the benefits of that investment 
will not show up immediately. They build gradually over time as 
businesses accumulate their stock of productive capital. The largest 
benefits may occur beyond the usual 10-year budget window.

    Moreover, the potential growth from business tax reform will be 
offset, at least in part, by other aspects of reform. If reform is 
revenue neutral, revenue raisers may temper future growth. If reform 
reduces the corporate tax rate while slowing investment write-offs, for 
example, the net effects on investment and growth will reflect the 
growth penalty from slower write-offs along with any growth benefits 
from lower rates. Depending on the changes, the net effect could even 
slow growth. If reform loses revenue--tax cuts mixed with reform--
deficits may crowd out private investment. Either way, the net boost to 
economic growth will be less than might be suggested by a narrow focus 
on the growth-increasing aspects of reform.

    Policymakers should therefore be realistic about how much 
additional growth they can expect from business tax reform and how much 
dynamic scoring can help pay for its costs. Former Ways and Means 
Chairman Dave Camp's tax reform in 2014 provides a good example. His 
proposal reduced the corporate tax rate to 25 percent, but among the 
offsetting revenue raisers were limits on interest deductibility and 
slower depreciation. As a result, the Joint Committee on Taxation 
(2014) concluded that the plan would likely reduce future investment. 
The plan boosted economic activity modestly, because JCT believed other 
features would encourage people to work more. On net JCT expected 
Camp's plan to lift gross domestic product by a total of 0.1 to 1.6 
percent over 10 years, yielding additional Federal revenues of $50 to 
$700 billion. Welcome amounts, to be sure, but modest relative to the 
revenue changes of large-scale business tax reform.
   2. the corporate income tax makes our tax system more progressive
    The burden of the corporate income tax falls on three types of 
people. Corporate shareholders bear some of the tax because it reduces 
the dividends and capital gains they receive. Owners of capital bear 
some of the tax because it reduces the return to capital in the economy 
more broadly. And workers bear some of the tax because it reduces the 
size and quality of the U.S. capital stock, which in turn reduces their 
wages, salaries, and benefits.

    Debate continues about how much each group bears. Some individual 
studies suggest workers may bear as much as 60 to 70 percent of the 
corporate income tax. But many other studies find lower shares. Federal 
agencies estimate that workers bear 19 to 25 percent of the corporate 
income tax (Huang and Debot 2017).

    My colleagues at the Tax Policy Center estimate that in the long 
run, 20 percent of changes in the corporate tax rate are ultimately 
borne by workers (Nunns 2012). The remainder is borne by corporate 
shareholders (60 percent) and capital owners generally (20 percent). 
Changes in investment write-off rules, however, can have a bigger 
effect on workers. Depreciation and expensing rules have a more direct 
effect on investment--and thus the productivity that drives wages, 
salaries, and benefits--than do changes in the corporate tax rate. TPC 
estimates that, in the long run, 50 percent of changes in depreciation 
rules and expensing are borne by workers and 50 percent by all capital.

    In these discussions, terms like ``workers'' and ``labor'' refer to 
all types of workers, including highly paid executives, professionals, 
and managers. Economists expect increased investment to boost 
productivity and incomes across all types of jobs and decreased 
investment to do the reverse.

[GRAPHIC] [TIFF OMITTED] T1917.002


    The benefits of cutting corporate income taxes thus go 
predominantly to people with high incomes. Under TPC's estimates, about 
70 percent of the benefit from cutting corporate tax rates would go to 
people in the top fifth of the income distribution, with 34 percent 
going to people in the top 1 percent (figure 1). The benefits of 
accelerating investment write-offs would be somewhat less concentrated 
at the top, with 62 percent going to the top fifth by income and 24 
percent to the top 1 percent.
        3. taxing pass-through businesses at preferential rates 
                       will inspire tax avoidance
    American businesses take many forms, from sole proprietors working 
from home to publicly traded multinationals that span the globe. The 
largest businesses are usually organized as C corporations, which pay 
the corporate income tax. Millions of sole proprietorships, 
partnerships, limited liability corporations, and S corporations, 
however, do not pay the corporate income tax. Instead, their owners pay 
ordinary income taxes on their share of profits. These entities are 
often called pass-throughs because for tax purposes their income passes 
through to their individual or owners.

    Pass-throughs are an important economic force. They account for 
about 95 percent of all businesses and more than half of all business 
revenue (Looney and Krupkin 2017, Prisinzano et al. 2016).

    Both President Trump and the Better Way plan have proposed that 
business income from pass-throughs be taxed at a lower maximum rate 
than wages, salaries, and other types of ordinary income. The Trump 
administration proposed that all business income be taxed at 15 
percent, with a top individual tax rate of 35 percent. In their Better 
Way proposal, House Republicans proposed a 25 percent tax rate on pass-
through business income, below their top 33 percent rate on ordinary 
income.

    These rate differentials--20 percentage points under President 
Trump's proposal and 8 percentage points under the Better Way's--would 
create new avenues for tax avoidance. Taxpayers facing higher tax rates 
on their nonbusiness income would now get a big tax saving if they can 
recharacterize some of that income as business income. Highly paid 
professionals, for example, might provide services through LLCs and 
claim some portion of their compensation as business income.

    Taxpayers clearly respond to such rate differentials. When Kansas 
exempted all pass-through income from its State income tax, with rates 
up to about 5 percent, Kansans responded by creating new LLCs, 
partnerships, and so on. State revenue plummeted without any apparent 
economic boost (DeBacker et al. 2016). At the Federal level, profits 
from S corporations are not subject to Medicare payroll taxes. The 
resulting rate differentials--2.9 percentage points through 2012, up to 
3.8 percentage points since 2013--have inspired some professionals to 
route income through S corporations and treat it as profit rather than 
compensation (Burman and Rosenberg 2017). Preferential tax rates 
similarly encourage people to convert ordinary income into capital 
gains and dividends.

    President Trump and the Better Way architects have both indicated 
they will introduce measures to curb avoidance. Legislative and 
regulatory measures can limit avoidance but will introduce new 
problems. Eligibility rules will create new complexity, create 
arbitrary distinctions (e.g., between qualifying and nonqualifying 
businesses), and increase administrative costs. Enforcement will 
require Internal Revenue Service resources and impose new taxpayer 
burdens. And despite such efforts, some avoidance will still occur. 
Payroll tax avoidance through S corporations, for example, continues to 
be an issue today (Burman and Rosenberg 2017).
  4. limiting the top tax rate on pass-through business income would 
                 benefit only people with high incomes
    Proposals for a maximum tax rate on pass-through business income 
would overwhelmingly benefit people with high incomes for two reasons. 
First, people with high incomes are much more likely to have business 
income. The Tax Policy Center estimates, for example, that the top 1 
percent receive more than half of pass-through business income. Second, 
maximum rates would help only taxpayers whose income is high enough 
that they would otherwise be in a higher tax bracket.

    The benefits from a maximum tax rate on pass-through business 
income thus skew enormously to people with high incomes. Rohaly, 
Rosenberg, and Toder (2017) recently considered several scenarios in 
which business income from pass-throughs faces a maximum tax rate of 15 
or 25 percent and with narrow and broad definitions of qualifying 
income. They estimated the effects of the maximum against a baseline of 
a 33-percent top individual tax rate and no alternative minimum tax, 
similar to leading Republican proposals. In all four cases, the 
benefits of a maximum tax tilt heavily to the high end. In the case 
with a 25-percent maximum rate and a broad definition of qualifying 
income, for example, they find that 88 percent of the tax savings go to 
people in the top 1 percent by income (figure 2).

    One way to reduce this inequity would be to introduce a complete 
schedule of preferential rates for taxpayers at all income levels. If a 
reformed code has individual rates of 35 percent, 25 percent, and 10 
percent, for example, the preferential rate schedule for pass-through 
business income might be 30 percent, 20 percent, and 5 percent. 
Benefits would still skew to people with the highest incomes because 
they receive the most business income. But this rate structure would 
eliminate the extra skew that comes from a maximum rate. On the other 
hand, this approach would greatly amplify concerns about tax avoidance. 
A maximum rate invites avoidance by the relatively few taxpayers with 
income high enough to benefit. A schedule of preferred rates invites 
avoidance by taxpayers at all income levels.

[GRAPHIC] [TIFF OMITTED] T1917.003

     5. taxing pass-through business income at the corporate rate 
                      would not achieve tax parity
    In a perfect world, businesses would organize as corporations or 
pass-throughs based on business and personal considerations. In 
practice, taxes often drive those decisions.

    Some observers have suggested that taxing pass-through and 
corporate income at the same rate would create a level playing field. 
The Main Street Tax Fairness Act (H.R. 5076 and S. 707), for example, 
would tax pass-through business income at the corporate tax rate. If 
the corporate rate fell, the pass-through rate would fall as well.

    However, making these rates equal would not achieve parity. 
Business income from pass-throughs faces a single layer of tax: each 
owner pays individual income taxes on his or her share of business 
profits. Corporate income, however, faces two layers of tax: one when 
the company pays its taxes and the other when shareholders receive 
dividends or realize capital gains. Several factors limit the size of 
this second layer of tax. Most dividends and capital gains are taxed at 
preferential rates. Capital gains are not taxed until they are 
realized. And most corporate stock is held by tax-exempt and tax-
deferred investors (Burman, Clausing, and Austin 2017). But accounting 
for all those factors, corporate income still faces higher taxes, on 
average, than does pass-through income.

    Taxing pass-through business income at the corporate tax rate would 
thus not achieve parity. True parity requires that pass-through income 
face a higher tax rate than corporate income, that pass-through income 
face a second layer of tax, or that shareholder taxes be eliminated.

  6. it is extremely difficult to pay for large cuts in business tax 
     rates by limiting existing business tax breaks and deductions
    Tax policy experts have spent much of this decade trying to find 
enough payfors to lower the corporate tax rate to 25 or 28 percent, the 
rates targeted by Governor Romney and President Obama in the 2012 
presidential campaign. In his 2014 proposal, Dave Camp demonstrated 
that a 25 percent rate might be technically possible but would require 
substantial cuts in existing tax breaks and limits on interest 
deductibility. The Tax Policy Center (2017) recently estimated that the 
corporate rate could be reduced to 26 percent without losing revenue in 
the long run if all corporate tax expenditures were eliminated except 
deferral. This would require eliminating such tax benefits as 
accelerated depreciation for machinery and equipment, expensing of 
investments for small businesses under section 179 of the code, 
expensing of research costs, the research credit, and the low-income 
housing credit, among others.

    Today, some Republican proposals go much further, lowering the 
corporate rate to 15 to 20 percent. It is extremely difficult to pay 
for such large cuts by limiting business tax breaks and deductions 
alone. As TPC and JCT analyses indicate, getting the corporate rate 
into the mid-20s may use up all business tax breaks. And there's a 
second challenge: deductions lose value as tax rates fall. A deduction 
that costs $100 at today's 35 percent rate is worth only $80 at a 28 
percent rate and only $43 at a 15 percent rate. The more you cut rates, 
the less budget savings you get by rolling back each deduction.

    The only way to pay for large rate reductions is to increase other 
taxes or introduce new ones. One option is to raise taxes on 
shareholders, who get significant benefits from corporate tax 
reductions. Eric Toder and Alan Viard (2016) offer one approach, which 
would tax shareholder gains at ordinary income tax rates as they accrue 
rather than at realization. Another option is to introduce a value-
added tax or a close relative like the destination-based cash flow tax. 
A third option is to introduce a carbon tax, which would discourage 
emissions of greenhouse gases and accelerate our move to cleaner energy 
sources.
            7. retroactive tax cuts would not boost growth, 
                    would benefit only shareholders
    Some tax policy optimists once hoped reform would happen quickly, 
with many changes taking effect on January 1, 2017. With three-quarters 
of the year now behind us, some voices still argue for that start date, 
especially for any business tax cuts.

    Making tax cuts retroactive would do little or nothing to promote 
economic growth. Indeed, it could weaken growth since it would leave 
less budgetary room to enact other pro-growth reforms. The purpose of 
business tax reform is not to put additional cash into the coffers of 
profitable businesses. Some slack may remain in our economy, but giving 
windfalls to businesses would provide little or no stimulus. Instead, 
the goal of business tax reform should instead be to change the 
financial incentives businesses face so they invest more and invest 
better here at home. Retroactive tax cuts fail to do that.

    The benefits of retroactive tax cuts would go solely to 
shareholders, not to workers. A retroactive tax cut would thus be more 
regressive than forward-looking cuts in corporate tax rates or more 
favorable investment write-offs. The Tax Policy Center estimates that 
76 percent of the benefits of a retroactive cut in corporate taxes 
would go to people in the top fifth of the income distribution 
(compared with 70 percent for forward-looking rate reductions and 62 
percent for faster write-offs) and 40 percent to the top 1 percent 
(compared with 34 percent and 24 percent, respectively).

    As 2017 draws to a close, lawmakers should focus on business tax 
reforms in 2018 and beyond.\1\
---------------------------------------------------------------------------
    \1\ One possible exception are the temporary tax provisions that 
expired at the end of last year but are widely expected to be extended. 
For my general views on these ``tax extenders,'' see Marron (2012).

    Thank you again for inviting me to appear today. I look forward to 
---------------------------------------------------------------------------
your questions.

References
Burman, Leonard E., Kimberly A. Clausing, and Lydia Austin, 2017. ``Is 
    U.S. Corporate Income Double-Taxed?'' National Tax Journal 70 (3): 
    675-706.

Burman, Len, and Joe Rosenberg, 2017. ``Preferential Pass-Through 
    Business Tax Rates and Tax Avoidance.'' Washington, DC: Urban-
    Brookings Tax Policy Center.

DeBacker, Jason Matthew, Bradley Heim, Shanthi Ramnath, and Justin M. 
    Ross, 2016. ``The Impact of State Taxes on Pass-Through Businesses: 
    Evidence From the 2012 Kansas Income Tax Reform.'' Available 
    through SSRN.

Huang, Chye-Ching, and Brandon Debot, 2017. ``Corporate Tax Cuts Skew 
    to Shareholders and CEOs, not Workers as Administration Claims.'' 
    Washington, DC: Center on Budget and Policy Priorities.

Joint Committee on Taxation, 2014. ``Macroeconomic Analysis of the Tax 
    Reform Act of 2014.'' Washington, DC: Joint Committee on Taxation.

Looney, Adam, and Aaron Krupkin, 2017. ``Nine Facts About Pass-Through 
    Businesses.'' Washington, DC: Urban-Brookings Tax Policy Center.

Marron, Donald, 2012. ``The `Tax Expirers.' '' Testimony before the 
    Subcommittee on Select Revenue Measures of the Committee on Ways 
    and Means, U.S. House of Representatives, June 8th.

Nunns, Jim, 2012. ``How TPC Distributes the Corporate Income Tax.'' 
    Washington, DC: Urban-Brookings Tax Policy Center.

Prisinzano, Richard, Jason DeBacker, John Kitchen, Matthew Knittel, 
    Susan Nelson, and James Pearce, 2016. ``Methodology to Identify 
    Small Business.'' Washington, DC: U.S. Department of the Treasury.

Rohaly, Jeffrey, Joseph Rosenberg, and Eric Toder, 2017. ``Options to 
    Reduce the Taxation of Pass-through Income.'' Washington, DC: 
    Urban-Brookings Tax Policy Center.

Tax Policy Center Staff, 2017. ``The Tax Reform Tradeoff: Eliminating 
    Tax Expenditures, Reducing Rates.'' Washington, DC: Urban-Brookings 
    Tax Policy Center.

Toder, Eric, and Alan Viard, 2016. ``Replacing Corporate Revenues with 
    a Mark-to-Market Tax on Shareholder Income.'' Washington, DC: 
    Urban-Brookings Tax Policy Center.

                                 ______
                                 
         Questions Submitted for the Record to Donald B. Marron
               Questions Submitted by Hon. Orrin G. Hatch
    Question. Dr. Marron, I was particularly interested in your 
testimony regarding the incidence of the corporate income tax and your 
comment that ``the benefits of cutting corporate income taxes thus go 
predominantly to people with high incomes.'' What I didn't find in your 
testimony is whether you believe it is nevertheless appropriate to 
reduce the statutory corporate income tax rate in tax reform, 
especially given that the U.S. corporate rate is regarded by almost 
everyone as globally uncompetitive. Would you please provide us your 
thoughts on that? I'm very curious to hear if your views are in line 
with the views of both former President Obama and President Trump on 
this issue.

    Answer. Yes, I believe we should cut the statutory corporate tax 
rate. Our current system features an especially high statutory rate and 
numerous tax breaks. Tax considerations thus loom large--too large in 
my view--in corporate decision-making. Lowering the corporate rate and 
repealing many tax breaks would create a simpler, fairer, more 
competitive tax system.

    Question. Dr. Marron, you identify in your testimony that growth 
effects in the near-term from tax reform may be modest, at least in the 
typical 10-year budget window used by congressional scorers. Growth had 
been stuck at a sluggish 2 percent or so, on average, during the 
previous administration, and some view continued sluggishness as some 
sort of destiny because of demographics and the like. However, even a 
quarter or half a percent sustained increase in economic growth would 
yield tremendous dividends, including dividends to middle-class 
Americans. Dr. Marron, I wonder if you agree that even a quarter or 
half a percent sustained increase in growth would be meaningful to 
Americans over the next 10 years, and whether the benefits would 
continue after that.

    Answer. The impacts of faster economic growth depend on how much 
growth accelerates, why it accelerates, and how the gains from growth 
are shared in society. If tax reform somehow lifts productivity growth 
by a quarter of a percent annually over the next decade and if those 
gains are broadly shared, then many Americans would see significant 
benefits. (If the growth came from increased labor supply, the benefits 
of increased economic activity would have to be weighed against the 
opportunity cost of shifting people's time from other activities.)

    For example, consider a family with $50,000 of income in 2017. 
Today their income might be expected to grow about 2 percent annually, 
reaching $61,000 in 2027. If it grew at 2.25 percent instead, their 
income would be $62,500 in 2027. That $1,500 gain is a real benefit.

    Note, however, that their gain would be only $125 in the first year 
of higher growth and only $500 in 2021. The benefits of faster growth 
take time to accumulate.

    This example considers a scenario in which tax reform would lift 
productivity growth by 0.25 percentage points in each of the next 10 
years, raising the level of economic activity by about 2.5 percent in 
2027. That would be a tremendous accomplishment, far beyond what I 
would expect from the Framework or related proposals.

    Question. Dr. Marron, you seem to put forward a Gordian knot in 
your testimony regarding pass-through businesses. On the one hand, 
lowering rates for pass-throughs would, as you suggest, create new 
opportunities for tax avoidance. On the other hand, you seem to 
indicate that attending to the issue by attempting to put up guardrails 
to deal with those opportunities for avoidance could impose new 
complexities, create arbitrary distinctions, and impose new 
administrative burdens. Dr. Marron, does that mean that nothing can be 
done to lower taxes on pass-throughs?

    Answer. It is a mistake to think of recent proposals as trying to 
lower taxes on pass-through businesses. Instead, they are proposals to 
lower taxes on a select group of pass-through businesses.

    The Framework proposal, for example, would create a 25-percent 
maximum tax rate on pass-through income. This would do nothing to 
reduce taxes for the vast majority of pass-through entities whose 
income is already taxed at 25 percent or less.

    Lawmakers understandably want to limit the benefits of the special 
rate even further. To do so requires some way of distinguishing pass-
through income that ``deserves'' a lower rate from pass-through income 
that doesn't. As I said in my testimony, any effort to do will impose 
new complexities, create arbitrary distinctions, impose new 
administrative burdens, and invite gaming by high-income taxpayers. 
Congress can try to limit those problems with simple, broad-brush rules 
such as allowing the lower rate for only 30 percent of pass-through 
income. By itself, however, that does nothing to focus the benefit on 
``deserving'' businesses or to discourage game playing.

    Question. Dr. Marron, in testimony before a House Committee in 
2014, you identified IRS research that estimated that corporations and 
partnerships spent more than $100 billion complying with the Federal 
income tax code for tax year 2009. Furthermore, you identified that 
small businesses bear the majority of those costs, with, at the time, 
$66 billion borne by businesses with less than $1 million in revenue 
and $91 billion for businesses with less than $10 million in revenue. 
Given such high costs of compliance, which largely fall on smaller 
businesses, do you believe that tax reform that simplifies the tax 
system for businesses could meaningfully reduce those compliance costs, 
especially for smaller businesses?

    Answer. Reducing compliance burdens on responsible small businesses 
should be a priority for reform. Increasing section 179 expensing and 
expanding eligibility for cash accounting are two ways to do so.

    Question. Dr. Marron, you favor expensing and believe it should be 
a higher priority for Congress than a reduction of the corporate tax 
rate. I understand one of the main arguments for such prioritization is 
that a corporate tax rate cut, while incentivizing new investment is, 
in large part, a windfall to old capital. That is, a corporate rate cut 
gives a benefit to income that would have been generated anyway. 
Expensing, on the other hand, only gives a tax benefit to new 
investments, so wouldn't be granting windfall benefits. Am I stating 
that argument correctly?

    Answer. As you say, one concern about cutting the corporate tax 
rate is that companies would pay lower taxes on profits that result 
from decisions and investments they have already made. That's a pure 
windfall to the companies. Another concern is that companies would pay 
lower taxes in the future on what economists call their super-normal 
returns, i.e., the profits they make in excess of their cost of 
capital. Expensing avoids both of these problems. It applies only to 
new investments, not past ones. And it applies only to the normal 
profits from investing, not the super-normal profits.

    Question. But I also want to ask, couldn't expensing also result in 
a windfall benefit? That is, if a business was going to invest $100 
million, say, in capital equipment under the Alternative Depreciation 
System (ADS), then to allow the $100 million to all be deducted in the 
first year of such investment, to allow it to be expensed, wouldn't 
that be giving a tax benefit for activity that would have happened 
anyway? Shouldn't that be considered a windfall benefit?

    Answer. I would draw a distinction here between a windfall benefit 
and what economists call an inframarginal benefit. Cutting the 
corporate tax rate creates a windfall for companies that have made 
profitable investments in the past. Expensing doesn't have that 
problem. But both expensing and lowering the corporate rate raise the 
issue you mention--some of the benefit would accrue on investments that 
businesses would have made in the United States anyway. Lowering taxes 
on these inframarginal investments does nothing to incentivize new 
investment.

    Question. Finally, would one way to address this problem be to 
allow full expensing for capital expensing that exceeds some base 
account, similar to how is done with the R&D credit? (With the R&D 
credit the point of that is that the R&D credit is targeted on research 
that would not have happened anyway, that would not have happened but 
for the credit.) Perhaps this could be a way to get most of the same 
growth effect from expensing, but while limiting the revenue costs.

    Answer. This approach makes some sense conceptually, but would be 
difficult to implement in practice. The dividing line between marginal 
and inframarginal investments changes constantly as economic conditions 
evolve and as individual businesses gain and lose market share.

    Question. Mr. Marron, you write that if tax reform loses revenue, 
the resulting deficits may crowd out private investment. Could you 
please explain that more?

    Answer. If tax reform loses revenue, the Federal Government has 
five options for making up the difference. It could raise future taxes, 
reduce future spending, sell public assets, print more money, or 
borrow. In my testimony, I focused on the scenario with more borrowing. 
In that case, the borrowed resources must come from some combination of 
increased private saving, reduced private investment, and capital 
inflows from abroad. Based on research by the Congressional Budget 
Office and others, I expect that a material amount of the resources 
will come from reduced private investment. That ``crowding out'' will 
reduce the future capital stock and reduce the economic gains from tax 
reform.

    Question. Dr. Marron, you seem to think that a move towards 
expensing would be more helpful to the economy than would a corporate 
rate cut. But I will tell you that many corporations I hear from seem 
to prefer the corporate rate cut. Why do you think that is? How much of 
that has to do with financial accounting--and if so, how much should 
policymakers take that into account?

    Answer. Several factors are at play here. First, the magnitude of 
the potential tax cuts differs. Corporations would get a bigger benefit 
from a large cut in the corporate rate than from a move to full 
expensing. Second, as you note, some corporations may prefer the 
financial accounting implications of a corporate tax cut (although 
companies with unused net operating losses may dislike it). I do not 
think policymakers should give these concerns much weight. Responsible 
management should focus on the economic value they create, not how it 
may appear in financial statements. That said, there is some evidence 
that financial accounting for taxes does influence corporate decisions 
and, in particular, that a focus on financial accounting can weaken the 
investment incentives from full expensing.

    Question. Dr. Marron, if investment in capital assets were allowed 
to be expensed, should there be exceptions to this for LIFO? For land? 
For real estate improvements?

    Answer. In principle, a consumption-based tax system would allow 
expensing for all assets, whether equipment, structures, inventory, or 
land. Such a system would also forbid tax deductions for interest 
payments from any debt financing these investments.

    In practice, lawmakers may want to focus consumption tax treatment 
on assets that are most sensitive to taxes, while maintaining income 
tax treatment for assets that are less sensitive. Land is an obvious 
candidate, since taxes have little effect on the amount of land 
available for productive use.

                                 ______
                                 
                 Questions Submitted by Hon. Ron Wyden
    Question. Dr. Marron, there is no question that tax reform needs to 
make American businesses more competitive. But one of the central 
questions of this hearing is who primarily benefits from corporate rate 
cuts.

    Treasury, CBO, JCT, and the Tax Policy Center all find that roughly 
three-
quarters of the benefit from a corporate rate cut would benefit 
shareholders and owners of capital--most of whom are wealthy. I know 
the Tax Policy Center has gone even further and looked at the benefits 
by income category.

    Can you tell the committee how much of a windfall the wealthiest 1 
percent would receive from a corporate rate cut?

    Rather than looking at the economic consensus by CBO, JCT, 
Treasury, and TPC, some on this committee choose to cherry-pick one-off 
studies from economists outside the mainstream who agree with their 
political views.

    I assume the Tax Policy Center didn't just pull their figures out 
of thin air. Could you explain how TPC arrived at its estimates, and 
how they differ from those studies that are outside of the mainstream?

    Answer. The Tax Policy Center estimates that 34 percent of the 
benefit from cutting the corporate tax rate would go to households in 
the top 1 percent of the income distribution.

    The Tax Policy Center estimates that, in the long run, 20 percent 
of the corporate income tax burden falls on workers, 60 percent on 
corporate shareholders, and 20 percent on all capital investors 
overall. Senior fellow Jim Nunns explains the evidence underlying those 
estimates in ``How TPC Distributes the Corporate Income Tax.'' He 
reviewed the extensive theoretical and empirical literature on the 
incidence of corporate income taxes.

    Studies that find that most of the corporate burden falls on 
workers differ from the mainstream in three main ways. First, those 
studies often assume that the United States is a small, open economy. 
Under that assumption, capital moves quickly and easily in response to 
tax changes, shifting most or all the burden to domestic workers. In 
reality, the United States is a very large economy, so some of the 
burden will be borne by domestic capital. Second, those studies often 
focus on the normal returns to investment, but ignore super-normal 
returns, i.e., profits in excess of a normal rate of return. Taxes on 
normal returns are much more likely to fall on workers than are taxes 
on super-normal returns. Third, some of those studies try to estimate 
the incidence of the corporate income tax by comparing wages and taxes 
in different countries over time. Unfortunately, it is difficult to 
control for all relevant factors in doing those comparisons, resulting 
in some studies with implausible estimates of the burden on workers.

    Question. Dr. Marron, earlier this year the Tax Policy Center 
estimated the economic impact of the House Republican tax plan. It 
found that the plan would cost more than $3.5 trillion over the first 
10 years and as much as $9 trillion by the end of the second decade.

    The study also found that this massive debt-finance tax cut would 
begin dragging down the economy within the first 10 years and would 
shrink the economy by more than 2.5 percent by the end of the second 
decade.

    Please explain to the committee the risks debt-financed tax cuts 
pose to the economy.

    Answer. Tax reforms that encourage new, productive private 
investment and expand the labor supply can boost our economy. 
Additional deficits, however, can offset those gains. With our economy 
near full employment, deficits will either crowd out some private 
investment, attract investment from abroad (thus directing some 
economic gains to overseas investors), or a combination of both. Debt-
financed tax cuts thus create a race between the potential economic 
gains from tax reductions and the economic losses from higher deficits. 
In practice, the conventional economic models used by CBO, JCT, and TPC 
find that the deficit effects eventually win. Debt-financed tax cuts 
thus undermine long-run economic growth.

                                 ______
                                 
                Questions Submitted by Hon. Bill Nelson
    Question. If you can, please provide some suggestions on how the 
President could achieve some of his stated objectives for business tax 
reform--including (1) reducing complexity in the tax code and hours 
spent on tax-related paperwork and (2) sustaining 3-percent economic 
growth or higher.

    Answer. Small businesses bear a disproportionate share of the 
compliance burden from our tax system. Expanding section 179 expensing 
and cash accounting could ease the burden somewhat for these 
businesses. Lawmakers should also ensure that changes to the code, such 
as special treatment for pass-throughs, not create new complexities and 
compliance burdens.

    We've enjoyed two consecutive quarters of 3 percent economic 
growth. But achieving persistent 3-percent growth over the next decade 
is unlikely, even with pro-growth reforms. Pro-growth reforms include 
reducing the corporate tax rate, allowing full expensing of new 
investments (especially for smaller businesses), reducing the mortgage 
interest deduction (which directs too much domestic capital into 
single-family homes), expanding the Earned Income Tax Credit (which 
brings more people into the workforce), and limiting the extent to 
which tax changes increase long-term deficits.

    Question. Do you believe Congress should consider cutting 
entitlement and safety net programs--like Social Security, Medicare, 
TANF, and food stamps--to pay for tax reform? If so, why? If not, why 
not?

    Answer. No, I do not. There is no need for a major tax cut. The 
economy has largely recovered from the financial crisis, and revenues 
are near historical averages relative to the size of the economy. 
Looking ahead, the fiscal pressures of our aging population and rising 
health-care costs will likely require significant fiscal adjustments, 
reducing the growth of spending and raising the trajectory of revenues. 
Given that context, there is no sense is cutting entitlement programs 
to pay for tax cuts today.

    Question. President Trump has said he wants to lower the top 
business tax to 15 percent. Do you believe this can be done without 
significantly adding to the deficit? If so, please provide a potential 
scenario for deficit-neutral tax reform in detail (with budget 
estimates).

    Answer. I do not see any politically acceptable way to reduce the 
top business tax rate to 15 percent. Making up the lost revenue will 
simply be too challenging. That said, my colleagues at the Tax Policy 
Center have explored several ways to make a 15-percent rate work. These 
include:

      Jim Nunns, ``Neutral Tax Reform with 15-Percent Business Income 
Tax Rate,'' which applies a 15-percent tax rate to corporations and 
pass-throughs.

      Eric Toder and Alan Viard, ``Replacing Corporate Revenues with a 
Mark-to-
Market Tax on Shareholder Income,'' which lowers the corporate rate to 
15 percent and makes up revenue by taxing shareholders.

      Donald Marron and Eric Toder, ``Carbon Taxes and Corporate Tax 
Reform,'' which explores how revenue from a carbon tax could help pay 
for lowering the corporate tax rate (this analysis considers corporate 
tax rates in the 20s, but a larger carbon tax could help get the rate 
to 15 percent).

    Question. Please provide any suggestions you have for how to reform 
the tax code for businesses without increasing income inequality.

    Answer. One way to limit the degree to which business tax reform 
increases income inequality is to focus on revenue neutral policy 
changes. For example, policymakers could allow full expensing of new 
business investment and pay for it by rolling back other tax breaks or 
by limiting interest deductibility. Designed well, such revenue neutral 
reforms can encourage new investment--helping workers throughout the 
income distribution--without providing a net tax cut to business 
owners, who tend to have higher incomes.

    Another approach is to pair business tax reductions with expanded 
credits in the individual income tax. For example, reductions in the 
corporate income tax rate could be combined with an expanded Child Tax 
Credit, an expanded Earned Income Tax Credit, or a new family credit to 
ensure that benefits flow to people throughout the income distribution. 
The overall distributional effect will depend, however, on how those 
tax reductions are ultimately paid for.

                                 ______
                                 
                 Prepared Statement of Hon. Ron Wyden, 
                       a U.S. Senator From Oregon
    Before I get to the substance of today's hearing, I need to address 
what's coming down the pike in this committee and on the Senate floor. 
And nothing I'm about to say should take away from our friendship, Mr. 
Chairman, or the fact that we've been able to get some important work 
done over the last several weeks, particularly with respect to CHIP.

    Last night the majority announced, without consulting the minority, 
that on Monday the Finance Committee will hold a hearing on the Graham-
Cassidy-Heller health-care proposal. I want to make clear that this is 
an abomination. It's an abomination of the process, it's an abomination 
of the substance, and it's an abomination of the history of this 
storied committee. First of all, this bill is a prescription for 
suffering and disastrous consequences for millions of Americans. 
Second, the CBO has informed the Congress that it'll be several weeks 
at the very least before it can provide full estimates for the bill. So 
this means the majority will be charging ahead with a radical, 
destructive transformation of our health-care system with the American 
people still in the dark. This bill's going to be a few roll call votes 
away from the President's desk and Republicans will not have answers to 
the basic threshold questions: What will happen to premiums? What will 
happen to coverage?

    The idea that a bill this destructive and far-reaching can swing 
through the Finance Committee for a single hearing on a Monday morning 
and hit the Senate floor a day or two later makes a mockery of the 
legislative process Senator McCain urged us to return to.

    Furthermore, this abomination of a process stands in stark contrast 
to what this committee has been able to achieve with respect to the 
Children's Health Insurance Program. But unfortunately, just when this 
committee ought to be celebrating a big victory for the millions of 
kids who count on CHIP, the Graham-Cassidy-Heller proposal threatens 
the health care of millions of children and families.

    Second point: the reconciliation process relies on secrecy, speed, 
and brute force to ram partisan bills through the Senate, and it's been 
an absolute trainwreck on health care. But Leader McConnell is 
committed to Reconciliation Round Two on tax reform. And that means 
another secretive, partisan bill coming together behind closed doors--
which leads me to a few points on the substance of today's hearing.

    The details leaking out of the ``Big Six'' meetings paint a clear 
picture of an unprecedented tax giveaway for the most fortunate and 
biggest corporations. The centerpiece could very well be a $2-trillion 
loophole having to do with what's called pass-through status.

    Pass-through status is supposed to be about helping small 
businesses, and there's no question that small businesses--who fuel 
local economies and hire the most workers--need a boost in tax reform. 
But any tax change that allows tax cheats to abuse pass-through status 
by ``self-declaring'' to avoid paying their fair share and dodge Social 
Security taxes would be worse than what's on the books today. The day 
the pass-through loophole becomes law would be Christmas morning for 
tax cheats. It would make a mockery of the Trump pledge that, quote, 
``the rich will not be gaining at all with this plan.'' And that's just 
one element of what's on offer.

    Bottom line, it's time for the Congress to take the lies out of the 
corporate tax rate in America. Many of the biggest corporations in the 
country employ armies of lawyers and accountants who know all the tax 
tricks. They winnow their tax rates down to the low teens, single 
digits, even zero. So the Congress cannot pair a big corporate rate cut 
with a plan to enshrine a vast array of loopholes that let corporations 
off the hook for paying their fair share. That's a surefire way of 
heaping a heavier burden onto the middle class.

    I hope the committee is able to take a close look at those issues 
today. As I mentioned, I'll be in and out this morning as I have an 
engagement with the Commerce Committee, but I look forward to returning 
for questions as soon as I'm able.

    Thank you, Chairman Hatch.

                                 ______
                                 

                             Communications

                              ----------                              


        A Call To Invest in Our Neighborhoods (ACTION) Campaign

                       10 G Street, NE, Suite 580

                          Washington, DC 20002

                              202-842-9190

                      www.EnterpriseCommunity.com

The A Call To Invest in Our Neighborhoods (ACTION) Campaign is a 
national coalition representing over 2,000 national, state, and local 
organizations and businesses advocating to preserve, strengthen, and 
expand the Low-Income Housing Tax Credit (Housing Credit). We thank 
Chairman Orrin Hatch and the Committee for holding this critically 
important hearing, and we appreciate the opportunity to provide 
feedback on business tax reform.

We are especially grateful for Finance Committee Chairman Hatch's and 
Committee member Senator Maria Cantwell's leadership in championing 
legislation to expand and strengthen the Housing Credit, our nation's 
primary tool for encouraging private investment in affordable rental 
housing. We strongly urge the Committee to advance this critical bill, 
the Affordable Housing Credit Improvement Act of 2017 (S. 548) this 
year, and protect both the Credit and multifamily Housing Bonds--a 
central component of the Housing Credit program--as part of any tax 
reform effort considered by Congress.
The Housing Credit is a Critical Part of Our Corporate Tax System
The use of the tax code to provide affordable rental housing through 
the Housing Credit and multifamily Housing Bonds has been one of the 
most important successes of the current business tax system. President 
Reagan and the Congress showed remarkable foresight when they created 
the Housing Credit as part of the Tax Reform Act of 1986. The Housing 
Credit is now our nation's most successful tool for encouraging private 
investment in the production and preservation of affordable rental 
housing, with a proven track record of creating jobs and stimulating 
local economies. For over 30 years, the Housing Credit has been a model 
public-
private partnership program, bringing to bear private sector resources, 
market forces, and state-level administration to finance more than 3 
million affordable apartments--nearly one-third of the entire U.S. 
inventory--giving more than 7 million households, including low-income 
families, seniors, veterans, and people with disabilities, access to 
homes they can afford. Roughly 40 percent of these homes were financed 
in conjunction with multifamily Housing Bonds, which are an essential 
component of the program's success.

The Housing Credit differs from many other corporate tax expenditures, 
which subsidize activity that still may occur without a tax benefit. In 
contrast, virtually no affordable rental housing development would 
occur without the Housing Credit. It simply costs too much to build 
rental housing to rent it at a level that low-income households can 
afford. In order to develop new apartments that are affordable to 
renters earning the full-time minimum wage, construction costs would 
have to be 72 percent lower than the current average.

Jeffrey D. DeBoer, President and CEO at the Real Estate Roundtable, who 
testified before the Committee as part of this hearing, recognized the 
Housing Credit's special standing within the corporate tax system. 
DeBoer's written testimony notes that the Housing Credit is an example 
of a tax incentive that is ``needed to address market failures and 
encourage capital to flow to socially desirable projects.''

Also, unlike most other corporate tax expenditures, substantially all 
of the net benefits of the Housing Credit go to low-income families, 
not corporations. This is because the Housing Credit is a purchased tax 
benefit, and corporations must pay in advance for the credit they 
receive. While corporations are the intermediaries who claim the 
credits in order to deliver private resources to affordable rental 
housing to low-income populations, it is the low-income families who 
live in these homes that the credit ultimately serves.
The Housing Credit is a Proven Solution to Meet a Vast and Growing Need
Despite the Housing Credit's tremendous impact, there are still 11.1 
million renter households--roughly one out of every four--who spend 
more than half of their income on rent, leaving too little for other 
necessary expenses like transportation, food, and medical bills. This 
crisis is continuing to grow. HUD reports that as of 2015, the number 
of households with ``worst case housing needs'' had increased by 38.7 
percent over 2007 levels, when the recession began, and by 63.4 percent 
since 2001. A study by Harvard University's Joint Center for Housing 
Studies and Enterprise Community Partners estimates that the number of 
renter households who pay more than half of their income towards rent 
could grow to nearly 15 million by 2025.

The Housing Credit transforms lives by providing quality, affordable 
homes to people in need. It plays a critical role in financing housing 
for families, seniors, persons with disabilities, veterans, and more. 
The Housing Credit is also central to the revitalization of Public 
Housing through HUD's Rental Assistance Demonstration (RAD). Since RAD 
was established in 2012, the Housing Credit has leveraged nearly $1.7 
billion to help recapitalize almost 28,000 homes.
The Housing Credit Creates Jobs
Housing Credit development supports jobs--roughly 1,130 for every 1,000 
Housing Credit apartments developed, according to the National 
Association of Home Builders (NAHB). This amounts to roughly 96,000 
jobs per year, and more than 3.4 million since the program was created 
in 1986. NAHB estimates that about half of the jobs created from new 
housing development are in construction. Additional job creation occurs 
across a diverse range of industries, including the manufacturing of 
lighting and heating equipment, lumber, concrete, and other products, 
as well as jobs in transportation, engineering, law, and real estate.

The Housing Credit Stimulates Local Economies and Improves Communities

The Housing Credit has a profound and positive impact on local 
economies. NAHB estimates that the Housing Credit adds $9.1 billion in 
income to the economy and generates approximately $3.5 billion in 
federal, state, and local taxes each year.

Conversely, a lack of affordable housing negatively impacts economies. 
Research shows that high rent burdens have priced out many workers from 
the most productive cities, resulting in 13.5 percent foregone GDP 
growth, a loss of roughly $1.95 trillion, between 1964 and 2009.

Housing Credit development also positively impacts neighborhoods in 
need of renewal. About one-third of Housing Credit properties help 
revitalize distressed communities. Stanford University research shows 
Housing Credit investments improve property values and reduce poverty, 
crime, and racial and economic isolation, generating a variety of 
socio-economic opportunities for Housing Credit tenants and 
neighborhood residents.
Affordable Housing Improves Low-Income Households' Financial Stability
Affordable housing promotes financial stability and economic mobility. 
It leads to better health outcomes, improves children's school 
performance, and helps low-
income individuals gain employment and keep their jobs. Affordable 
housing located near transportation and areas with employment 
opportunities provides low-income households with better access to 
work, which increases their financial stability and provides employers 
in those areas with needed labor.

Families living in affordable homes have more discretionary income than 
low-income families who are unable to access affordable housing. This 
allows them to allocate more money to other needs, such as health care 
and food, and gives them the ability to pay down debt, access 
childcare, and save for education, a home down payment, retirement, or 
unexpected needs.
The Housing Credit is a Model Public-Private Partnership
The Housing Credit is structured so that private sector investors 
provide upfront equity capital in exchange for a credit against their 
tax liability over 10 years, which only vests once the property is 
constructed and occupied by eligible households paying restricted 
rents. This unique, market-based design transfers the risk from the 
taxpayer to the private sector investor. In the rare event that a 
property falls out of compliance during the first 15 years after it is 
placed in service, the Internal Revenue Service can recapture tax 
credits from the investor. Therefore, it is in the interest of the 
private sector investors to ensure that properties adhere to all 
program rules, including affordability restrictions and high-quality 
standards--adding a unique accountability structure to the program.

The Housing Credit is State Administered With Limited Federal 
Bureaucracy

The Housing Credit requires only limited federal bureaucracy because 
Congress wisely delegated its administration and decision-making 
authority to state government as part of its design. State Housing 
Finance Agencies, which administer the Housing Credit in nearly every 
state, have statewide perspective; a deep understanding of the needs of 
their local markets; and sophisticated finance, underwriting, and 
compliance capacity. States develop a system of incentives as part of 
their Qualified Allocation Plans (QAP), which drives housing 
development decisions, including property siting, the populations 
served, and the services offered to residents. States are also deeply 
involved in monitoring Housing Credit properties, including compliance 
audits and reviews of financial records, rent rolls, and physical 
conditions.
The Demand for Housing Credits Exceeds the Supply
Viable and sorely needed Housing Credit developments are turned down 
each year because the cap on Housing Credit authority is far too low to 
support the demand. In 2014--the most recent year for which data is 
available--state Housing Credit allocating agencies received 
applications requesting more than twice their available Housing Credit 
authority. Many more potential applications for worthy developments are 
not submitted in light of the intense competition, constrained only by 
the lack of resources.

The scarcity of Housing Credit resources forces state allocating 
agencies to make difficult trade-offs between directing their extremely 
limited Housing Credit resources to preservation or new construction, 
to rural or urban areas, to neighborhood revitalization or developments 
in high opportunity areas, or to housing for the homeless, the elderly, 
or veterans. There simply is not enough Housing Credit authority to 
fund all of the properties needed, but with a substantial increase in 
resources, many more of these priorities would be addressed--and the 
benefits for communities would be even greater.

Though the need for Housing Credit-financed housing has long vastly 
exceeded its supply, Congress has not increased Housing Credit 
authority permanently in 16 years.
We Urge Congress to Expand and Strengthen the Housing Credit
To meaningfully grow our economy and address our nation's growing 
affordable housing needs through tax reform, we urge Congress to 
increase the cap on Housing Credit authority by 50 percent. Such an 
expansion would support the preservation and construction of up to 
400,000 additional affordable apartments over a 10-year period. We also 
call on Congress to retain the tax exemption on multifamily Housing 
Bonds, which are essential to Housing Credit production.

S. 548, which would authorize such an expansion, has earned strong 
bipartisan support in the Senate and among Senate Finance Committee 
members.

This legislation would increase Housing Credit allocation authority by 
50 percent phased in over 5 years, and enact roughly two dozen changes 
to strengthen the program by streamlining program rules, improving 
flexibility, and enabling the program to serve a wider array of local 
needs. For example, S. 548 would encourage Housing Credit development 
in rural and Native communities, where it is currently more difficult 
to make affordable housing developments financially feasible; Housing 
Credit developments that serve the lowest-income tenants, including 
veterans and the chronically homeless; the development of mixed-income 
properties; the preservation of existing affordable housing; and 
development in high-opportunity areas. The legislation would also 
generate a host of benefits for local communities, including raising 
local tax revenue and creating jobs.

We also encourage Congress to make adjustments to the Housing Credit 
necessary to offset the impact that a lower corporate tax rate would 
have on Housing Credit investment. Senator Cantwell raised this 
important point during the hearing, when she noted that just the 
prospect of a lower corporate tax rate over the last year has resulted 
in lower pricing of Housing Credits by investors. This has impacted 
production at a time when our nation's shortage of affordable housing 
is vast and growing. However, Congress could negate the negative impact 
on the Housing Credit created by a lower corporate tax rate by making 
adjustments to the Housing Credit program's discount rate. Members of 
ACTION stand ready to help the Committee make these modifications to 
the program, which are outside the scope of S. 548, and ensure that 
affordable housing production continues at a robust level regardless of 
other changes made in tax reform.

An investment in the Housing Credit is an investment in individuals, 
local communities, and the economy. It transforms the lives of millions 
of Americans, many of whom are able to afford their homes for the first 
time--and it transforms their communities and local economies. The 
ACTION Campaign applauds the leadership the Senate Finance Committee 
has shown in support of the Housing Credit to date and urges the 
Committee to expand and strengthen the Housing Credit and multifamily 
Housing Bonds.

ACTION Campaign Co-Chairs
National Council of State Housing Agencies
Enterprise Community Partners

ACTION Campaign Steering Committee Members
Affordable Housing Tax Credit Coalition
Council for Affordable and Rural Housing
Council of Large Public Housing Authorities
CSH
Housing Advisory Group
Housing Partnership Network
LeadingAge
Local Initiatives Support Corporation/National Equity Fund
Make Room
National Association of Affordable Housing Lenders
National Association of Home Builders
National Association of Housing and Redevelopment Officials
National Association of Realtors
National Association of State and Local Equity Funds
National Housing and Rehabilitation Association
National Housing Conference
National Housing Trust
National Low Income Housing Coalition
National Multifamily Housing Council
Stewards of Affordable Housing for the Future
Volunteers of America

For a full list of ACTION Campaign members, visit 
www.rentalhousingaction.org.

                                 ______
                                 
                    American Farm Bureau Federation

                  600 Maryland Avenue, SW, Suite 1000W

                          Washington, DC 20024

                            p. 202-406-3600

                            t. 202-406-3606

                               www.fb.org

The American Farm Bureau Federation is the country's largest general 
farm organization, with nearly 6 million member families and 
representing nearly every type of crop and livestock production across 
all 50 states and Puerto Rico. Our members grow and produce the food, 
fiber, and fuel that propel our nation's economy as well as putting 
food on our tables. According to USDA, 11 percent of U.S. employment 
comes from the agriculture and food industry, accounting for 21 million 
jobs of which about 18 million are off-the-farm positions.

Federal tax policy affects the economic behavior and well-being of farm 
households as well as the management and profitability of farm and 
ranch businesses. Farm Bureau supports replacing the current federal 
income tax with a fair and equitable tax system that encourages 
success, savings, investment, and entrepreneurship.

Farms and ranches operate in a world of uncertainty. From unpredictable 
commodity and product markets to fluctuating input prices, from 
uncertain weather to insect or disease outbreaks, running a farm or 
ranch business is challenging under the best of circumstances. Farmers 
and ranchers need a tax code that recognizes the financial challenges 
that impact agricultural producers. They want a tax code that doesn't 
make the challenging task of running a farm or ranch business more 
difficult than it already is.

Farm Bureau supports tax laws that help the family farms and ranches 
that grow America's food and fiber, often for rates of return that are 
modest compared to other business. What is needed is tax reform that 
supports high-risk, high-input, capital-intensive businesses like farms 
and ranches that predominantly operate as sole proprietors and pass-
through entities. We believe that tax reform should be equitable and 
designed to encourage private initiative and domestic economic growth.

Farm Bureau commends the Committee on Finance for holding a hearing on 
business tax reform. The statement that follows focuses on and provides 
additional commentary on the tax reform issues most important to 
farmers and ranchers.

               COMPREHENSIVE TAX REFORM WILL BOOST FARM 
                          AND RANCH BUSINESSES

Any tax reform proposal considered by Congress must be comprehensive 
and include individual as well as corporate reform and rate reduction. 
By far, the most common form of farm ownership is as a sole-proprietor. 
In total, farms and ranches operated as individuals, partners and S 
corporation shareholders constitute about 94 percent of our nation's 2 
million farms and ranches and about 85 percent of total agricultural 
production. Because many business deductions and credits are used by 
both corporate and pass-through businesses, their elimination without 
substantial rate reduction for all business entities could result in a 
tax increase for the vast majority of farmers and ranchers.

              LOWER EFFECTIVE TAX RATES WILL BENEFIT FARM 
                          AND RANCH BUSINESSES

Farm Bureau supports reducing effective tax rates and views this as the 
most important goal of tax reform. Tax reform that lowers rates by 
expanding the base should not increase the overall tax burden (combined 
income and self-employment taxes) of farm and ranch businesses.

Because profit margins in farming and ranching are tight, farm and 
ranch businesses are more likely to fall into lower tax brackets. Tax 
reform plans that fail to factor in the impact of lost deductions for 
all business entities and for all rate brackets could result in a tax 
increase for agriculture.

Farming and ranching is a cyclical business. A period of prosperity can 
be followed by one or more years of low prices, poor yields or even a 
weather disaster. Without the opportunity to even out income over time, 
farmers and ranchers will pay more than comparable non-cyclical 
businesses. Tax code provisions like income averaging allow farmers and 
ranchers to pay taxes at an effective rate equivalent to a business 
with the same aggregate, but steady revenue stream. Farm savings 
accounts would accomplish the same objective plus allow a farmer or 
rancher to reserve income in a dedicated savings account for withdrawal 
during a poor financial year. Installment sales of land benefit both 
buyers and sellers by providing sellers with an even income flow and 
buyers with the ability to make payments over time.

        ACCELERATED COST RECOVERY HELPS FARMERS REMAIN EFFICIENT

Farmers and ranchers need to be able to match income with expenses in 
order to manage their businesses through challenging financial times. 
Expensing allows farm and ranch businesses to recover the cost of 
business investments in the year a purchase is made. In addition to 
Section 179 small business expensing, the tax code also provides 
immediate cost recovery through bonus depreciation and through long-
standing provisions that allow for the expensing of soil and water 
conservation expenditures, expensing of the costs of raising dairy and 
breeding cattle and for the cost of fertilizer and soil conditioners 
such as lime. Farm Bureau supports the expansion of immediate 
expensing.

Because production agriculture has high input costs, Farm Bureau places 
a high value on the immediate write-off of all equipment, production 
supplies and pre-
productive costs. While Section 179 does provide full expensing for 
most small and mid-size farms, USDA reports that almost a quarter of 
the large farms that account for nearly half of all agricultural 
production made investments exceeding the expensing limit in 2015. 
Thus, an expansion of immediate expensing has the potential to change 
the investment behavior of farms responsible for a significant amount 
of agriculture production.

When farmers are not allowed immediate expensing they must capitalize 
purchases and deduct the expense over the life of the property. 
Accelerated deductions reduce taxes in the purchase year, providing 
readily available funds for upgrading equipment, to replace livestock, 
to buy production supplies for the next season and for farmers to 
expand their businesses. This is not only a benefit to production 
agriculture; a study in the journal Agricultural Finance Review found 
that for every $1,000 increase to the Section 179 expensing amount, 
farms that had been previously limited by the expensing amount made an 
incremental capital investment of between $320 and $1,110.

            CASH ACCOUNTING HELPS FARM AND RANCH BUSINESSES 
                              TO CASH FLOW

Cash accounting is the preferred method of accounting for farmers and 
ranchers because it allows them to match income with expenses and aids 
in tax planning. Farm Bureau supports the continuation of cash 
accounting.

Cash accounting allows farmers and ranchers to improve cash flow by 
recognizing income when it is received and recording expenses when they 
are paid. This provides the flexibility farmers need to plan for major 
business investments and in many cases provides guaranteed availability 
of some agricultural inputs.

Under a progressive tax rate system, farmers and ranchers, whose 
incomes can fluctuate widely from year to year, will pay more total 
taxes than taxpayers with more stable incomes. The flexibility of cash 
accounting also allows farmers to manage their tax burden on an annual 
basis by controlling the timing of revenue to balance against expenses 
and target an optimum level of income for tax purposes.

Loss of cash accounting would create a situation where a farmer or 
rancher might have to pay taxes on income before receiving payment for 
sold commodities. Not only would this create cash flow problems, but it 
also could necessitate a loan to cover ongoing expenses until payment 
is received. The use of cash accounting helps to mitigate this 
challenge by allowing farm business owners to make tax payments after 
they receive payment for their commodities.

         DEDUCTING INTEREST EXPENSE IS IMPORTANT FOR FINANCING

Debt service is an ongoing and significant cost of doing business for 
farmers and ranchers who typically rely on borrowed money to buy 
production inputs, vehicles and equipment, and land and buildings. 
Interest paid on these loans should be deductible because interest is a 
legitimate business expense. According to the USDA Economic Research 
Service, interest expense accounts for 17.9 percent of fixed expenses 
for farms and ranches. Immediate expensing will not offset the loss of 
this deduction, especially for the bulk of farmers and ranchers 
currently covered under Section 179 small business expensing.

Farm and ranch businesses are almost completely debt financed with 
little to no access to investment capital to finance the purchase of 
land and production supplies. In 2015, all but 5 percent of farm sector 
debt was held by banks, life insurance companies and government 
agencies. Without a deduction for interest, it would be harder to 
borrow money to purchase land and production inputs and the agriculture 
sector could stagnate.

Land has always been farmers' greatest asset, with real estate 
accounting for 79 percent of total farm assets in 2015. Since almost 
all land purchases require debt financing, the loss of the deduction 
for mortgage interest would make it more difficult to cash flow loan 
payments and could even make it impossible for some to secure financing 
at all. The need for debt financing is especially critical for new and 
beginning farmers who need to borrow funds to start their businesses.

          REPEALING ESTATE TAXES WILL AID IN FARM TRANSITIONS

Estate taxes disrupt the transition of farm and ranch businesses from 
one generation to the next. Farm Bureau supports estate tax repeal, 
opposes the collection of capital gains taxes at death, and supports 
the continuation of unlimited stepped-up basis.

Farming and ranching is both a way of life and a way of making a living 
for the millions of individuals, family partnerships, and family 
corporations that own more than 97 percent of our nation's more than 
2.1 million farms and ranches. Many farms and ranches are multi-
generation businesses, with some having been in the family since the 
founding of our nation.

Many farmers and ranchers have benefited greatly from congressional 
action that increased the estate tax exemption to $5 million indexed 
for inflation, provided portability between spouses, and continued the 
stepped-up basis. Instead of spending money on life insurance and 
estate planning, most farmers are able to upgrade buildings and 
purchase equipment and livestock. And more importantly, they have been 
able to continue farming when a family member dies without having to 
sell land, livestock or equipment to pay the tax.

In spite of this much-appreciated relief, estate taxes are still a 
pressing problem for some agricultural producers. One reason is that 
the indexed estate tax exemption, now $5.49 million, is still catching 
up with recent increases in farmland values. While increases in 
cropland values have moderated over the last 3 years, cropland values 
remain high. On average cropland values are 62 percent higher than they 
were a decade ago. As a result, more farms and ranches now top the 
estate tax exemption. With 91 percent of farm and ranch assets 
illiquid, producers have few options when it comes to generating cash 
to pay the estate tax.

        REDUCED TAXATION OF CAPITAL GAINS ENCOURAGES INVESTMENT

The impact of capital gains taxes on farming and ranching is 
significant. Production agriculture requires large investments in land 
and buildings that are held for long periods of time during which land 
values can more than triple. USDA survey data suggests about 40 percent 
of all family farms and ranches report some gain or loss, more than 
three times the average individual taxpayer. Farm Bureau supports 
reducing capital gains tax rates and wants an exclusion for farm land 
that remains in production.

Capital gains taxes are owed when farm or ranch land, buildings, 
breeding livestock and some timber are sold. While long-term capital 
gains are taxed at a lower rate than ordinary income to encourage 
investment and in recognition that long-term investments involve risk, 
the tax can still discourage property transfers or alternatively lead 
to a higher asking price.

Land and buildings typically account for 79 percent of farm or ranch 
assets. The current top capital gains tax is 20 percent. Because the 
capital gains tax applies to transfers, it provides an incentive to 
hold rather than sell land. This makes it harder for new farmers and 
producers who want to expand their business, say to include a child, to 
acquire property. It also reduces the flexibility farms and ranches 
need to adjust their business structures to maximize use of their 
capital.

                STEPPED-UP BASIS REDUCES TAXES FOR THE 
                      NEXT GENERATION OF PRODUCERS

There is also interplay between estate taxes and capital gains taxes: 
stepped-up basis. Step-up sets the starting basis (value) of land and 
buildings at what the property is worth when it is inherited. Farm 
Bureau supports continuation of stepped-up basis.

Capital gains taxes on inherited assets are owed only when sold and 
only on gains over the stepped-up value. If capital gains taxes were 
imposed at death or if stepped-up basis were repealed, a new capital 
gains tax would be created and the implications of capital gains taxes 
as described above would be magnified. This is especially true for the 
vast majority of farmers and ranchers who are both under the estate tax 
exemption and have the benefit of stepped-up basis.

Stepped-up basis is also important to the financial management of farms 
and ranches that continue after the death of a family member. Not only 
are land and buildings eligible for stepped-up basis at death but so is 
equipment, livestock, stored grains, and stored feed. The new basis 
assigned to these assets resets depreciation schedules, providing 
farmers and ranchers with an expanded depreciation deduction.

         LIKE-KIND EXCHANGES HELP AG PRODUCERS STAY COMPETITIVE

Like-kind exchanges help farmers and ranchers operate more efficient 
businesses by allowing them to defer taxes when they sell assets and 
purchase replacement property of a like-kind. Farm Bureau supports the 
continuation of Section 1031 like-kind exchanges.

Like-kind exchanges have existed since 1921 and are used by farmers and 
ranchers to exchange land and buildings, equipment, and breeding and 
production livestock. Without like-kind exchanges some farmers and 
ranchers would need to incur debt in order to continue their farm or 
ranch businesses or, worse yet, delay mandatory improvements to 
maintain the financial viability of their farm or ranch.

       FARMERS AND RANCHERS PAY SIGNIFICANT STATE AND LOCAL TAXES

Farm Bureau supports continuation of the deduction for state and local 
taxes. Loss of the deduction for state and local taxes paid would have 
a significant impact on farm and ranch businesses. According to the 
USDA Economic Research Service, state and local property taxes account 
for 16 percent of fixed expenses for all farms. An additional, 
important contributing factor is that taxes are often built into the 
price of rent and lease payments, which are substantial for farms. 
Therefore, losing the state and local tax deduction likely would cause 
higher rent and lease payments. It should be noted that the figures for 
taxes mentioned above are only for real estate and property taxes and 
do not include any state income taxes if those exist. Therefore, the 
overall local and state tax burden is likely higher than stated above.

                                SUMMARY

Farm Bureau supports replacing the current federal income tax with a 
fair and equitable tax system that encourages success, savings, 
investment, and entrepreneurship. We believe that the new code should 
be revenue-neutral and fair to farmers and ranchers. Tax reform should 
embrace the following overarching principles:

    -  Comprehensive: Tax reform should help all farm and ranch 
businesses, including sole proprietors, partnerships and sub-S 
corporations.
    -  Effective Tax Rate: Tax reform should reduce combined income and 
self-
employment tax rates low enough to account for any deductions/credits 
lost due to base broadening.
    -  Cost Recovery: Tax reform should allow businesses to deduct 
expenses when incurred, including business interest expense. Cash 
accounting should continue. Section 1031 like kind exchanges should 
continue. There should be a deduction for state and local taxes.
    -  Estate Taxes: Tax reform should repeal estate taxes. Stepped-up 
basis should continue.
    -  Capital Gains Taxes: Tax reform should lower taxes on capital 
investments. Capital gains taxes should not be levied on transfers at 
death.

                                 ______
                                 
             American Forest and Paper Association (AF&PA)

                      1101 K Street, NW, Suite 700

                          Washington, DC 20005

                             (202) 463-2700

                        http://www.afandpa.org/

The American Forest and Paper Association (AF&PA) serves to advance a 
sustainable U.S. pulp, paper, packaging, tissue, and wood products 
manufacturing industry through fact-based public policy and marketplace 
advocacy. AF&PA member companies make products essential for everyday 
life from renewable and recyclable resources and are committed to 
continuous improvement through the industry's sustainability 
initiative--Better Practices, Better Planet 2020.

U.S. manufacturers of paper and wood products appreciate the 
opportunity to provide input to the Senate Finance Committee as it 
considers how tax reform will grow our economy and create jobs across 
America. AF&PA supports comprehensive tax reform that encourages 
economic growth, job creation, and the competitiveness of all U.S. 
businesses. Central to this is a low corporate tax rate, support for 
investment in U.S. manufacturing and its global supply chain and a 
competitive territorial-based international tax system.

The U.S. forest products industry--made up of both C-corporations and 
pass-through entities--is a significant contributor to the U.S. 
economy, employing nearly 900,000 men and women in above-average wage 
jobs, investing heavily in equipment and improvements, and exporting 
products throughout the world. The U.S. forest products industry also 
supports jobs in other sectors of the U.S. economy. A recent study 
conducted by the Economic Policy Institute found that each paper 
industry job supports 3.25 jobs in supplier industries and in local 
communities as the result of respending and tax receipts.

The U.S. forest products industry provides excellent employee payroll, 
retirement, and health benefits to its workers. Meeting a payroll of 
approximately $50 billion, the forest products industry employs about 
the same number of people as the automotive industry and more people 
than the chemical and plastics industries. The industry has a generous 
compensation and benefits structure--earnings of pulp and paper mill 
workers exceed the average for all U.S. private sector workers by about 
23 percent.

The industry produces more than $200 billion in paper and wood products 
annually, accounting for approximately 4.0 percent of the total U.S. 
manufacturing GDP, and ranks among the top 10 manufacturing sector 
employers in 45 states. In a typical year, the forest products industry 
transforms approximately 13 billion cubic feet of wood--the majority of 
which is purchased from privately-owned forest land--into value-added 
paper, packaging, lumber, and other wood products.

Our key goals include lowering the corporate tax rate and a reformed 
competitive international tax system to help attract and retain 
business operations and good paying jobs in the United States. To 
ensure capital-intensive manufacturers invest and expand with new and 
more efficient equipment, we support appropriate depreciation, interest 
expense, and research and experimentation tax policies. Further, 
capital gains and dividends rates for individuals should be tailored to 
ensure U.S. equity markets remain a reliable source of capital. AF&PA 
believes that a reformed tax code should be long-term, prospective, 
provide for a smooth transition, and not result in negative market 
bias.

We are highly capital-intensive, in some cases more so than the average 
manufacturing industry. Data from the U.S. Census Bureau's fourth 
quarter 2016 Quarterly Financial Report indicate that depreciation, 
depletion, and amortization amounted to 5.0 percent of paper industry 
sales, versus 3.2 percent for all manufacturing. The industry has made 
significant investments and facility upgrades in recent years. 
According to the Annual Survey of Manufacturers, in 2015, the paper and 
wood products industry invested $12 billion in plant and equipment. 
Items such as recovery boilers, turbine generators, paper machines, and 
environmental controls are critical to maintaining technologically 
advanced manufacturing facilities that compete in an extremely 
competitive global marketplace.

In addition to capital cost recovery issues, the tax provisions on net 
interest expense, employee benefits, and the deduction for pension, 
profit sharing, stock bonus, and annuity plans are important to our 
industry. Thus, we will be keenly monitoring developments and sharply 
focused on transition rules in these areas. In evaluating any tax 
reform proposals, we note that the lower the corporate rate, the less 
significant many of the tax attributes utilized by the industry become.

The industry's supply chain and customer base is globally integrated 
and includes many cross-border transactions. Exports of U.S. paper and 
wood products account for more than 15 percent of the industry's annual 
total sales. In 2016, the industry's global exports totaled $29.4 
billion, of which $9 billion were exports of wood products and $20.4 
billion were exports of pulp, paper and packaging. We estimate that our 
industry's exports support approximately 135,000 jobs at pulp, paper 
and wood products mills and related logging operations in the U.S., as 
well as many more jobs in communities where these facilities are 
located. At the same time, many of the industry's vital large capital 
purchases come from abroad because there is no U.S. manufacturer of 
like items.

AF&PA's member companies recognize that comprehensive tax reform will 
not be easy. However, the opportunity to increase U.S. economic growth 
through tax reform is enormous. We would be pleased to discuss these 
priorities with the committee and answer any questions you may have 
about our industry. We are eager for tax reform and appreciate the 
Finance Committee's attention to the issue.

For more information, please contact:

Elizabeth Bartheld
Vice President, Government Affairs
[email protected]
202-463-2444

                                 ______
                                 
                         Beer Institute et al.
September 19, 2018

The Honorable Orrin Hatch
Chairman
Senate Finance Committee
219 Dirksen Senate Office Building
Washington, DC 20510-6200

The Honorable Ron Wyden
Ranking Member
Senate Finance Committee
219 Dirksen Senate Office Building
Washington, DC 20510-6200

Dear Chairman Hatch and Ranking Member Wyden:

As you convene a hearing today on Business Tax Reform, we are writing 
to express our support for excise tax reform for the beverage alcohol 
industry to be part of comprehensive tax reform which the Committee is 
considering.

Since its initial introduction in 2015, the Craft Beverage 
Modernization and Tax Reform Act (currently S. 236) has enjoyed 
overwhelming support in Congress. The legislation currently counts over 
260 cosponsors in the House and nearly 50 in the Senate. Additionally, 
the bill has the support from a broad array of outside organizations, 
including the National Association of Manufacturers, and the American 
Farm Bureau. Even the National Taxpayers Union has described the Craft 
Beverage Bill as a ``no brainer'' bill that is ``commonsense, 
bipartisan legislation that would in some way create a change for the 
better.''

Every congressional district in the United States includes a brewery, 
winery, distillery, importer, or industry supplier. These businesses 
are often cornerstones of their communities. Unfortunately, outdated 
regulations and tax laws may impede the growth of these individual 
businesses.

The beverage alcohol industry remains one of the most regulated 
industries in America. Brewers, winemakers, and distillers pay state, 
local and federal taxes on their production. Federal excises taxes, 
which are regressive taxes, are simply too high. S. 236 would 
recalibrate and simplify federal excise taxes on domestic and imported 
beer, wine and spirits sold in the United States. It would also update 
and streamline outdated regulations.

The excise tax relief and regulatory reform embodied in S. 236 supports 
businesses of many shapes and sizes, both small and large. The broad, 
bipartisan, bicameral showing of support for this bill signifies how 
important excise tax relief is to many in Congress. We urge you to 
consider including S. 236 in any tax package that is slated for 
consideration in the 115th Congress and will stand with you to support 
its passage.

Sincerely,

Jim McGreevy, President and CEO     Bob Pease, President and CEO
Beer Institute                      Brewers Association

Robert P. ``Bobby'' Koch, President 
and                                 Jim Trezise, President
CEO                                 WineAmerica
Wine Institute

Mark Gorman, Senior Vice President  Margie A.S. Lehrman, Executive 
                                    Director
Government Relations                American Craft Spirits Association
Distilled Spirits Council

                                 ______
                                 
              Biotechnology Innovation Organization (BIO)

                  1201 Maryland Avenue, SW, Suite 900

                          Washington, DC 20024

                             202-962-9200 p

                             202-488-6307 f

                          https://www.bio.org/

Chairman Hatch, Ranking Member Wyden, and Members of the Committee, the 
Biotechnology Innovation Organization (BIO) applauds you for convening 
this hearing and for your dedication to reforming America's corporate 
tax code to make it competitive on the global stage.

BIO members are discovering groundbreaking cures and treatments for 
devastating diseases; developing advanced biofuels, renewable 
chemicals, and biobased products for the development of everyday 
innovative consumer products which simultaneously provide environmental 
benefits; and researching novel gene traits for identifying food 
sources that could help combat global hunger. As tax reform takes 
shape, it is imperative that Congress modernize the current U.S. 
corporate tax code, enabling America to maintain its leadership in 
these key 21st century industries in the face of challenges from 
foreign competitors.

For the United States to continue to lead the world in the 21st century 
innovation economy, tax reform must support the growth of small 
business innovators, incentivize investment in breakthrough 
technologies, and bolster U.S. companies currently hamstrung by a high 
corporate tax rate and a burdensome worldwide tax system out of step 
with the rest of the world.

The Impact of Tax Reform on Innovation

The tax code should recognize and promote innovation as fundamental to 
the long-term economic growth of the United States. Congress can take 
steps toward accomplishing this goal by including a specific section on 
innovation and entrepreneurship in any tax reform package. A standalone 
section of tax reform dedicated to the promotion of innovation would 
send a message to the world that the U.S. will not cede its global 
leadership while also ensuring that the drive to lower tax rates does 
not leave pre-revenue, emerging businesses behind.

BIO supports your efforts to streamline the tax code in order to 
facilitate lower rates and international competitiveness. At the same 
time, there are provisions in the current code that stimulate biotech 
R&D, and these provisions are vitally important to the scientific 
progress of BIO members. Furthermore, Congress has the opportunity in 
tax reform to take new steps to inspire innovative science by 
supporting the growth of, and incentivizing investment in, pre-revenue 
small businesses early in their life cycle. The combination of lower 
overall rates, strengthened innovation incentives, and targeted small 
business provisions will support breakthrough research and bolster the 
21st century innovation economy.

In order to save lives, reduce dependence on foreign oil, build a 
biobased economy, and create jobs in innovative businesses, BIO 
believes the guiding principle of tax reform should be the promotion of 
innovation. BIO supports the following tax reform proposals, and 
believes they should be included in any reformed tax code.

International Tax Competitiveness

Lower Corporate Tax Rate

High tax rates impede America's ability to compete with other 
industrialized nations on the global stage, and our current corporate 
tax system stifles growth. The worldwide average tax rate has declined 
from 30 percent to 22.5 percent since 2003, with every region in the 
world seeing a decline in the average corporate tax rate in the 
previous 14 years. With international competitors gaining ground in the 
biotech industry, the U.S. cannot afford to continue this competitive 
imbalance. BIO supports efforts to lower the U.S. corporate tax rate to 
a competitive level.

To further bolster U.S. leadership in life sciences innovation, 
Congress also should consider favorable tax treatment of income derived 
from the research and manufacturing of innovative products in the 
United States. Such an approach should not affect the design of a 
competitive international tax regime or treat income derived from 
intangible assets less favorably than other income.

Territorial Tax System

It is vital that Congress take steps to move America to a competitive 
territorial tax system, unburdened by overly stringent anti-base 
erosion policies and consistent with those in so many other OECD 
countries. Freeing up over two trillion dollars that are currently 
trapped overseas due to the inefficiencies of the tax code will boost 
economic growth and capital investment.

Congress should ensure that a move to a territorial system is truly 
competitive for knowledge-based industries like biotechnology. Placing 
disproportionate tax burdens on the biotechnology industry harms 
America's competitiveness on the world stage and could stymie cutting-
edge R&D critical to meeting our nation's public health, agricultural, 
bioenergy, and environmental challenges.

Existing Tax Incentives for Innovation

R&D Tax Credit

BIO supports maintaining the R&D Tax Credit in the reformed tax code, 
while at the same time strengthening it by increasing the Alternative 
Simplified Credit (ASC) rate. The R&D Credit was made permanent by the 
Protecting Americans from Tax Hikes (PATH) Act in December 2015, and 
BIO strongly believes it should remain in the reformed tax code. 
Studies have shown that the R&D Tax Credit contributes to U.S. job 
growth and an increase in the U.S. GDP. However, the U.S. has fallen 
behind in its R&D incentive generosity, falling from a leader among 
OECD countries in the late 1980s to 25th for large companies and 26th 
for small businesses in 2016. Maintaining and strengthening this credit 
would recognize its vital role in supporting America's innovation 
economy.

PATH Act R&D Credit Reforms

BIO also supports maintaining the PATH Act's reform to the R&D Tax 
Credit that allows pre-revenue innovators to take a portion of their 
Credit against their payroll tax obligation, an important recognition 
that income tax credits do not yet benefit pre-revenue companies.

Under current law, companies in their first 5 years of operation can 
utilize up to $250,000 in R&D Credits under the PATH Act reforms. While 
BIO believes this change was an important first step, we would also 
support expanding the provision, either by extending the eligibility 
time period or by expanding the dollar amount of credits available for 
use. Given the long development timelines of groundbreaking innovation 
and the high costs of biotech research, these targeted expansions to 
the payroll credit would ensure that innovative pre-revenue companies 
can take full advantage of this new incentive.

Orphan Drug Tax Credit

BIO supports maintaining the Orphan Drug Tax Credit in the reformed tax 
code. The Credit, which was enacted in 1983 and made permanent in 1997, 
corrects a market failure by removing significant impediments to drug 
development for rare diseases that do not exist for diseases with 
larger patient populations.

By reducing the costs of developing drugs for smaller patient 
populations, the Orphan Drug Tax Credit has encouraged companies to 
develop hundreds of new therapies that would otherwise not have been 
commercially feasible. Since its enactment, there have been over 600 
drugs developed to treat more than 400 rare diseases. According to 
recent studies, a third of the existing treatments approved for orphan 
indications would not have been developed if not for the Orphan Drug 
Tax Credit.

By maintaining the Orphan Drug Tax Credit in the reformed tax code, 
Congress can ensure that the Credit will continue to incentivize the 
development of drugs to treat rare diseases for which no treatment 
currently exists--helping millions of patients suffering from rare 
conditions get the new medicines they desperately need, while fostering 
economic growth through new and expanding biotech companies with good 
jobs and high wages.

Small Business Tax Incentives

By itself, a lower corporate tax rate will not support growth and 
innovation in America's small businesses, many of which are pre-
revenue. Comprehensive tax reform should go further than ``broadening 
the base and lowering the rate.'' Instead, policymakers should 
specifically promote innovative research-intensive businesses through 
incentives for other companies, individuals, and funds to invest in 
small companies and support their research.

Section 469 R&D Partnership Structures

Prior to 1986 tax reform, many growing companies attracted investors by 
using R&D Limited Partnerships, in which individual investors would 
finance R&D projects and then utilize the operating losses and tax 
credits generated during the research process. These structures gave 
investors a tax incentive to support biotech research, which is 
entirely dependent on outside investors but often too risky or 
expensive to attract sufficient investment capital. The enactment of 
the passive activity loss (PAL) rules in 1986 prevented investors from 
using a company's losses to offset their other income, thus removing 
the incentive to support vital research.

BIO supports targeted reforms to Section 469 to allow a limited 
exception from the PAL rules for R&D-focused pass-thru entities. Under 
this proposal, small companies would be able to enter into a joint 
venture with an R&D project's investors. The losses and credits 
generated by the project would then flow through to the company and 
investors, who would be able to use the tax assets to offset other 
income. Relaxing the PAL rules to allow investors to enjoy a more 
immediate return on their investment, despite the long and risky 
timeline usually associated with groundbreaking research, would 
incentivize them to invest at an earlier stage, when the capital is 
most needed.

This proposal has been introduced on a bipartisan basis in both the 
House and the Senate. In the 114th Congress, Senators Toomey, Menendez, 
Roberts, and Carper introduced the Start up Jobs and Innovation Act, 
which would make this vital reform in order to spur investment in 
early-stage groundbreaking innovation.

Innovation Investor Tax Credit

Providing a tax credit for individual investors who support research at 
its earliest stages could lead to a capital infusion for the small 
business innovators at the forefront of scientific advancement. In the 
biotech industry, emerging companies are developing 70% of the global 
pipeline--including 84% of the industry's product candidates to treat 
rare diseases. The vast majority of these clinical programs are still 
in early-stage research (only 16% have made it to Phase III clinical 
testing), so continued investor support is vital to bring these 
potentially life-saving treatments out of the lab, bring them through 
the clinic, and ultimately deliver them to patients in need.

A tax credit targeted at early-stage investors in innovative industries 
would incentivize the capital infusion necessary to fund 21st century 
R&D. In biotechnology, and other innovative industries, early-stage 
funding is key to a company's success. Without product revenue for more 
than a decade, these small businesses depend on investor capital to 
fund their research into life-saving treatments and groundbreaking 
technologies. A targeted tax credit, designed to stimulate early-stage 
capital, would serve as an important incentive for investment in the 
R&D at the foundation of America's innovation economy.

Section 382 NOL Reform

Innovative companies often have a long and capital-intensive 
development period, meaning that they can undergo a decade of research 
and development without any product revenue prior to commercialization. 
During this time period, companies generate significant net operating 
losses (NOLs), which can be used to offset future gains if the company 
becomes profitable. However, Section 382 restricts the usage of NOLs by 
companies that have undergone an ``ownership change.'' The law was 
enacted to prevent NOL trafficking, but small biotech companies are 
caught in its scope--their reliance on outside financing and deals 
triggers the ownership change restrictions and their NOLs are rendered 
useless.

BIO supports reform of Section 382 to allow certain NOLs to be carried 
forward at companies conducting R&D or in the event of a capital 
infusion or financing round. This change would allow small companies 
the freedom to raise capital for innovative research without fear of 
losing their valuable NOLs. Additionally, the ability of a small 
business to maintain its NOLs makes it more attractive to investors and 
purchasers looking to take its research to the next level.

Section 1202 Capital Gains Reform

Section 1202 allows investors to exclude from taxation 100% of their 
gain from the sale of a qualified small business (QSB) stock if they 
hold the stock for five years. This provision was designed to promote 
investment in growing businesses, but its overly restrictive size 
requirements prohibit innovative companies from accessing valuable 
investment capital. Currently, QSBs must have gross assets below $50 
million. The high costs of research, coupled with valuable intellectual 
property and successive rounds of venture financing, often push growing 
innovators over the $50 million gross assets limit and out of the QSB 
definition.

In addition to maintaining the 100% exclusion, BIO supports changing 
the QSB definition to include companies with gross assets up to $150 
million, with that cap indexed to inflation. BIO also supports 
excluding the value of a company's IP when calculating its gross 
assets. These changes would allow more growing innovators to attract 
investors to fund their vital research. Providing incentives to invest 
in biotech research will increase the innovation capital available to 
research-intensive businesses and speed the development of 
groundbreaking medicines.

Biofuels Tax Incentives

Since 2009, the advanced biofuels industry has invested billions of 
dollars to build first-of-a-kind demonstration and commercial-scale 
biorefineries across the country. Despite the challenges associated 
with developing new technologies, as of 2015 there were five commercial 
scale cellulosic biorefineries with a combined capacity of more than 50 
million gallons within the United States. Unfortunately, policy 
instability undermines certainty and predictability for investors and 
other market participants. The uncertain cycle of expirations and 
reinstatements for tax incentives for advanced and cellulosic biofuels 
make it difficult for the industry to take advantage of these tax 
incentives that could help move these projects to commercial production 
by attracting investment and reducing the cost of production.

The development of advanced and cellulosic biofuels is a difficult and 
capital-
intensive enterprise. Despite the recent successes of building 
commercial-scale facilities, this is a new and developing industry. 
However, there are great benefits to developing these technologies. 
Over the past 10 years the biofuels industry has displaced nearly 1.9 
billion barrels of foreign oil by replacing fossil fuels with homegrown 
biofuels. This has saved consumers an average of $1 a gallon at the 
pump. The use of biofuels has also led to a reduction in U.S. 
transportation-related carbon emissions of 590 million metric tons over 
the past decade--an equivalent of removing more than 124 million cars 
from the road. Even with these benefits, this sector needs predictable 
federal tax policy to continue to attract investment in order to grow 
and compete with incumbent industries that have long received favorable 
tax preferences.

Tax Incentives for Biofuel Innovation

BIO has long supported a suite of tax incentives important for the 
development of advanced and cellulosic biofuels--the Second Generation 
Biofuel Producer Tax Credit (PTC), the Special Depreciation Allowance 
for Second Generation Biofuel Plant Property, the Biodiesel and 
Renewable Diesel Fuels Credit, and the Alternative Fuel Vehicle 
Refueling Property Credit. Unfortunately, the PTC and associated 
depreciation provisions have never been enacted for a sufficient length 
of time to allow investors to depend upon their existence once the 
facilities are eventually placed in service. BIO supports the extension 
of these provisions. Further, BIO would encourage Congress to reject 
the creation of a phase-out. Ending the tax credits on an arbitrary 
date in the near term will hamper the utilization of these incentives 
for an industry where financing and constructing new facilities takes 
on average 5 to 6 years.

Clean Energy Development

If the Committee determines it could best stimulate investment and 
growth of clean energy development and deployment with a simple, 
durable, and technology neutral program, it is important the Committee 
develops a formula that does not inadvertently discriminate against 
technologies. BIO strongly supports the concept of providing tax 
incentives on a performance basis rather than arbitrary assignment by 
statute. With any energy efficiency formula, it may be necessary to 
provide some extra bonus credits to fuels that achieve a ``negative'' 
carbon emissions rating and to fuels that provide socially valuable 
octane enhancements. BIO believes Ranking Member Wyden's Clean Energy 
for America Act (S. 1086) is one technology neutral proposal which 
could stimulate investment into and growth of biofuels and other forms 
of clean energy.

Tax Incentive Eligibility

Technology neutral incentives must also provide developers and 
investors confidence in the availability of the tax incentives. The 
Department of Treasury process that determines eligibility of fuels 
should rely wherever possible upon existing Environmental Protection 
Agency (EPA) data. However, due to lengthy and unpredictable 
administrative processes with EPA approval of pathways, which would 
undermine public confidence in the timely availability of the 
incentives, BIO suggests that EPA should be encouraged to provide 
interim data wherever possible that would allow the fuels to become 
eligible for tax incentives in advance of the multi-year pathway 
determinations.

To allow for a smooth transition to the new credit program, the 
definition of ``qualifying facility'' should be adjusted to provide a 
uniform 10-year stream of production tax credits for each otherwise 
eligible facility placed in service before date of enactment. 
Facilities placed in service after date of enactment would trigger the 
10-year period when placed in service. We would like to continue to 
work with Members of Congress to develop a tax incentive regime for 
advanced and cellulosic biofuels that reflects the life cycle 
environmental benefits of those fuels.

Funding for Infrastructure Investment

Should the Committee consider an increase to the excise tax on gasoline 
to fund infrastructure developments and provide greater funding for 
highways, which could increase the number of construction and 
manufacturing jobs in the economy, BIO encourages the Committee to 
carefully balance incentives to develop innovative biofuels and the 
necessary distribution infrastructure. Any future increases to the 
excise tax on gasoline should include a reduced rate for fuels that 
contain higher levels of ethanol and other biofuels, ranging from E15, 
which contains 15 percent ethanol, up to E85, which contains 85 percent 
ethanol. A rate reduction for higher blends of biofuels in the 
transportation fuel supply will spur greater use of domestically 
produced renewable fuel. Providing a lower excise tax on fuels 
containing higher levels of ethanol will spur investments in 
infrastructure to deploy greater volumes of biofuels and grow market 
space for advanced and cellulosic biofuels. This will benefit 
consumers, the nation's economy, infrastructure, rural communities, and 
energy and national security.

Renewable Chemicals and Biobased Products Tax Incentives

Companies are using industrial biotechnologies to help resolve 
important challenges in synthesizing new products, whole cell systems, 
and other biological processes to improve all types of manufacturing 
and chemical processes. This progress is enabling the production of a 
new generation of renewable chemicals, biobased products, and 
bioplastics produced from renewable biomass, which can supplement or 
substitute for traditional petroleum-based chemicals and products. 
Given that the U.S. faces the challenge of reducing its costly 
dependence on foreign oil and competing in a $2.4 trillion worldwide 
clean energy market with a number of countries already implementing 
aggressive alternative energy development programs, the emergence of 
this technology represents a historic opportunity to reverse job losses 
in the U.S. chemicals and plastics sectors while simultaneously 
improving energy security and the environment.

Investment and production tax credits are currently offered to 
incumbent fossil energy industries. As such, tax incentives for 
renewable chemicals and biobased products are critical to our efforts 
to attract capital given that these types of incentives are offered to 
other U.S. energy sectors. It will be more difficult for renewable 
chemical companies to develop projects in the United States if other 
nations such as China, Germany, Malaysia, and other BRIC nations offer 
attractive investment incentives. To realize the industry's potential 
for domestic job creation and reduced reliance on foreign oil, Congress 
must ensure that renewable chemical technologies are incentivized in 
the tax code, and at a minimum receive tax parity with other renewable 
energy technologies.

Production or Investment Tax Credit for Qualifying Renewable Chemicals

BIO supports the enactment of a production or investment renewable 
chemicals tax credit, which would create a targeted, short-term tax 
credit for the production of qualifying renewable chemicals from 
biomass. Applicants for the tax credit would be evaluated on job 
creation, innovation, environment al benefits, commercial viability and 
contribution to U.S. energy independence. Like current law for 
renewable electricity production credits, the credits would be general 
business credits available for a limited period per facility. This 
renewable chemicals tax credit would support innovation and help 
domestic companies compete in a rapidly growing global renewable 
chemicals market, revitalize domestic manufacturing, and bring new 
energy efficient biobased products for consumers. That, in turn, would 
create millions of new jobs and opportunities for economic growth.

To truly achieve energy security, the U.S. must develop biorefineries 
that produce alternatives to all of the products made from each barrel 
of oil. Industrial biotechnology enables the production of renewable 
chemicals and biobased products from biomass, and the total 
displacement of fossil fuel products can be accelerated with a 
production or investment tax credit. The bipartisan reintroduction of 
the Renewable Chemicals Act (H.R. 3149), offers a strong model for 
implementation of this proposal.

Master Limited Partnerships Parity Act for Renewable Chemicals and 
Biofuel Producers

BIO supports the Master Limited Partnerships Parity Act, previously 
introduced in the 113th and 114th Congresses, which would extend the 
publicly-traded partnership ownership structure to renewable energy 
power generation projects, renewable chemicals, and transportation 
fuels. This bill would amend the Internal Revenue Code to extend 
availability of the master limited partnership (MLP) business structure 
in which renewable chemicals and biofuels investors are treated as 
partners for tax purposes but whose ownership interest can be traded 
like corporate stock. Availability of the MLP structure would reduce 
the cost of private capital for renewable chemicals and biofuels 
projects. BIO supports this important effort to modernize MLP, which is 
extremely timely given the significant transformation in the nation's 
energy mix that has occurred over the past two decades.

Reinstating Sec. 48C and Eligibility for Renewable Chemicals and 
Biobased Products

To realize the full potential of the domestic renewable chemicals 
industry, existing renewable energy and manufacturing tax incentive 
regimes should be opened to renewable chemicals. Renewable chemicals 
and biobased products impact everyday products impacting our economy, 
such as car parts, cleaning products, soaps, insulation materials, 
plastics, foams, fibers, and fabrics. BIO urges Congress to incorporate 
the language of the Make It in America Tax Credit Act of 2011 into any 
energy or manufacturing tax package discussed and introduced in tax 
reform.

Conclusion

Federal tax policy that recognizes the special demands placed on 
biotech companies and other highly innovative industries will speed the 
development of products to vastly improve the lives of Americans and 
people around the world. By recognizing the importance of innovation 
and the economic potential of the biotech industry, Congress can 
incentivize further development and improve America's economic health.

BIO supports a U.S. tax code that recognizes innovation as a crucial 
part of the 21st century American economy and encourages innovative 
research and new technologies to enter the market. The tax code should 
promote research-intensive and advanced manufacturing businesses as 
they continue to create high-quality American jobs, stimulate long-term 
economic growth, and bolster America's competitiveness on an 
increasingly global stage.

                                 ______
                                 
                            BUILD Coalition

                     805 15th Street, NW, Suite 200

                          Washington, DC 20005

                              202-822-1205

September 18, 2017

The Honorable Orrin Hatch           The Honorable Ron Wyden
Chairman                            Ranking Member
Committee on Finance                Committee on Finance
U.S. Senate                         U.S. Senate
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510                Washington, DC 20510

RE: Senate Finance Committee hearing on ``Business Tax Reform'' 
(September 19, 2017) and the preservation of full interest 
deductibility

Dear Chairman Hatch, Ranking Member Wyden, and Members of the 
Committee:

The Businesses United for Interest and Loan Deductibility (BUILD) 
Coalition is submitting this letter to reiterate our support for 
maintaining full interest deductibility in tax reform. We applaud the 
Committee's thoughtful approach to making tax reform a legislative 
priority, and we support its commitment to simplifying the code, 
creating a system that treats all taxpayers equally, and fostering 
sustained economic growth in today's competitive global marketplace.

The BUILD Coalition's members represent critical industries throughout 
the American economy, including agriculture, manufacturing, real 
estate, retail, and telecommunications. We believe that any measures to 
spur long-term, sustainable U.S. economic growth should ensure 
companies retain the necessary access to affordable capital for 
undertaking new investments, expanding operations, and creating more 
jobs.

Therefore, as the Committee determines which of the various elements of 
the tax code should remain or be reformed to encourage stronger growth, 
we'd like to reinforce the importance of preserving the full 
deductibility of interest on borrowing for all U.S. businesses. To 
create a tax structure that fulfills America's maximum growth 
potential, Congress must avoid any limitation to, or elimination of, 
interest deductibility.

Our experience managing the daily operations of our respective 
businesses compels us to relay the real-world implications of 
eliminating or limiting interest deductibility. It is also essential 
that we dispel misconceptions regarding this key part of our tax code, 
including the inaccurate notions that limiting, interest deductibility 
to finance a lower tax rate for businesses would result in economic 
growth, that the interest expense deduction distorts financing 
decisions, that interest deductibility can be replaced by immediate 
expensing of capital expenditures, and that interest deductibility 
encourages excessive risk in the economy.

The deductibility of business interest expense is a well-established, 
growth-
promoting component of the tax code. Interest expense is a normal cost 
of doing business. The deduction for interest is necessary to measure 
income properly and has been present in the tax code since the 
implementation of the modern income tax structure roughly a century 
ago. Failure to maintain interest deductibility will overstate a 
business' taxable income and result in over-taxation. By guaranteeing 
businesses will not be taxed on the cost of accessing capital, interest 
deductibility affords us the correct tax treatment and encourages us to 
continue to invest in growing our businesses and creating more jobs.

Also, a study by Ernst and Young (EY) finds that limiting interest 
deductibility to help fund a lower corporate tax rate would negatively 
impact economic growth in the long-run.\1\ More specifically, EY found 
that a 25 percent across-the-board limitation on corporate interest 
expenses can be used to fund an approximate 1.5 
percentage-point reduction in the corporate income tax rate. EY's 
research found that this trade-off would raise the cost of capital and 
result in a decline in long-run GDP of 0.2 percent, with the majority 
of this effect occurring in the first 10 years.
---------------------------------------------------------------------------
    \1\ EY's Quantitative Economics and Statistics (QUEST) Group. 
``Macroeconomic Analysis of a Revenue-Neutral Reduction in the 
Corporate Income Tax Rate Financed by an Across-the-Board Limitation on 
Corporate Interest Expenses.'' EY. July 2013.

In other words, proposals that call for placing limits on interest 
deductibility in order to achieve a lower tax rate for businesses run 
counter to the Committee's stated goal of achieving pro-growth tax 
---------------------------------------------------------------------------
reform.

Beyond economic models, the practical implications of limiting or 
eliminating interest deductibility for businesses throughout the U.S. 
economy raise major cause for concern. As our member organizations 
prove, businesses of all sizes borrow in order to finance expansions or 
meet obligations and the ability to deduct interest expense gives 
business owners the certainty to make critical operating decisions. For 
many firms, access to credit is essential for working capital, and many 
of these companies use debt to weather shifts in demand.

Our nation's debt capital markets are the most liquid and efficient in 
the world. Banks supply the credit that is in turn the life blood of 
American businesses of all sizes and types-the businesses that provide 
the core growth in our economy.

The impact would be particularly harsh for startups, small businesses, 
and other private companies, which do not have ready access to 
alternative sources of financing. In fact, research has found that 75 
percent of startups and 80 percent of small businesses rely on debt 
financing.\2\ In addition to these small businesses, medium and large 
enterprises also turn to debt financing in large part because of its 
efficiency and relative speed to market compared to equity financing. 
Borrowing allows these businesses to respond quickly to market demands 
and capitalize on new opportunities, whether through revolving lines of 
credit, bonds, or bank loans. Without access to affordable credit, 
companies of all sizes will struggle to create jobs and grow the 
economy.
---------------------------------------------------------------------------
    \2\ Cole, Rebel A., ``Why Businesses Use Debt--And How Debt 
Benefits Businesses.'' June 2013.

Proponents of eliminating interest deductibility argue that the tax 
code favors debt over equity, and that this encourages companies to 
take on more leverage. And yet, research by economists from Duke 
University, University of Pennsylvania, and Washington University in 
St. Louis,\3\ as well as findings by Nobel Prize-winning economist 
Merton Miller,\4\ show that the tax code has little to no impact on 
companies' leverage ratios. Harvard University finance professor Mihir 
Desai confirmed the findings of these earlier studies, noting that the 
non-financial sector is ``remarkably underlevered by historical 
standards.'' \5\ We believe this is because corporate decisions 
regarding the level of debt to assume are impacted by numerous non-tax 
market forces, such as analysts, rating agencies, regulators, 
investors, and lenders.
---------------------------------------------------------------------------
    \3\ Graham, John R., Mark T. Leary, and Michael R: Roberts. ``A 
Century of Capital Structure: The Leveraging of Corporate America.'' 
June 2014.
    \4\ Miller, Merton. ``Debt And Taxes.'' Journal of Finance. May 
1977.
    \5\ Desai, Mihir. Testimony of Mihir A. Desai. United States Senate 
Committee on Finance and the United States Committee on Ways and Means. 
July 2011.

Moreover, the argument that equity and debt financing are similar is a 
fallacy. Debt and equity do not serve identical purposes and are not 
interchangeable forms of financing. There are a variety of non-tax 
reasons that businesses like ours choose debt over equity when raising 
---------------------------------------------------------------------------
capital. Thus, their differing tax treatment is appropriate.

For one thing, many businesses do not have access to equity markets, 
making debt their only option to start and grow enterprises that in 
turn create new jobs. In contrast to the dilutive effects of equity, 
borrowing allows owners to access capital without diluting control of 
their business. Debt is also a cheaper financing solution than equity 
because it is more secure for investors, who charge a premium for the 
risks associated with equity. Therefore, on both sides of the equation, 
debt and equity play separate and distinct roles in capital formation.

To the extent that policymakers would like to incentivize equity 
financing, the answer is to reduce or eliminate the tax on dividends, 
not to punish and restrict debt financing by removing or limiting 
interest deductibility. Any purported debt bias would also be 
significantly reduced by lowering the corporate tax rate.

In addition, proposals to offer 100 percent expensing in place of 
interest deductibility miss the mark. Such proposals fail to account 
for the real-life implications of what such a trade-off means for 
businesses, namely that full and immediate capital expensing is not an 
acceptable alternative for interest deductibility. Immediate expensing 
is a timing difference, while interest deductibility has a permanent 
impact and helps ensure income is properly measured.

A recent analysis by Goldman Sachs Economics Research predicts that 
proposals to eliminate interest deductibility in favor of 100 percent 
expensing ``would raise the user cost of capital and reduce investment 
in the longer run.'' While 100 percent expensing might boost cash flows 
in the near term by pulling forward depreciation schedules, ``after the 
first year, however, the impact on cash flow would begin to decline and 
eventually turn negative,'' the Goldman Sachs study warns.\6\
---------------------------------------------------------------------------
    \6\ Mericle, David, and Daan Struyven. ``U.S. Daily: Corporate Tax 
Reform: Trading Interest Deductibility for Full Capex Expensing.'' 
Goldman Sachs Economic Research. November 2016.

These harmful effects would not be canceled out by lower rates, either. 
As University of Pennsylvania professor Chris Sanchirico has explained, 
even proposals to lower the tax rate would ``not temper'' the harmful 
effects of the proposed trade-off between interest deductibility and 
expensing.\7\ As businesses that make these financing decisions every 
day, we know firsthand that you can't expense what you can't afford.
---------------------------------------------------------------------------
    \7\ Sanchirico, Chris William. ``Expensing and Interest in the GOP 
Blueprint: Good Deal? Good Idea?'' Tax Notes. April 2017.

Lastly, some have claimed that debt inherently creates risk in the 
economy and that steps should be taken to discourage too much borrowing 
by businesses. This is by no means a given. In fact, a study published 
by the St. Louis Federal Reserve's Brent Glover, Joao F. Gomes, and 
Amir Yaron finds that limiting interest deductibility would actually 
increase volatility throughout the economy by raising the overall cost 
of accessing capital. The authors understand that limiting or 
eliminating the deduction for business interest expense would push 
firms to intentionally cap their size and rely more on operating 
---------------------------------------------------------------------------
leverage, making them more susceptible to default.

Glover, Gomes, and Yaron conclude: ``Contrary to conventional wisdom, 
we find that eliminating interest deductibility results in an increase 
in the default frequency and average credit spreads. The intuition for 
this lies in the fact that this policy change makes external financing 
more costly, which results in riskier firms and higher credit 
spreads.'' \8\
---------------------------------------------------------------------------
    \8\ Glover, Brent, Joao F. Gomes, and Amir Yarons. ``Corporate 
Taxes, Leverage, and Business Cycles.'' St. Louis Fed. July 2011.

All of the arguments against interest deductibility also ignore the 
distributional impact of limiting interest deductibility. According to 
a report by the Small Business Administration (SBA), woman- and 
minority-owned small businesses typically have less access to equity 
markets compared to other businesses. Thus, woman- and 
minority-owned small businesses turn to bank loans, as well as 
alternative lending methods. By limiting interest deductibility, 
policymakers would further increase the existing financial burdens that 
woman and minority business owners face when trying to raise capital 
for investments.\9\
---------------------------------------------------------------------------
    \9\ Robb, Alicia. ``Access to Capital Among Young Firms, Minority-
owned Firms, Women-owned Firms, and High-tech Firms.'' U.S. Small 
Business Administration. April 2013.

These are just the immediate dangers. Numerous policy proposals would 
also suffer if interest deductibility is limited. For example, 
President Donald Trump has announced his desire for a $1 trillion 
infrastructure investment plan based in large part on public-private 
partnerships. Congressional leaders have discussed similar proposals, 
which also feature a heavy emphasis on the private sector. Of course, 
limiting or eliminating the deductibility of interest expense would 
undermine these plans by increasing the cost of capital and making such 
---------------------------------------------------------------------------
investments less feasible for the private sector.

Finally, limiting interest deductibility would directly undermine 
``America-First'' goals for tax reform. America's capital markets are 
second to none, giving the U.S. a major advantage over other nations in 
attracting businesses and investment. Without the ability to deduct 
interest expenses, these businesses would look overseas for their 
credit needs, weakening U.S. credit markets and hindering job growth.

As the Committee investigates ways to promote stronger economic growth 
and faster job creation through tax reform, it must maintain provisions 
in the tax code that help achieve these goals. Interest deductibility 
is one of these provisions, and has been since the creation of the 
modern tax code.

While the BUILD Coalition fully supports the Committee's goal of 
achieving pro-growth tax reform, any proposal that places limitations 
on interest deductibility will harm these efforts. We strongly 
encourage the Committee, in any proposed tax legislation, to maintain 
the full deductibility of business interest expense as it exists under 
current law. By doing so, policymakers will give the U.S. economy the 
opportunity to achieve its full growth potential.

Sincerely,
The BUILD Coalition

                                 ______
                                 
                          Business Roundtable
The nation's tax system is in urgent need of reform to boost economic 
growth, increase global competitiveness for American companies, and 
bring about meaningful improvements in the incomes of American families 
through higher wages and more American jobs.

It has been over 30 years since Congress last undertook tax reform. The 
United States has failed to act while the rest of the world has 
implemented modern tax policies to aggressively compete for jobs and 
investment. The urgency of tax reform cannot be overstated.

Tax reform, done right, will be a catalyst for U.S. economic growth, 
increased wages and job creation. A recent Business Roundtable survey 
found that CEOs believe that tax reform is the single most effective 
action that Congress can take to accelerate economic growth. Seventy-
six percent of the CEOs said that they would increase hiring at their 
company if tax reform is enacted, and 82 percent would increase capital 
spending.

Comprehensive tax reform for both individuals and businesses--including 
more competitive rates for non-corporate businesses--is fundamental to 
strengthening the U.S. economy, enhancing job creation, increasing wage 
growth, and ensuring that American workers and American companies can 
successfully compete around the globe. Tax reform should also be used 
to give a targeted boost to lower- and middle-income workers by 
expanding programs such as the Earned Income Tax Credit (EITC), which 
already provides a helping hand to more than 29 million workers.

A comprehensive approach is the best way to create a modern, 
competitive tax system for both businesses and individuals. Business 
Roundtable calls for the following corporate tax changes:

      A corporate tax rate set at an internationally competitive 
level; and
      A modern international tax system (territorial-like) that 
permanently removes the penalty for returning foreign earnings to the 
United States, thereby aligning the U.S. system with the tax systems of 
our major trading partners.

We believe that these reforms can be achieved in a fair and fiscally 
responsible manner. Business Roundtable companies are committed to 
putting all corporate tax credits and special deductions on the table 
in consideration of an internationally competitive corporate tax 
system.

Based on the knowledge and experience of most Business Roundtable CEOs, 
the remainder of this submission focuses on reform of the corporate 
income tax system.

The Need for U.S. Corporate Tax Reform

The U.S. corporate tax system was last reformed in 1986. It is outdated 
and fails to reflect the increased competition American companies face 
from their global competitors both at home and abroad. The U.S. 
corporate tax rate is the highest among industrialized countries. 
Including state taxes, the combined U.S. statutory corporate tax rate 
is 38.91 percent, more than 15 percentage points higher than the 23.75 
percent average combined national and sub-national statutory corporate 
tax rate of the other 34 members of the Organization for Economic 
Cooperation and Development.\1\
---------------------------------------------------------------------------
    \1\ OECD Tax Database, available at: http://stats.oecd.org/
Index.aspx?DataSetCode=TABLE_
II1. The average U.S. state corporate tax rate is 6.01 percent 
according to the OECD. Because state corporate income taxes are 
deductible against federal corporate income taxes, the combined federal 
and state statutory corporate tax rate is .35 + (1 - .35)(.0601 ) = 
38.91 percent. If tax reform lowered the U.S. federal corporate tax 
rate to 20 percent, it would result in a combined federal and state tax 
rate of 24.81 percent--still a full percentage point greater than the 
OECD average rate.

While effective tax rates are typically lower than statutory tax rates, 
U.S. effective tax rates are consistently found to be among the highest 
of developed countries. A recent study conducted for the European 
Commission found the corporate effective marginal tax rate for 
investments in the United States to be 34.3 percent while the average 
of the other 34 surveyed countries (28 EU countries, plus four other 
European countries, Canada, and Japan) was 16.0 percent.\2\ Many other 
developed countries also have special favorable tax rules for 
intellectual property, including so-called ``patent boxes'' or 
``innovation boxes,'' with effective tax rates on such income typically 
ranging from 5 to 15 percent.\3\
---------------------------------------------------------------------------
    \2\ Center for European Economic Research (ZEW), ``Effective Tax 
Levels Using the Devereux/Griffith Methodology,'' Project for the EU 
Commission TAXUD/2013/CC/120, Intermediate Report, October 2015, 
available at: http://ec.europa.eu/taxation_customs/sites/taxation/
files/resources/documents/common/publications/studies/
effective_tax_rates.pdf.
    \3\ Countries with patent or innovation boxes include Belgium, 
France, Hungary, Ireland, Israel, Italy, Korea, Luxembourg, Malta, 
Netherlands, Portugal, Spain, Switzerland, Turkey, and the United 
Kingdom. For details on qualifying income and tax rates, see PwC, 
Global Research and Development Incentives Group, April 2017, available 
at: https://www.pwc.com/gx/en/services/tax/international-tax-services/
global-research-and-development-incentives-group.html.

Further, the U.S. international tax system still is premised on rules 
first adopted in 1909 that tax the worldwide income of American 
corporations. Virtually all other advanced economies--including all 
other G7 countries and 29 of the other 34 OECD countries--have adopted 
territorial tax rules that ensure that their own companies are as 
competitive as possible in the global market place. By contrast, the 
U.S. rules place an additional tax on the foreign earnings of U.S. 
companies when they are sent home, which discourages the repatriation 
of these earnings and has now resulted in $2.6 trillion in foreign 
earnings being trapped overseas due to America's anticompetitive tax 
---------------------------------------------------------------------------
system.

Together, the high U.S. corporate tax rate and outdated international 
tax rules make the U.S. corporate tax system an outlier from the rest 
of the world, harming the ability of American companies and their 
workers to compete successfully. By suppressing investment in the 
United States, the corporate income tax lowers worker productivity and 
holds back wages. An estimated 75 percent of the corporate income tax 
burden falls on workers.\4\
---------------------------------------------------------------------------
    \4\ For example, a study by the Congressional Budget Office 
concludes that 73.7 percent of the burden of the corporate income tax 
is borne by workers. See, Congressional Budget Office, ``International 
Burdens of the Corporate Income Tax,'' August 2006.

Successful tax reform should end the competitive tax disadvantage that 
U.S. companies and American workers face every day in the global 
marketplace.

Creating a Competitive Advantage

Our trading partners use their corporate tax systems to achieve 
competitive advantage at the expense of the American worker. For 
example, Canada has aggressively lowered its combined federal and 
provincial corporate tax rate from 42.4 percent to 26.7 percent since 
2000, with the federal rate now at 15 percent. As outlined by the 
Canadian government in a 2006 policy document, ``Advantage Canada,'' 
this was part of an explicit Canadian policy to obtain a competitive 
advantage over the United States:

        To create a Canadian tax advantage over the coming years, 
        Canada's New Government will . . . [e]stablish a broader 
        corporate tax advantage for Canada in the treatment of business 
        investment. Step one is to create a meaningful tax advantage 
        over the United States, our closest economic partner. Step two 
        is to achieve the lowest tax rate on new business investment in 
        G7 countries.\5\
---------------------------------------------------------------------------
    \5\ ``Advantage Canada: Building a Strong Economy for Canadians,'' 
Department of Finance Canada, p. 33, available at: https://
www.fin.gc.ca/ec2006/pdf/plane.pdf.

Since 2000, average wages have grown 7 percent faster in Canada than in 
the United States.\6\ And even with the substantially lower tax rate, 
Canada's federal corporate tax revenues as a share of GDP are greater 
than those of the United States and greater than in the 1980s when 
Canada's federal tax rate was twice as high.\7\
---------------------------------------------------------------------------
    \6\ OECD statistics, available at: https://stats.oecd.org/
Index.aspx?DataSetCode=AV_AN_
WAGE.
    \7\ See, Fiscal References, Table 4, providing historical data on 
Canadian federal tax revenues, available at: http://www.fin.gc.ca/frt-
trf/2016/frt-trf-16-eng.pdf.

Perhaps not surprisingly, Canada understands U.S. tax reform can end 
Canada's tax advantage and attract greater investment to the United 
States.\8\
---------------------------------------------------------------------------
    \8\ See recent articles in the Canadian press describing the 
potentially adverse impact of U.S. corporate tax reform on Canada's 
current tax advantage as well as the benefits to the United States: 
``Donald Trump's `big, big' corporate tax cut could `erase Canada's 
advantage','' Global News, March 1, 2017; (http://globalnews.ca/news/
3279987/donald-trump-corporate-tax-cut-canada/); ``Trump's corporate 
tax cut could end Canada's advantage,'' Toronto Star, April 26, 2017 
(https://www.thestar.com/business/2017/04/26/trumps-corporate-tax-cut-
could-end-canadas-advantage.html); `` `A real negative for Canada': 
Businesses warn Trump's tax plan would hurt competitiveness,'' National 
Post, April 27, 2017 (http://business.financialpost.com/news/economy/a-
real-negative-for-canada-businesses-warns-trumps-tax-cut-plan-would-
hurt-competitiveness/wcm/cOddad77-5698-44b4-8f15-5ac67c9bb059).

The problem for the United States has been that nearly every developed 
country has explicitly or implicitly sought to achieve a tax advantage 
over the United States. Of the other 34 OECD countries, all but one 
have lowered their statutory corporate tax rate since the last U.S. tax 
reform--and all have set their corporate tax rate below that of the 
---------------------------------------------------------------------------
United States.

At the same time, territorial tax systems--under which a company pays 
tax in the country in which profits are earned but not a second time 
when earnings are brought home to the company's home country--have 
become the norm among developed countries. Since 1990, the number of 
OECD countries with territorial tax systems has grown from 9 to 29.\9\ 
Of the 29 countries, 21 provide 100 percent exemption for foreign 
qualifying dividends and the other 8 exempt 95 to 97 percent of such 
income, resulting in a home-country tax rate of approximately 1 percent 
on the foreign dividend.
---------------------------------------------------------------------------
    \9\ PwC, ``Evolution of Territorial Tax Systems in the OECD,'' 
prepared for the Technology CEO Council, April 2013; updated for 
accession of Latvia to the OECD in 2016, and Latvia's adoption of 
territorial rules in 2013.

U.S. companies operate in an increasingly competitive global market 
place. Among companies listed in the Global Fortune 500, the number of 
U.S.-headquartered companies declined by 25 percent between 2000 and 
2015. U.S. companies competing abroad are virtually certain to be 
facing competition from a company headquartered in a territorial 
country in addition to locally headquartered companies that face only 
---------------------------------------------------------------------------
the local country tax.

Both a competitive U.S. corporate tax rate and adoption of a modern 
international tax system can turn the current U.S. tax disadvantage 
into a U.S. tax advantage. With a competitive 20 percent corporate tax 
rate, a new study for Business Roundtable estimates that 4,700 
companies would have remained under U.S. ownership over the past 13 
years.\10\
---------------------------------------------------------------------------
    \10\ EY, ``Buying and Selling: Cross-Border Mergers and 
Acquisitions, and the U.S. Corporate Income Tax,'' prepared for 
Business Roundtable, September 2017.
---------------------------------------------------------------------------

The Framework for a Competitive U.S. Corporate Tax System

Current high tax rates discourage investment and hold back wages and 
job creation in the United States. Further, the current U.S. 
international tax rules hinder American companies in foreign markets 
and discourage them from bringing their earnings home for reinvestment.

Business Roundtable believes that reform should include reduction of 
the corporate tax rate to a competitive level, taking into 
consideration both federal and state corporate tax rates. Additionally, 
tax reform should include adoption of a modern international tax 
system, consistent with the territorial tax systems of our major 
trading partners, to allow U.S. companies to compete on a level playing 
field with their foreign competitors and return their foreign earnings 
for investment in the U.S. economy.

We also believe these goals can be achieved in a fiscally responsible 
manner, taking into account the positive macroeconomic benefits from 
tax reform and a realistic budget baseline that acknowledges that 
longstanding tax provisions extended repeatedly on a short-term basis 
are in reality a permanent feature of current law.

We understand that tax reform will require a careful and balanced 
examination of existing tax preferences and that reform of the U.S. 
international tax system will be accompanied by appropriate safeguards 
to protect America's tax base. However, policymakers must be careful 
that proposals intended to protect against loss of the U.S. tax base 
are not so broad that they undermine the ability of American companies 
to compete against companies not encumbered by such restrictions.

At the end of the day, if U.S. tax reform is to be successful--if the 
United States is to end the competitive tax disadvantage that U.S. 
companies currently face--the reformed system should result in 
companies wanting to be headquartered in the United States over foreign 
domiciles. For too long we have observed investment dollars flowing out 
of the United States, companies inverting or being acquired by a 
foreign competitor, or entrepreneurs founding their new businesses 
outside of the United States due to the U.S. tax disadvantage. It is 
now time to establish a U.S. tax advantage. Let us once again make the 
United States the best place in the world to establish and grow a 
business.

                                * * * *

Business Roundtable, as the leaders of America's largest businesses, 
urges Congress and the Administration to work together with the highest 
priority to enact permanent, pro-growth tax reform this year in a fair 
and fiscally responsible manner. We stand ready to work with you to 
achieve this goal and to put America on a path of accelerated economic 
growth with higher wages and greater employment opportunities for all 
Americans.

                                 ______
                                 
                        Center for Fiscal Equity

                    Statement of Michael G. Bindner

Chairman Hatch and Ranking Member Wyden, thank you for the opportunity 
to submit these comments for the record to the Committee on Finance. As 
usual, we will preface our comments with our comprehensive four-part 
approach, which will provide context for our comments.

      A Value-Added Tax (VAT) to fund domestic military spending and 
domestic discretionary spending with a rate between 10% and 13%, which 
makes sure every American pays something.
      Personal income surtaxes on joint and widowed filers with net 
annual incomes of $100,000 and single filers earning $50,000 per year 
to fund net interest payments, debt retirement and overseas and 
strategic military spending and other international spending, with 
graduated rates between 5% and 25%.
      Employee contributions to Old-Age and Survivors Insurance (OASI) 
with a lower income cap, which allows for lower payment levels to 
wealthier retirees without making bend points more progressive.
      A VAT-like Net Business Receipts Tax (NBRT), which is 
essentially a subtraction VAT with additional tax expenditures for 
family support, health care and the private delivery of governmental 
services, to fund entitlement spending and replace income tax filing 
for most people (including people who file without paying), the 
corporate income tax, business tax filing through individual income 
taxes and the employer contribution to OASI, all payroll taxes for 
hospital insurance, disability insurance, unemployment insurance and 
survivors under age 60.

Probably the most broken part of our tax code is how businesses are 
taxed. Corporations pay separate taxes while sole proprietors and 
``pass-throughs'' pay taxes through the personal income taxes of their 
owners. This has some people being taxed twice, regardless of whether 
this is appropriate to extract taxes on higher incomes not collected 
through the business, while others face complexity on their personal 
forms, as well as a different set of rules. In 2003, President Bush and 
the Congress tried to fix this but could not, settling instead on a 
lower rate for dividends and capital gains.

The results of simply cutting rates were not pretty. CEOs and investors 
had an incentive to keep labor costs in check and pocket all 
productivity gains, which were huge through automation and outsourcing. 
Higher tax rates would have put a damper on such behavior. Of course, 
because not every rich person can be a CEO and because most companies 
borrowed money rather than issued stock, there were few good 
investments, which had beneficiaries of the 2001 and 2003 tax cuts seek 
more exotic vehicles, like oil futures and mortgage-backed securities. 
This (not any action by the GSEs) led to the mortgage boom and the 
Great Recession (as well as provisions in the 1986 tax reform that let 
homeowners use their houses as ATMs, a provision Trump wants to keep).

The President proposes simply lowering the tax on ``pass-through'' 
income, which will increase the number of companies fronting what would 
have been pay to individuals for salary and rent in order to take 
advantage of the lower rates. This is tax DEFORM not reform. We tried 
such cuts in 2003 and the proposed cut will yield the same result, 
especially if the President succeeds in defanging Dodd-Frank through 
regulatory reform (again deform).

There is a better way. Value-Added Taxes and Net Business Receipts 
Taxes (Subtraction VAT) will both simplify taxation and treat all 
businesses in the same way. While some special tax breaks might be 
preserved in the NBRT, most would not because there would be no way to 
justify taxing the labor or an activity and not the associated profit 
or taxing research salaries one way and production wages another. All 
profit and wage would be taxed at the same rate, which also removes the 
tax bias against wage income.

The proposed Destination-Based Cash Flow Tax is a compromise between 
those who hate the idea of a value-added tax and those who seek a 
better deal for workers in trade. It is not a very good idea because it 
does not meet World Trade Organization standards, though a VAT would. 
It would be simpler to adopt a VAT on the international level and it 
would allow an expansion of family support through an expanded child 
tax credit. Many in the majority party oppose a VAT for just that 
reason, yet call themselves pro life, which is true hypocrisy. Indeed, 
a VAT with enhanced family support is the best solution anyone has 
found to grow the economy and increase jobs.

Some oppose VATs because they see it as a money machine, however this 
depends on whether they are visible or not. A receipt visible VAT is as 
susceptible to public pressure to reduce spending as the FairTax is 
designed to be, however unlike the FairTax, it is harder to game. 
Avoiding lawful taxes by gaming the system should not be considered a 
conservative principle, unless conservatism is in defense of entrenched 
corporate interests who have the money to game the tax code.

Our VAT rate estimates are designed to fully fund non-entitlement 
domestic spending not otherwise offset with dedicated revenues. This 
makes the burden of funding government very explicit to all taxpayers. 
Nothing else will reduce the demand for such spending, save perceived 
demands from bondholders to do so--a demand that does not seem evident 
given their continued purchase of U.S. Treasury Notes.

Value-Added Taxes can be seen as regressive because wealthier people 
consume less, however when used in concert with a high-income personal 
income tax and with some form of tax benefit to families, as we suggest 
as part of the NBRT, this is not the case.

This is not to say that there will be no deductions. The NBRT will be 
the vehicle for social spending through the tax code.

The NBRT base is similar to a Value-Added Tax (VAT), but not identical. 
Unlike a VAT, an NBRT would not be visible on receipts and should not 
be zero rated at the border--nor should it be applied to imports. While 
both collect from consumers, the unit of analysis for the NBRT should 
be the business rather than the transaction. As such, its application 
should be universal--covering both public companies who currently file 
business income taxes and private companies who currently file their 
business expenses on individual returns.

In the long term, the explosion of the debt comes from the aging of 
society and the funding of their health-care costs. Some thought should 
be given to ways to reverse a demographic imbalance that produces too 
few children while life expectancy of the elderly increases.

Unassisted labor markets work against population growth. Given a choice 
between hiring parents with children and recent college graduates, the 
smart decision will always be to hire the new graduates, as they will 
demand less money--especially in the technology area where recent 
training is often valued over experience.

Separating out pay for families allows society to reverse that trend, 
with a significant driver to that separation being a more generous tax 
credit for children. Such a credit could be ``paid for'' by ending the 
Mortgage Interest Deduction (MID) without hurting the housing sector, 
as housing is the biggest area of cost growth when children are added. 
While lobbyists for lenders and realtors would prefer gridlock on 
reducing the MID, if forced to choose between transferring this 
deduction to families and using it for deficit reduction (as both 
Bowles-Simpson and Rivlin-Domenici suggest), we suspect that they would 
choose the former over the latter if forced to make a choice. The 
religious community could also see such a development as a ``pro-life'' 
vote, especially among religious liberals.

Enactment of such a credit meets both our nation's short term needs for 
consumer liquidity and our long term need for population growth. Adding 
this issue to the pro-life agenda, at least in some quarters, makes 
this proposal a win for everyone.

Our proposals dovetail on our prior comments testimony on Individual 
Taxes. Tax benefits and filings that were once found in the individual 
code would be moved to the Business code. The most obvious provision is 
that most families will no longer have to file individual income taxes. 
Most will receive all of their tax benefits through an employer paid 
net business receipts tax, which is essentially a subtraction VAT. 
Health benefits through the Affordable Care Act or the health insurance 
exclusion for corporate income taxes will come through the NBRT, as 
will a refundable child tax credit paid through wages or education or 
social insurance benefits, rather than through end of the year tax 
filing, the EITC, TANF or SNAP.

The NBRT should fund services to families, including education at all 
levels, mental health care, disability benefits, Temporary Aid to Needy 
Families, Supplemental Nutrition Assistance, Medicare and Medicaid. If 
society acts compassionately to prisoners and shifts from punishment to 
treatment for mentally ill and addicted offenders, funding for these 
services would be from the NBRT rather than the VAT.

The NBRT could also be used to shift governmental spending from public 
agencies to private providers without any involvement by the 
government--especially if the several states adopted an identical tax 
structure. Either employers as donors or workers as recipients could 
designate that revenues that would otherwise be collected for public 
schools would instead fund the public or private school of their 
choice. Private mental health providers could be preferred on the same 
basis over public mental health institutions. This is a feature that is 
impossible with the FairTax or a VAT alone.

To extract cost savings under the NBRT, allow companies to offer 
services privately to both employees and retirees in exchange for a 
substantial tax benefit, provided that services are at least as 
generous as the current programs. Employers who fund catastrophic care 
would get an even higher benefit, with the proviso that any care so 
provided be superior to the care available through Medicaid. Making 
employers responsible for most costs and for all cost savings allows 
them to use some market power to get lower rates, but not so much that 
the free market is destroyed. Increasing Part B and Part D premiums 
also makes it more likely that an employer-based system will be 
supported by retirees.

Conceivably, NBRT offsets could exceed revenue. In this case, employers 
would receive a VAT credit.

Business owners, whether sole proprietors, partners, Schedule C or 1099 
employees will file through the NBRT and also collect VAT, both of 
which will be coordinated with state revenue agencies and forwarded to 
the government. Form 1099 employees will not be required to file or get 
their own insurance unless they have multiple clients. Even then, the 
clients will pay the tax on their value added and provide insurance and 
retirement savings as if they were employees. We have inflated the 
number of ``small businesses'' for quite too long.

While some employee sole proprietors might like the freedom of multiple 
clients, most work for only one and would rather have full benefits and 
no tax filing. Congress can do this small thing for them in tax reform. 
Indeed, there is no reason to do tax reform without such changes 
(especially the child tax credit expansion). The larger firms will 
navigate and exploit the tax code regardless of reform, so their 
interests are not so important unless campaign contributions are really 
bribes.

The VAT and NBRT would eliminate the need for any corporate income tax, 
or as they used to be called, corporate profits taxes. Because 
consumption taxes burden labor and profit at the same rate, discounted 
tax rates on dividends and capital gains would no longer be required. 
Any residual income or inheritance surtax would be a way to maintain 
progressivity by charging a higher rate or rates for households 
receiving higher incomes from the same business activities.

Value-added taxes act as instant economic growth, as they are spur to 
domestic industry and its workers, who will have more money to spend. 
The Net Business Receipts Tax as we propose it includes a child tax 
credit to be paid with income of between $500 and $1,000 per month. 
Such money will undoubtedly be spent by the families who receive it on 
everything from food to housing to consumer electronics.

The tax reforms detailed here will make the nation truly competitive 
internationally while creating economic growth domestically, not by 
making job creators richer but families better off. The Center's reform 
plan will give you job creation. The current blueprint and the 
President's proposed tax cuts for the wealthy will not.

In September 2011, the Center submitted comments on Economic Models 
Available to the Joint Committee on Taxation for Analyzing Tax Reform 
Proposals. Our findings, which were presented to the JCT and the 
Congressional Budget Office (as well as the Wharton School and the Tax 
Policy Center), showed that when taxes are cut, especially on the 
wealthy, only deficit spending will lead to economic growth as we 
borrow the money we should have taxed. When taxes on the wealthy are 
increased, spending is also usually cut and growth still results. The 
study is available at http://fiscalequity.blogspot.com/ 2011/09/
economic-models-available-to-joint.html.

Our current expansion and the expansion under the Clinton 
Administration show that higher tax rates always spur growth, while tax 
cuts on capital gains lead to toxic investments--almost always in 
housing. Business expansion and job creation will occur with economic 
growth, not because of investment from the outside but from the 
recycling of profits and debt driven by customers rather than the price 
of funds. We won't be fooled again by the saccharin song of the supply 
siders, whose tax cuts have led to debt and economic growth more 
attributable to the theories of Keynes than Stockman and Gramm.

Thank you for the opportunity to address the committee. We are, of 
course, available for direct testimony or to answer questions by 
members and staff.

                                 ______
                                 
                 Coalition to Preserve Cash Accounting

                           September 27, 2017

The Honorable Orrin Hatch           The Honorable Ron Wyden
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510-6200           Washington, DC 20510-6200

Dear Chairman Hatch and Ranking Member Wyden:

    On behalf of the Coalition to Preserve Cash Accounting (``the 
Coalition''), we are writing to explain why it is important to continue 
to allow farmers, ranchers, and service provider pass-through 
businesses to continue to use the cash method of accounting as part of 
any tax reform plan. We appreciate the opportunity to provide these 
comments in connection with the Senate Committee on Finance's September 
19, 2017 hearing on ``Business Tax Reform.'' The Coalition applauds 
your efforts to improve the nation's tax code to make it simpler, 
fairer and more efficient in order to strengthen the U.S. economy, make 
American businesses more competitive, and create jobs.

    The Coalition is comprised of dozens of individual businesses and 
trade associations representing thousands of farmers, ranchers, and 
service provider pass-through entities across the United States that 
vary in line of business, size and description, but have in common that 
our members rely on the use of cash accounting to simply and accurately 
report income and expenses for tax purposes. Pass-through entities 
account for more than 90 percent of all business entities in the United 
States. A substantial number of these businesses are service providers, 
farmers, and ranchers that currently qualify to use cash accounting. 
They include a variety of businesses throughout America--farms, 
trucking, construction, engineers, architects, accountants, lawyers, 
dentists, doctors, and other essential service providers--on which 
communities rely for jobs, health, infrastructure, and improved quality 
of life. These are not just a few big businesses and a few well-to-do 
owners. According to IRS data, there are over 2.5 million partnerships 
using the cash method of accounting, in addition to hundreds of 
thousands of Subchapter S corporations eligible to use the cash method.
About the Cash Method of Accounting
    Under current law, there are two primary methods of accounting for 
tax purposes--cash and accrual. Under cash basis accounting, taxes are 
paid on cash actually collected and bills actually paid. Under accrual 
basis accounting, taxes are owed when the right to receive payment is 
fixed, even if that payment will not be received for several months or 
even several years; expenses are deductible even if they have not yet 
been paid.

    The tax code permits farmers, ranchers, and service pass-through 
entities (with individual owners paying tax at the individual level) of 
all sizes--including partnerships, Subchapter S corporations, and 
personal service corporations--to use the cash method of accounting. 
Cash accounting is the foundation upon which we have built our 
businesses, allowing us to simply and accurately report our income and 
expenses, and to manage our cash flows, for decades. It is a simple and 
basic method of accounting--we pay taxes on the cash coming in the 
door, and we deduct expenses when the cash goes out the door. No 
gimmicks, no spin, no game playing. Cash accounting is the very essence 
of the fairness and simplicity that is on everyone's wish list for tax 
reform.

    Some recent tax reform proposals would require many of our 
businesses to switch to the accrual method of accounting, not for any 
policy reason or to combat abuse, but rather for the sole purpose of 
raising revenues for tax reform. Forcing such a switch would be an 
effective tax increase on the thousands upon thousands of individual 
owners who generate local jobs and are integral to the vitality of 
local economies throughout our nation. It would also increase our 
recordkeeping and compliance costs due to the greater complexity of the 
accrual method. Because many of our businesses would have to borrow 
money to bridge the cash flow gap created by having to pay taxes on 
money we have not yet collected, we may incur an additional cost with 
interest expense, a cost that would be exacerbated if interest expense 
is no longer deductible, as proposed under the House Republicans' 
Better Way blueprint (``the blueprint''). Some businesses may not be 
able to borrow the necessary funds to bridge the gap, requiring them to 
terminate operations with a concomitant loss of jobs and a harmful 
ripple effect on the surrounding economy.
Tax Reform Proposals and Cash Accounting
    The blueprint moves toward a cash flow, destination-based 
consumption tax. The cash flow nature of the proposal suggests that the 
cash method of accounting would be integral and entirely consistent 
with the blueprint since it taxes ``cash-in'' and allows deductions for 
``cash-out,'' including full expensing of capital expenditures. While 
we understand that they are different proposals, the ABC Act (H.R. 
4377), a cash flow plan introduced by Rep. Devin Nunes (R-CA) in the 
114th Congress, required all businesses to use the cash method. 
However, the blueprint does not provide details regarding the use of 
the cash method, including whether all businesses would be required to 
use it, whether businesses currently allowed to use the cash method 
would continue to be allowed to do so, whether a hybrid method of cash 
and accrual accounting would apply, or some other standard would be 
imposed.

    President Trump's tax reform plan is not a cash flow plan and takes 
a more traditional income tax-based approach, yet the principles 
articulated in the administration's plan are entirely consistent with 
the continued availability of the cash method of accounting. Growing 
the economy, simplification, and tax relief are exemplified by the cash 
method of accounting. Requiring businesses that have operated using the 
cash method since their inception to suddenly pay tax on money they 
have not yet collected, and may never collect, is an effective tax 
increase, and will have a contraction effect on the economy as funds 
are diverted from investment in the business to pay taxes on money they 
have not received or as businesses close because of insufficient cash 
flow and inability to borrow. It is important to note that cash 
accounting is not a ``tax break for special interests;'' it is a 
simple, well-established and long-authorized way of reporting income 
and expenses used by hundreds of thousands of family-owned farms, 
ranches, businesses, and Main Street service providers that are the 
backbone of any community.

    Several recent tax reform proposals, including Senator John Thune's 
(R-SD) S. 1144, the Investment in New Ventures and Economic Success 
Today Act of 2017, would expand the use of cash accounting to allow all 
businesses under a certain income threshold, including those businesses 
with inventories, to use cash accounting. Such proposals aim to 
simplify and reduce recordkeeping burdens and costs for small 
businesses, while still accurately reporting income and expenses. A few 
of these proposals (not S. 1144) would pay for this expansion by 
forcing all other businesses currently using cash accounting to switch 
to accrual accounting. We do not oppose expanding the allowable use of 
cash accounting, but it is unfair and inconsistent with the goals of 
tax reform to pay for good policy with bad policy that has no other 
justification than raising revenues. When cash accounting makes sense 
for a particular type of business, the size of the business should make 
no difference. Further, there have been no allegations that the 
businesses currently using cash accounting are abusing the method, 
inaccurately reporting income and expenses, or otherwise taking 
positions inconsistent with good tax policy.

    Tax reform discussions seem to be trending toward faster cost 
recovery than under current law. For example, the blueprint allows for 
full expensing of capital investment, Senator Thune's bill makes bonus 
depreciation permanent, and comments from administration officials 
suggest that President Trump and his team prefer faster write-offs of 
capital assets. Such policies benefit capital intensive businesses. 
However, service businesses by their very nature are not capital 
intensive, so it would be unfair to allow faster cost recovery for some 
businesses while imposing an effective tax increase and substantial new 
administrative burdens on pass-through service providers who will not 
benefit from more generous expensing or depreciation rules by taking 
away the use of cash accounting.
Other Implications of Limiting Cash Accounting
    In addition to the policy implications, there are many practical 
reasons why the cash method of accounting is the best method to 
accurately report income and expenses for farmers, ranchers, and pass-
through service providers:

        The accrual method would severely impair cash flow. Businesses 
        could be forced into debt to finance their taxes, including 
        accelerated estimated tax payments, on money we may never 
        receive. Many cash businesses operate on small profit margins, 
        so accelerating the recognition of income could be the 
        difference between being liquid and illiquid, and succeeding or 
        failing (with the resulting loss of jobs).

        Loss of cash accounting will make it harder for farmers to stay 
        in business. For farmers and ranchers, cash accounting is 
        crucial due to the number and enormity of up-front costs and 
        the uncertainty of crop yields and market prices. A heavy 
        rainfall, early freeze, or sustained drought can devastate an 
        agricultural community. Farmers and ranchers need the 
        predictability, flexibility and simplicity of cash accounting 
        to match income with expenses in order to handle their tax 
        burden that otherwise could fluctuate greatly from one year to 
        the next. Cash accounting requires no amended returns to even 
        out the fluctuations in annual revenues that are inherent in 
        farming and ranching.

        Immutable factors outside the control of businesses make it 
        difficult to determine income. Many cash businesses have 
        contracts with the government, which is known for long delays 
        in making payments that already stretch their working capital. 
        Billings to insurance companies and government agencies for 
        medical services may be subject to being disputed, discounted, 
        or denied. Service recipients, many of whom are private 
        individuals, may decide to pay only in part or not at all, or 
        force the provider into protracted collection. Structured 
        settlements and alternative fee arrangements can result in 
        substantial delays in collections, sometimes over several 
        years; therefore, taxes owed in the year a matter is resolved 
        could potentially exceed the cash actually collected.

        Recordkeeping burdens, including cost, staff time, and 
        complexity, would escalate under accrual accounting. Cash 
        accounting is simple--cash in/cash out. Accrual accounting is 
        much more complex, requiring sophisticated analyses of when the 
        right to collect income or to pay expenses is fixed and 
        determinable, as well as the amounts involved. In order to 
        comply with the more complex rules, businesses currently 
        handling their own books and records may feel they have no 
        other choice than to hire outside help or incur the additional 
        cost of buying sophisticated software.

        Accrual accounting could have a social cost. Farmers, ranchers, 
        and service providers routinely donate their products and 
        services to underserved and underprivileged individuals and 
        families. An effective tax increase and increased 
        administrative costs resulting from the use of accrual 
        accounting could impede the ability of these businesses to 
        provide such benefits to those in need in their local 
        communities.
Conclusions
    The ability of a business to use cash accounting should not be 
precluded based on the size of the business or the amount of its gross 
receipts. Whether large or small, a business can have small profit 
margins, rely on slow-paying government contracts, generate business 
through deferred fee structures or be wiped out through the vagaries of 
the weather. Cash diverted toward interest expense, taxes, and higher 
recordkeeping costs is capital unavailable for use in the actual 
business, including paying wages, buying capital assets, or investing 
in growth.

    Proposals to limit the use of cash accounting are counterproductive 
to the already agreed upon principles of tax reform, which focus on 
strengthening our economy, fostering job growth, enhancing U.S. 
competitiveness, and promoting fairness and simplicity in the tax code. 
Accrual accounting does not make the system simpler, but more complex. 
Increasing the debt load of American businesses runs contrary to the 
goal of moving toward equity financing instead of debt financing and 
will raise the cost of capital, creating a drag on economic growth and 
job creation. Putting U.S. businesses in a weaker position will further 
disadvantage them in comparison to foreign competitors. It is simply 
unfair to ask the individual owners of pass-through businesses to 
shoulder the financial burden for tax reform by forcing them to pay 
taxes on income they have not yet collected where such changes are 
likely to leave them in a substantially worse position than when they 
started.

    As discussions on tax reform continue, the undersigned respectfully 
request that you take our concerns into consideration and not limit our 
ability to use cash accounting. We would be happy to discuss our 
concerns in further detail. Please feel free to contact Mary Baker 
([email protected]) or any of the signatories for additional 
information.

Thank you for your consideration of this important matter.

Sincerely,\1\
---------------------------------------------------------------------------
    \1\ Although not a signatory to this letter, the American Bar 
Association (ABA) is working closely with the Coalition and has 
expressed similar concerns regarding proposals to limit the ability of 
personal service businesses to use cash accounting. The ABA's most 
recent letter to the Senate Committee on Finance sent in April 2017 is 
available at: http://bit.ly/2xvv6YB.

Americans for Tax Reform
American Council of Engineering Companies
American Farm Bureau Federation
American Institute of Certified Public Accountants
American Medical Association
American Society of Interior Designers
The American Institute of Architects
The National Creditors Bar Association
Akin, Gump, Strauss, Hauer, and Feld LLP
Baker Donelson
Debevoise and Plimpton LLP
Dorsey and Whitney LLP
Foley and Lardner LLP
Jackson Walker LLP
K&L Gates LLP
Kilpatrick, Townsend, and Stockton LLP
Lewis, Roca, Rothgerber, Christie LLP
Littler Mendelson P.C.
Miles and Stockbridge P.C.
Mitchell, Silberberg, and Knupp LLP
Morrison and Foerster LLP
Nelson, Mullins, Riley, and Scarborough LLP
Ogletree, Deakins, Nash, Smoak, and Stewart, P.C.
Perkins Coie LLP
Quarles and Brady LLP
Rubin and Rudman LLP
Squire Patton Boggs (U.S.) LLP
Steptoe and Johnson LLP
White and Case LLP

                                 ______
                                 
                               CVS Health

                1275 Pennsylvania Avenue, NW, Suite 700

                          Washington, DC 20004

    Chairman Hatch, Ranking Member Wyden, and Members of the Committee, 
thank you for the opportunity for CVS Health, on behalf of its 
subsidiaries and affiliated entities, to highlight the importance of 
comprehensive tax reform. CVS Health believes that tax reform that 
includes a significant and meaningful reduction in the corporate tax 
rate is the single most effective step Congress can take to strengthen 
the economy, create jobs, and foster innovation. CVS Health is 
committed to working with Congress and the Administration to advance 
tax reform that achieves these goals.

    CVS Health is a U.S.-based domestic company with nearly 250,000 
employees across the United States. As a pharmacy innovation company, 
we are committed to helping people on their path to better health. We 
operate 9,600 retail pharmacies and 1,100 Minute Clinics, and cover 90 
million lives through our pharmacy benefit management division, in 
addition to our home infusion, long-term care, specialty and mail-order 
business operations throughout the country. CVS Health helps people, 
businesses and communities manage health care in more affordable, 
effective ways. One in three Americans have touch points with CVS 
Health services each year, and 75 percent of people in the United 
States live within 3 to 5 miles of a CVS store. Our unique integrated 
model increases access to quality care, delivers better health 
outcomes, and lowers overall health-care costs.

    The single most important issue in tax reform for CVS Health is a 
significant and meaningful reduction in the corporate tax rate. With an 
effective federal tax rate of 35 percent, CVS Health pays one of the 
highest effective tax rates in the world on our operating income. In 
2016, CVS Health's effective federal tax rate was actually greater than 
the statutory federal tax rate of 35 percent, and CVS Health paid 
nearly 1 percent of all corporate taxes collected in the United States. 
CVS Health strongly supports comprehensive tax reform that includes a 
meaningful reduction in the corporate rate, and believes that all 
corporate credits, preference items, and special deductions should be 
closely evaluated and scrutinized in pursuit of achieving a lower rate.

    With a lower rate, CVS Health could immediately create new jobs and 
help grow the economy. For each single-digit reduction in the corporate 
rate, CVS Health could generate more than $90 million in incremental 
annual capital to be invested in communities across the United States. 
If the corporate rate was reduced to 25 percent, for example, that 
would free up $900 million a year that could be used to substantially 
increase our annual investments in growth and innovation. With a 25 
percent corporate rate, CVS Health could build 50 new pharmacies and 
open 100 new Minute Clinics each year, in addition to our current 
planned investment and growth. We would also need to accelerate by 2 or 
3 years the construction of a new distribution center to support our 
additional locations. We would further invest $140 to $200 million in 
new technology to improve health-care outcomes and access, including 
breakthrough digital tools to address issues like medication adherence.

    By increasing our annual investment into new pharmacies, clinics, 
supporting facilities, and technologies, CVS Health could create as 
many as 3,000 permanent jobs within just 2 to 3 years, as well as up to 
4,500 temporary construction jobs per year. In turn, this would 
generate more than $42 million in new annual salaries and benefits 
every year, significantly increasing employee purchasing power and 
spurring growth in local economies.

    We support the proposal on corporate integration as a way to reduce 
the total tax burden on corporate earnings, and we appreciate your 
leadership and work on this issue. Like a reduction in the corporate 
rate, we believe that corporate integration would promote economic 
growth and competitiveness. Further, corporate integration tends to 
encourage equity financing, which reduces the preference for debt 
financing without the challenges of limiting the deductibility of 
interest expense.

    In conclusion, CVS Health strongly supports comprehensive tax 
reform that meaningfully lowers the corporate rate. Tax reform is 
critical to faster economic growth, and we believe that Congress 
currently has a once in a lifetime opportunity to overhaul the tax code 
and drive economic growth. CVS Health strongly supports comprehensive 
tax reform that meaningfully lowers the corporate tax rate, and 
provides certainty and predictability for businesses to invest. CVS 
Health is committed to working with the Committee to advance this 
important goal.

                                 ______
                                 
                            Dwight J. Davis

                        King Springs Pecans, LLC

                            Managing Partner

Chairman Hatch, Ranking Member Wyden, Senator Isakson, and members of 
the Committee:

Thank you for the opportunity to address this esteemed Committee on the 
subject of tax reform and business interest deductibility. As 
background, I am the proud co-owner of King Springs Pecans in 
Hawkinsville, Georgia. I am also a strong supporter of the effort to 
reform our tax system.

Like many pecan farmers in Georgia, my business partner and I have made 
a sizeable investment into the production of food for both domestic and 
international markets. Also, like most farmers, our expenses in growing 
these crops do not occur at or near the time our revenues occur. 
Accordingly, we must borrow a sizeable amount of money to operate a 
successful family farm. Pecan farmers, like most farmers, have little 
or no interest income against which to claim a deduction for the 
interest expense associated with the revolving debt. The denial of the 
interest deduction will seriously erode the income from farms which, as 
is well known, already operate on slim margins. Moreover, the proposal 
to allow immediate expensing for one-time asset purchases will not 
offset the loss of the tax deduction for recurring interest expense.

The importance of access to debt is even more important during 
difficult financial times. As you know, Hurricane Irma ravaged the 
southeast and caused severe damage to the agricultural sector. The 
Georgia Pecan industry was especially hit hard. It is estimated that 
collectively we lost 30% of our yield this year and many pecan farmers 
lost 80% of their crops. Literally thousands of producing pecan trees 
were destroyed and this will adversely affect crop yields for years to 
come. Similar losses have occurred in the peach and blueberry crops.

As for our farm, we look to rebuild and replant any damaged trees. We 
will need access to capital for our operations and rebuilding. The 
deduction for interest payments will be critical to this recovery.

Thank you for this opportunity to be heard. If I can supply any 
additional information, please do not hesitate to contact me.

                                 ______
                                 
                     Enterprise Community Partners

                       10 G Street, NE, Suite 580

                          Washington, DC 20002

                              202-842-9190

                      www.EnterpriseCommunity.com

Enterprise Community Partners thanks Chairman Orrin Hatch and the 
Committee for the opportunity to provide feedback on the Senate Finance 
Committee's hearing on business tax reform, held Tuesday, September 19, 
2017. Enterprise is a national nonprofit organization whose mission is 
to create opportunity for low- and moderate-income people through 
affordable housing in diverse, thriving communities. We work to achieve 
this by introducing solutions through cross-sector public-private 
partnerships with financial institutions, governments, community 
organizations and other partners that share our vision. Since 1982, 
Enterprise has raised and invested $28.9 billion to help finance nearly 
380,000 affordable homes across the United States. Two of the primary 
tools Enterprise uses to invest in communities are the Low-Income 
Housing Tax Credit (Housing Credit) and the New Markets Tax Credit 
(NMTC), both of which will be impacted by business tax reform. 
Enterprise has invested $12 billion in Housing Credit equity, financing 
nearly 150,000 affordable housing homes, and placed more than $700 
million of NMTC equity in over 60 commercial and mixed-use developments 
nationwide.

We are especially grateful for Finance Committee Chairman Hatch's and 
Committee member Senator Maria Cantwell's leadership in championing 
legislation to expand and strengthen the Housing Credit, our nation's 
primary tool for encouraging private investment in affordable rental 
housing. As hearing witness Jeffrey D. DeBoer, President and CEO at the 
Real Estate Roundtable, stated in his written testimony, low-income 
housing is an example of a tax incentive that is ``needed to address 
market failures and encourage capital to flow to socially desirable 
projects.'' We strongly urge the Committee to advance the Affordable 
Housing Credit Improvement Act of 2017 (S. 548) this year, and protect 
both the Credit and multifamily Housing Bonds--a central component of 
the Housing Credit program--as part of any tax reform effort considered 
by Congress.

We also thank Senator Cantwell for raising the impact of tax reform on 
the Housing Credit during the Committee's hearing. As Senator Cantwell 
noted, the prospect of lower corporate tax rates has resulted in lower 
levels of investment capital in affordable housing development, 
impacting production at a time when our nation's shortage of affordable 
housing has never been greater. We urge the Senate Finance Committee to 
make any adjustments to the Housing Credit needed beyond those proposed 
in the Affordable Housing Credit Improvement Act to ensure that 
affordable housing production continues at a robust level regardless of 
other changes made in tax reform.

Enterprise also urges the Senate Finance Committee to preserve and 
expand the NMTC as part of any tax reform effort considered by 
Congress. As Chairman Hatch noted in his opening statement, a chief 
goal of tax reform should be economic growth, and the NMTC is a proven 
and effective tool to spur economic development and revitalize 
distressed urban and rural communities. Without the NMTC, low-
income communities across the country will continue to be starved of 
the patient capital needed to support and grow businesses, create jobs 
and increase economic opportunity. Enterprise urges the committee to 
support the New Markets Tax Credit Extension Act of 2017 (S. 384), 
introduced by Senators Roy Blunt (R-MO) and Ben Cardin (D-MD), to 
indefinitely extend the NMTC. This legislation has bipartisan support, 
including the support of several members of the Finance Committee.

THE HOUSING CREDIT

The Housing Credit has a Remarkable Track Record

President Reagan and the Congress showed remarkable foresight when they 
created the Housing Credit as part of the Tax Reform Act of 1986. The 
Housing Credit is now our nation's most successful tool for encouraging 
private investment in the production and preservation of affordable 
rental housing, with a proven track record of creating jobs and 
stimulating local economies. For over 30 years, the Housing Credit has 
been a model public-private partnership program, bringing to bear 
private-sector resources, market forces, and state-level administration 
to finance more than 3 million affordable apartments--nearly one-third 
of the entire U.S. inventory--giving more than 7 million households, 
including low-income families, seniors, veterans, and people with 
disabilities, access to homes they can afford. Roughly 40 percent of 
these homes were financed in conjunction with multifamily Housing 
Bonds, which are an essential component of the program's success.

The Housing Credit is a Proven Solution to Meet a Vast and Growing Need

Despite the Housing Credit's tremendous impact, there are still over 11 
million renter households--roughly one out of every four--who spend 
more than half of their income on rent, leaving too little for other 
necessary expenses like transportation, food, and medical bills. This 
crisis is continuing to grow. HUD reports that as of 2015, the number 
of households with ``worst case housing needs'' had increased by 38.7 
percent over 2007 levels, when the recession began, and by 63.4 percent 
since 2001. A study by Harvard University's Joint Center for Housing 
Studies and Enterprise Community Partners estimates that the number of 
renter households who pay more than half of their income towards rent 
could grow to nearly 15 million by 2025.

Without the Housing Credit, there would be virtually no private 
investment in affordable housing. It simply costs too much to build 
rental housing to rent it at a level that low-income households can 
afford. In order to develop new apartments that are affordable to 
renters earning the full-time minimum wage, construction costs would 
have to be 72 percent lower than the current average.

The Housing Credit Creates Jobs

Housing Credit development supports jobs--roughly 1,130 for every 1,000 
Housing Credit apartments developed, according to the National 
Association of Home Builders (NAHB). This amounts to roughly 96,000 
jobs per year, and more than 3.4 million since the program was created 
in 1986. NAHB estimates that about half of the jobs created from new 
housing development are in construction. Additional job creation occurs 
across a diverse range of industries, including the manufacturing of 
lighting and heating equipment, lumber, concrete, and other products, 
as well as jobs in transportation, engineering, law, and real estate.

The Housing Credit Stimulates Local Economies and Improves Communities

The Housing Credit has a profound and positive impact on local 
economies. NAHB estimates that the Housing Credit adds $9.1 billion in 
income to the economy and generates approximately $3.5 billion in 
federal, state, and local taxes each year.

Conversely, a lack of affordable housing negatively impacts economies. 
Research shows that high rent burdens have priced out many workers from 
the most productive cities, resulting in 13.5 percent foregone GDP 
growth, a loss of roughly $1.95 trillion, between 1964 and 2009.

Housing Credit development also positively impacts neighborhoods in 
need of renewal. About one-third of Housing Credit properties help 
revitalize distressed communities. Stanford University research shows 
Housing Credit investments improve property values and reduce poverty, 
crime, and racial and economic isolation, generating a variety of 
socio-economic opportunities for Housing Credit tenants and 
neighborhood residents.

Affordable Housing Improves Low-Income Households' Financial Stability

Affordable housing promotes financial stability and economic mobility. 
It leads to better health outcomes, improves children's school 
performance, and helps low-
income individuals gain employment and keep their jobs. Affordable 
housing located near transportation and areas with employment 
opportunities provides low-income households with better access to 
work, which increases their financial stability and provides employers 
in those areas with needed labor.

Families living in affordable homes have more discretionary income than 
low-income families who are unable to access affordable housing. This 
allows them to allocate more money to other needs, such as health care 
and food, and gives them the ability to pay down debt, access 
childcare, and save for education, a home down payment, retirement, or 
unexpected needs.

The Housing Credit is a Model Public-Private Partnership

The Housing Credit is structured so that private sector investors 
provide upfront equity capital in exchange for a credit against their 
tax liability over 10 years, which only vests once the property is 
constructed and occupied by eligible households paying restricted 
rents. This unique, market-based design transfers the risk from the 
taxpayer to the private sector investor. In the rare event that a 
property falls out of compliance during the first 15 years after it is 
placed in service, the Internal Revenue Service can recapture tax 
credits from the investor. Therefore, it is in the interest of the 
private sector investors to ensure that properties adhere to all 
program rules, including affordability restrictions and high-quality 
standards--adding a unique accountability structure to the program.

The Housing Credit is State-Administered With Limited Federal 
Bureaucracy

The Housing Credit requires only limited federal bureaucracy because 
Congress wisely delegated its administration and decision-making 
authority to state government as part of its design. State Housing 
Finance Agencies, which administer the Housing Credit in nearly every 
state, have statewide perspective; a deep understanding of the needs of 
their local markets; and sophisticated finance, underwriting, and 
compliance capacity. States develop a system of incentives as part of 
their Qualified Allocation Plans (QAP), which drives housing 
development decisions, including property siting, the populations 
served and the services offered to residents. States are also deeply 
involved in monitoring Housing Credit properties, including compliance 
audits and reviews of financial records, rent rolls, and physical 
conditions.

The Housing Credit is Critical to Preserving Our Nation's Existing 
Housing Investments

The Housing Credit is our primary tool to preserve and redevelop our 
nation's current supply of affordable housing. For every new affordable 
apartment created, two are lost due to deterioration, abandonment, or 
conversion to more expensive housing. Without the Housing Credit, our 
ability to revitalize and rehabilitate our nation's public housing and 
Section 8 housing inventory, decades in the making, would be 
significantly diminished. In addition to putting the residents of these 
properties at risk of displacement, we would lose these investments 
that taxpayers have already made. Preservation is also more cost-
effective, costing 33 percent less than new construction.

The Housing Credit is the Single Largest Financing Source for 
Affordable Rural Homes

Since it was created, the Housing Credit has developed or preserved 
270,000 affordable homes in rural communities, supporting 1.15 million 
jobs and generating $86.9 billion in local income. In rural areas, 
where direct funding for rural housing programs has been cut 
significantly, the Housing Credit is the backbone for preservation and 
capital improvements to the existing housing stock, comprising nearly 
half of all financing. Low-income rural residents ' incomes average 
just $12,960, and they are often living in areas with extremely limited 
housing options, making preservation of the existing housing stock 
crucial.

The Demand for Housing Credits Exceeds the Supply

Viable and sorely needed Housing Credit developments are turned down 
each year because the cap on Housing Credit authority is far too low to 
support the demand. In 2014--the most recent year for which data is 
available--state Housing Credit allocating agencies received 
applications requesting more than twice their available Housing Credit 
authority. Many more potential applications for worthy developments are 
not submitted in light of the intense competition, constrained only by 
the lack of resources. A recent analysis by accounting firm CohnReznick 
finds that there is a 97.8% occupancy rate for Housing Credit 
properties, underscoring the successful operation of Housing Credit 
properties and the need for more resources to meet the nation's growing 
demand for affordable housing.

The scarcity of Housing Credit resources forces state allocating 
agencies to make difficult trade-offs between directing their extremely 
limited Housing Credit resources to preservation or new construction, 
to rural or urban areas, to neighborhood revitalization or developments 
in high opportunity areas, or to housing for the homeless, the elderly, 
or veterans. There simply is not enough Housing Credit authority to 
fund all of the properties needed, but with a substantial increase in 
resources, many more of these priorities would be addressed--and the 
benefits for communities would be even greater.

Though the need for Housing Credit-financed housing has long vastly 
exceeded its supply, Congress has not increased Housing Credit 
authority permanently in 17 years.

We Urge Congress to Expand and Strengthen the Housing Credit

To meaningfully grow our economy and address our nation's growing 
affordable housing needs through tax reform, we urge Congress to 
increase the cap on Housing Credit authority by 50 percent. Such an 
expansion would support the preservation and construction of up to 
400,000 additional affordable apartments over a 10-year period.

S. 548, which would authorize such an expansion, has earned strong 
bipartisan support in the Senate and among Senate Finance Committee 
members. This legislation would increase Housing Credit allocation 
authority by 50 percent phased in over 5 years, and enact roughly two 
dozen changes to strengthen the program by streamlining program rules, 
improving flexibility, and enabling the program to serve a wider array 
of local needs. For example, S. 548 would encourage Housing Credit 
development in rural and Native communities, where it is currently more 
difficult to make affordable housing developments financially feasible; 
Housing Credit developments that serve the lowest-income tenants, 
including veterans and the chronically homeless; the development of 
mixed-income properties; the preservation of existing affordable 
housing; and development in high-opportunity areas. The legislation 
would also generate a host of benefits for local communities, including 
raising local tax revenue and creating jobs.

We also call on Congress to retain the tax exemption on multifamily 
Housing Bonds, which are essential to Housing Credit production. In 
addition, we encourage Congress to make any adjustments needed in order 
to offset the impact of a lower corporate tax rate on Housing Credit 
investment and subsequent affordable housing production, a concern that 
Senator Cantwell voiced during the hearing.

An investment in the Housing Credit is an investment in individuals, 
local communities, and the economy. It transforms the lives of millions 
of Americans, many of whom are able to afford their homes for the first 
time--and it transforms their communities and local economies. 
Enterprise applauds the leadership the Senate Finance Committee has 
shown in support of the Housing Credit to date and urges the Committee 
to expand and strengthen the Housing Credit and multifamily Housing 
Bonds in tax reform.

NEW MARKETS TAX CREDIT

The NMTC is a Successful Component of the Business Tax System and 
Should Be Preserved

The NMTC encourages private capital to flow to some of the most 
economically distressed communities in the country, both urban and 
rural, by providing a modest tax incentive to investors who provide 
capital to qualified Community Development Entities (CDEs). The NMTC 
enjoys bipartisan support because it is an effective, targeted and 
cost-efficient financing tool valued by businesses, communities and 
investors. At the end of 2016, the NMTC had financed over 5,400 
businesses, creating 178 million square feet of manufacturing, office 
and retail space in distressed communities that would not have been 
possible without the Credit. In 2010 alone, NMTC investments in 
operational activities generated almost $1.1 billion in federal tax 
revenue, easily offsetting the estimated $720 million cost of the 
program for the federal government.

As the Committee considers reforms to the nation's tax code that 
incentivize economic growth and job creation, our nation's most 
distressed communities should remain at the forefront of the 
conversation. The NMTC has proven to be a successful component of the 
current business tax system that should be preserved as the tax code is 
modernized.

The NMTC Incentivizes Investments That Would Not Have Been Made Without 
the Credit

In 2007, the U.S. Government Accountability Office surveyed investors 
and reported that 88 percent indicated they would not have made the 
investment without the NMTC, and almost two-thirds said they increased 
their investments in low-income communities because of the NMTC. The 
NMTC makes it possible to invest in low-income communities with better 
rates and terms, and more flexible features, than would be available in 
the market. Without the NMTC, urban and rural communities across the 
country would continue to suffer from disinvestment and continue to be 
starved of the capital needed to spur economic growth.

The NMTC Attracts Capital to Some of the Nation's Most Distressed 
Communities

Many of the nation's low-income communities, both urban and rural, 
struggle to access the capital necessary to support a business, create 
jobs or sustain a healthy economy. These communities have such a dearth 
of resources--including vacant properties, neglected infrastructure and 
limited education opportunities--that investments are not feasible 
without a tax incentive. The NMTC encourages private investment in 
these communities by providing a modest tax incentive that attracts the 
patient capital that is necessary to revitalize these severely 
distressed communities.

By law, NMTC investments must be made in census tracts where the 
individual poverty rate is at least 20 percent or where median family 
income does not exceed 80 percent of the area median, but the majority 
of NMTC investments are made in communities exhibiting even more severe 
economic distress. These low-income urban and rural communities face 
diminishing jobs, high-unemployment, and bleak opportunities for 
economic advancement. The NMTC provides these communities with the 
access to patient capital that is needed to support and grow 
businesses, create jobs, and sustain healthy local economies.

The NMTC Leverages $8 of Private Capital for Every $1 in NMTC 
Investment

Between 2003 and 2015, NMTC investments directly created over 750,000 
jobs and leveraged over $80 billion in capital investment in credit-
starved businesses in communities with high poverty and unemployment 
rates. According to the Treasury Department, every $1 in investment 
from the NMTC program leverages approximately $8 of private capital. A 
recent analysis of Treasury Department data indicates that NMTC-
financed businesses and jobs generate more income tax revenue than the 
NMTC actually costs. Additionally, the NMTC creates jobs at a cost to 
the federal government of less than $20,000 per job.

The NMTC Jumpstarts Rural Manufacturing

The NMTC has had a profoundly positive impact in rural communities 
across the country. The most popular use of the NMTC in rural America 
is to support the manufacturing sector. NMTC financing typically goes 
to business expansions, new equipment and facilities, and working 
capital. Between 2003 and 2014, the NMTC financed 223 rural 
manufacturing projects totaling $4.8 billion.

The NMTC Should Be a Permanent Part of the Tax Code

The NMTC was authorized in the Community Renewal Tax Relief Act of 2000 
with bipartisan support and has been reauthorized numerous times since 
its initial temporary authorization, most recently in the 2015 PATH 
Act, which extended the NMTC through 2019. As a proven public-private 
partnership that leverages private investment to grow local economies, 
create jobs and transform neighborhoods, the NMTC should be a permanent 
part of the tax code. In addition to allowing the program to lift up 
more distressed communities, permanence would provide stability and 
certainty to this critical community development tool for low-income 
communities. NMTC equity pricing would subsequently increase, providing 
for greater program efficiency and increased leveraging of private 
capital.

Senators Roy Blunt (R-MO) and Ben Cardin (D-MD) introduced the New 
Markets Tax Credit Extension Act of 2017 (S. 384) to provide an 
indefinite extension to the NMTC, increase the annual NMTC allocation 
and index the allocation to inflation and provides Alternative Minimum 
Tax (AMT) relief for NMTC investments. Enterprise urges Congress to 
enact this legislation through tax reform.

We thank you for this opportunity to share comments on tax reform. If 
you have any questions regarding these comments, please do not hesitate 
to reach out to me at [email protected], or Emily 
Cadik, Director of Public Policy, at [email protected].

Sincerely,

Marion McFadden
Vice President, Public Policy
Enterprise Community Partners

                                 ______
                                 
                Like-Kind Exchange Stakeholder Coalition

September 27, 2017

The Honorable Orrin Hatch           The Honorable Ron Wyden
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510-6200           Washington, DC 20510-6200

Dear Chairman Hatch and Ranking Member Wyden:

We are submitting the following statement for the record in response to 
the Senate Committee on Finance's hearing on September 19, 2017 
entitled ``Business Tax Reform.'' As you consider ways to create jobs, 
grow the economy, and raise wages through tax reform, we strongly urge 
that current law be retained regarding like-kind exchanges under 
section 1031 of the Internal Revenue Code (``Code''). We further 
encourage retention of the current unlimited amount of gain deferral.

Like-kind exchanges are integral to the efficient operation and ongoing 
vitality of thousands of American businesses, which in turn strengthen 
the U.S. economy and create jobs. Like-kind exchanges allow taxpayers 
to exchange their property for more productive like-kind property, to 
diversify or consolidate holdings, and to transition to meet changing 
business needs. Specifically, section 1031 provides that taxpayers do 
not immediately recognize a gain or loss when they exchange assets for 
``like-kind'' property that will be used in their trade or business. 
They do immediately recognize gain, however, to the extent that cash or 
other ``boot'' is received. Importantly, like-kind exchanges are 
similar to other non-recognition and tax deferral provisions in the 
Code because they result in no change to the economic position of the 
taxpayer.

Since 1921, like-kind exchanges have encouraged capital investment in 
the U.S. by allowing funds to be reinvested back into the enterprise, 
which is the very reason section 1031 was enacted in the first place. 
This continuity of investment not only benefits the companies making 
the like-kind exchanges, but also suppliers, manufacturers, and others 
facilitating them. Like kind exchanges ensure both the best use of real 
estate and a new and used personal property market that significantly 
benefits start-ups and small businesses. Eliminating like-kind 
exchanges or restricting their use would have a contraction effect on 
our economy by increasing the cost of capital, slowing the rate of 
investment, increasing asset holding periods and reducing transactional 
activity.

A 2015 macroeconomic analysis by Ernst and Young found that either 
repeal or limitation of like kind exchanges could lead to a decline in 
U.S. GDP of up to $13.1 billion annually.\1\ The Ernst and Young study 
quantified the benefit of like-kind exchanges to the U.S. economy by 
recognizing that the exchange transaction is a catalyst for a broad 
stream of economic activity involving businesses and service providers 
that are ancillary to the exchange transaction, such as brokers, 
appraisers, insurers, lenders, contractors, manufacturers, etc. A 2016 
report by the Tax Foundation estimated even greater economic 
contraction--a loss of 0.10% of GDP, equivalent to $18 billion 
annually.\2\
---------------------------------------------------------------------------
    \1\ ``Economic Impact of Repealing Like-Kind Exchange Rules,'' 
Ernst and Young (March 2015, Revised November 2015), at (iii), 
available at: http://www.1031taxreform.com/wp-content/uploads/Ling-
Petrova-Economic-Impact-of-Repealing-or-Limiting-Section-1031-in-Real-
Estate
.pdf.
    \2\ ``Options for Reforming America's Tax Code,'' Tax Foundation 
(June, 2016) at p. 79, available at: http://taxfoundation.org/article/
options-reforming-americas-tax-code.

Companies in a wide range of industries, business structures, and sizes 
rely on the like-kind exchange provision of the Code. These 
businesses--which include real estate, construction, agricultural, 
transportation, farm/heavy equipment/vehicle rental, leasing and 
manufacturing--provide essential products and services to U.S. 
---------------------------------------------------------------------------
consumers and are an integral part of our economy.

A microeconomic study by researchers at the University of Florida and 
Syracuse University, focused on commercial real estate, supports that 
without like-kind exchanges, businesses and entrepreneurs would have 
less incentive and ability to make real estate and other capital 
investments.\3\ The immediate recognition of a gain upon the 
disposition of property being replaced would impair cash flow and could 
make it uneconomical to replace that asset. This study further found 
that taxpayers engaged in a like-kind exchange make significantly 
greater investments in replacement property than non-exchanging buyers.
---------------------------------------------------------------------------
    \3\ David Ling and Milena Petrova, ``The Economic Impact of 
Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate'' 
(March 2015, revised June 2015), at 5, available at: http://
www.1031taxreform.com/wp-content/uploads/Ling-Petrova-Economic-Impact-
of-Repealing-or-Limiting-Section-1031-in-Real-Estate.pdf.

Both studies support that jobs are created through the greater 
investment, capital expenditures and transactional velocity that are 
associated with exchange properties. A $1 million limitation of gain 
deferral per year, as proposed by the Obama Administration,\4\ would be 
particularly harmful to the economic stream generated by like-kind 
exchanges of commercial real estate, agricultural land, and vehicle/
equipment leasing. These properties and businesses generate substantial 
gains due to the size and value of the properties or the volume of 
depreciated assets that are exchanged. A limitation on deferral would 
have the same negative impacts as repeal of section 1031 on these 
larger exchanges. Transfers of large shopping centers, office 
complexes, multifamily properties or hotel properties generate economic 
activity and taxable revenue for architects, brokers, leasing agents, 
contractors, decorators, suppliers, attorneys, accountants, title and 
property/casualty insurers, marketing agents, appraisers, surveyors, 
lenders, exchange facilitators and more. Similarly, high volume 
equipment rental and leasing provides jobs for rental and leasing 
agents, dealers, manufacturers, after-market outfitters, banks, 
servicing agents, and provides inventories of affordable used assets 
for small businesses and taxpayers of modest means. Turnover of assets 
is key to all of this economic activity.
---------------------------------------------------------------------------
    \4\ ``General Explanations of the Administration's Fiscal Year 2017 
Revenue Proposals,'' at 107, available at: https://www.treasury.gov/
resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf.

In summary, there is strong economic rationale, supported by recent 
analytical research, for the like-kind exchange provision's nearly 100-
year existence in the Code. Limitation or repeal of section 1031 would 
deter and, in many cases, prohibit continued and new real estate and 
capital investment. These adverse effects on the U.S. economy would 
likely not be offset by lower tax rates. Finally, like-kind exchanges 
promote uniformly agreed upon tax reform goals such as economic growth, 
---------------------------------------------------------------------------
job creation and increased competitiveness.

Thank you for your consideration of this important matter.

Sincerely,

Air Conditioning Contractors of America
American Car Rental Association
American Farm Bureau Federation
American Rental Association
American Seniors Housing Association
American Truck Dealers
American Trucking Associations
Associated Equipment Distributors
Associated General Contractors of America
Avis Budget Group, Inc.
Building Owners and Managers Association (BOMA) International
C.R. England, Inc.
Equipment Leasing and Finance Association
Federation of Exchange Accommodators
International Council of Shopping Centers
Investment Program Association
NAIOP, the Commercial Real Estate Development Association
National Apartment Association
National Association of Home Builders
National Association of Real Estate Investment Trusts
National Association of Realtors
National Automobile Dealers Association
National Business Aviation Association
National Multifamily Housing Council
National Ready Mixed Concrete Association
National Stone, Sand, and Gravel Association
Truck Renting and Leasing Association

                                 ______
                                 
                    National Association of Realtors

                       500 New Jersey Avenue, NW

                       Washington, DC 20001-2020

                     202-383-1194 Fax 202-383-7580

                   www.realtors.org/governmentaffairs

                              Introduction

The nearly 1.3 million members of the National Association of Realtors 
(NAR) thank the U.S. Senate Committee on Finance for holding this 
hearing on ``Business Tax Reform.''

NAR is America's largest trade association, including our eight 
affiliated Institutes, Societies, and Councils, five of which focus on 
commercial transactions. Realtors are involved in all aspects of the 
residential and commercial real estate industries and belong to one or 
more of some 1,400 local associations or boards, and 54 state and 
territory associations of Realtors.

                               Tax Reform

NAR acknowledges the complexity of the current tax system and seeks tax 
reforms that support the goals of homeownership and freedom to buy, 
maintain and sell real estate. At the same time, the current real 
estate tax provisions are among the most widely used and most readily 
understood tax provisions. Millions of real estate investment decisions 
have been made with the current tax law factored in. Adversely changing 
the rules on existing investments could harm economic recovery and 
future job creation and would be unfair to those who relied on those 
rules.

Income-producing real estate is vital for strong economic growth and 
job creation, and great care must be taken in tax reform to ensure that 
current provisions that encourage those results not be weakened or 
repealed. Commercial real estate adds value to the places that we work, 
conduct commerce, live, and play.

I. Section 1031 Like-Kind Exchanges

Since 1921, U.S. tax law has recognized that the exchange of one 
investment or business-use property for another of like-kind results in 
no change in the economic position of the taxpayer, and therefore, 
should not result in the immediate imposition of income tax. The like-
kind exchange rules permit the deferral of taxes, so long as the 
taxpayer satisfies numerous requirements and consummates both a sale 
and purchase of replacement property within 180 days.

NAR strongly believes that the like-kind exchange provision in current 
law is vital to a well-functioning real estate sector and a strong 
economy, and must be preserved in tax reform. The like-kind exchange is 
a basic tool that helps to prevent a ``lockup'' of the real estate 
market. Allowing capital to flow more freely among investments 
facilitates commerce and supports economic growth and job creation. 
Real estate owners use the provision to efficiently allocate capital to 
its most productive uses. Additionally, like-kind exchange rules have 
allowed significant acreage of environmentally sensitive land to be 
preserved.

Section 1031 is used by all sizes and types of real estate owners, 
including individuals, partnerships, LLCs, and corporations. Moreover, 
a recent survey of our members indicated that 63 percent of Realtors 
have participated in a 1031 like-kind exchange over the past 4 years.

A 2015 study \1\ found that in contrast to the common view that 
replacement properties in a like-kind exchange are frequently disposed 
of in a subsequent exchange to potentially avoid capital gain 
indefinitely, 88 percent of properties acquired in such an exchange 
were disposed of through a taxable sale. Moreover, the study found that 
the estimated amount of taxes paid when an exchange is followed by a 
taxable sale are on average 19 percent higher than taxes paid when an 
ordinary sale is followed by an ordinary sale. A second study by EY 
concluded that new restrictions on Section 1031 would increase the cost 
of capital, discourage entrepreneurship and risk taking, and slow the 
rate of investment.\2\
---------------------------------------------------------------------------
    \1\ ``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.
    \2\ ``Economic Impact of Repealing Like-Kind Exchange Rules,'' EY, 
November 2015.

If one of the goals of tax reform is to boost economic growth and job 
creation, any repeal or limitation of the current-law like-kind 
exchange provision is a step in the wrong direction.

II. Business Interest Deduction

Another recent tax reform idea with the potential to cause very serious 
disruption to the commercial real estate sector is the proposal to 
eliminate the deduction for net investment expense included in the 
House Republican Blueprint. 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. Since its inception, our tax system has appropriately 
allowed business interest expense to be deducted as an ordinary and 
necessary business expense.

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 new projects being developed, fewer jobs being created, 
and fewer loans being refinanced. Legislation altering the tax 
treatment of existing debt could harm successful firms, pushing some 
close to the brink of insolvency or even into bankruptcy.

Tax reform must preserve the current tax treatment of business 
interest. By increasing the cost of capital, limitations on business 
interest deductibility could dramatically reduce real estate 
investment, reducing property values across the country, and 
discouraging entrepreneurship and responsible risk-taking.

III. Carried Interest

Many real estate partnerships utilize the common practice of providing 
additional incentives for a general partner to perform well by sharing 
some of the profits above a certain rate with them via a carried 
interest, even when they contributed little or no capital to the 
enterprise. The general partner's interest is ``carried'' with the 
property until it is sold, which can be a number of years after the 
enterprise is formed and limited partners have received profit 
distributions. That carried interest is then taxed at the capital gains 
rate, as a reward for entrepreneurs (general partners, in this case) 
who take the risks inherent in new projects.

The carried interest provision is an integral product of the 
flexibility Congress imbued in the tax rules for partnerships more than 
50 years ago. The current tax treatment of carried interests is based 
on the established partnership tax principle that partners are taxed 
based on their share of partnership income (ordinary or capital gains), 
rather than based on the character of the partner (general or limited) 
to whom the income is allocated. The partnership structure has been a 
huge success, giving investors and entrepreneurs in many industries the 
tools to create and grow businesses, build shopping centers, found 
technology companies, and create millions of jobs.

Increasing the tax burden on these real estate partnerships, and 
particularly on those with operational expertise, by changing the 
treatment of a general partner's carried interest from capital gains to 
ordinary income would make real estate a less attractive investment. 
When the value of real estate investment is impaired, there is an 
indirect impact on all real estate. 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.

IV. Depreciation

The current law depreciation rules are out of date and do not reflect 
the actual economic life of structures. The 27.5- and 39-year cost 
recovery periods should be shortened to a depreciable life for real 
estate that more accurately reflects the economic life of the property.

Independent studies indicate that the economic life of real property 
ranges between 18 and 30 years. Economic depreciation is more than just 
physical wear and tear, but also includes adjustments to the value of 
real property caused by changes in tastes, new technology, and by 
improvements in the quality of new assets relative to old assets 
(obsolescence).

NAR and several other real estate-related trade associations funded 
academic research on the actual rate of economic depreciation of 
commercial and investment real property. The study results,\3\ released 
in early 2016, showed that the economic depreciation of real property 
is much shorter than the current tax rules provide, and is evidence 
that depreciable lives should not be extended in tax reform. Rather, we 
urge Congress to shorten the depreciable lives of structures to better 
reflect their true economic lives.
---------------------------------------------------------------------------
    \3\ ``Tax Policy Implications of New Measures of Economic 
Depreciation of Commercial Structures,'' PwC, April 2016.
---------------------------------------------------------------------------

                               Conclusion

Thank you for the opportunity to submit these comments. NAR appreciates 
the Senate Committee on Finance for its open and collaborative process 
as it seeks to reform our Nation's tax code. In order to devise a 
fairer and simpler tax code, the input of stakeholders at all levels is 
imperative to avoid unintended consequences.

Commercial real estate adds value to the U.S. economy at every level, 
and a well- tuned tax policy can help it continue to innovate, create 
jobs and add wealth to every community in the U.S. NAR looks forward to 
continued collaboration with this Committee as it works to devise a 
fairer and simpler tax code that boosts the overall economy.

                                 ______
                                 
                   National Mining Association (NMA)

               101 Constitution Avenue, NW, Suite 500 East

                          Washington, DC 20001

       Tax Policies Should Keep U.S. Mining Globally Competitive

The National Mining Association is pleased to offer its recommendations 
in connection with the Senate Finance Committee's hearing on Business 
Tax Reform. NMA strongly supports a substantial reduction in the 
corporate tax rate; the current federal rate of 35 percent coupled with 
state taxes are a detriment to our industry.

NMA believes that Congress should reject unwarranted proposals that 
would significantly harm the competitiveness of domestic miners by 
eliminating or reducing the present-law percentage depletion tax 
deduction for mining activities, by eliminating the net interest 
expense deduction, or by otherwise increasing taxes on miners. U.S. 
mineral and coal producers play an integral role in fostering continued 
American economic prosperity and energy security.

Background on U.S. Mining Industry

U.S. mineral and coal miners play an integral role in fostering 
continued American economic prosperity by meeting, through domestic 
production, much of the nation's growing energy needs and by producing 
important minerals for commercial use as cost-effective inputs for 
farms, factories and other job creators. Mined products are used in 
every part of the economy.

Mining producers are vital to continued economic prosperity by 
providing 30% of the nation's electricity through affordable coal power 
and another 20% through uranium powered nuclear plants--totaling 50% of 
our nation's electricity supply. While coal-based electricity has 
increased by more than 170 percent over the past four decades, 
emissions have decreased by 90 percent. New high-efficiency coal plants 
can further reduce emissions by more than 30 percent.

Hardrock miners provides essential minerals for commercial use as cost-
effective inputs for farmers, national defense systems, and high 
technology such as smart phones, hybrid cars and minerals for the 
manufacturing base. Domestic mining products are used in virtually 
every part of the economy. Ores and metals are used in the production 
of capital goods for manufacturing and construction. Essential 
electronic, telecommunications and medical processes depend on metals. 
Non-metallic minerals are used in agriculture as fertilizers, in 
medicine as pharmaceuticals and in construction and other industrial 
processes.

The United States needs the public policies that unlock, and do not 
hamper, the full potential of our immense mineral endowment in a highly 
competitive world economy in which the demand for minerals continues to 
grow.

The mining industry, comprised of both coal and hardrock minerals 
miners, has a combined direct and indirect employment of almost 1.7 
million jobs in all 50 states--with one of the highest paying private 
sector average wages at: $74,695 per year.

U.S. mining's total direct and indirect economic contribution to GDP 
was over $220 billion in 2015--generating almost $44 billion in tax 
payments to federal, state, and local governments. The value added to 
GDP by major industries that consume processed mineral materials was 
$2.4 trillion in 2014. Mining exports made significant positive 
contributions to America's balance of trade.

Capital Costs

It is important to recognize the unique nature of mining investments. 
Mining requires significant financial commitments to long-term projects 
to deliver a competitive product at a low margin. Enormous amounts of 
capital must be expended at the front end of mining projects to realize 
future returns. For example, a number of mines in the Western states 
have capital costs around $500 million or more, and it is not unusual 
for a world-class mining project today to require $1 billion in 
engineering, development, construction and other costs to commence and 
sustain the enterprise.

Additionally, current laws result in a process that takes 5 to 10 years 
to navigate, putting the U.S. dead last among top mining countries when 
ranked on permitting delays.

Competitiveness

Many American mines have large reserves, but often of lower ore grades 
than other mines around the world. Many U.S. mines cannot bear large 
tax increases and still remain globally competitive. Other U.S. mines 
would have their productive lives significantly shortened by major tax 
increases. As the U.S. economy is recovering from the recession, the 
mining industry is hiring and is poised to expand production and 
increase hiring. The industry is a major job creator, but tax increases 
would jeopardize that hiring.

Tax Reform

It has been suggested that tax reform could involve the elimination of 
various so-called ``tax expenditures.'' The Joint Committee on Taxation 
has identified tax expenditures specifically related to mining. These 
provisions are not ``loopholes'' but are instead essential components 
of domestic mineral and coal mining operations. Elimination of the 
priorities listed below could result in a net tax increase on the 
mining industry if the corporate tax rate is not lowered enough to 
offset these provisions.

Percentage Depletion. A key tax provision incentivizing mining in the 
U.S. is percentage depletion. Under longstanding law, taxpayers 
producing from mines, wells, and other natural deposits are allowed to 
claim as a deduction for depletion a percentage of the gross income 
from these mining properties. This deduction is known as ``percentage 
depletion.''

It should be noted that percentage depletion is applied to all 
extractive industries, including many independent oil and gas 
producers. Internal Revenue Code section 613 lists percentage depletion 
rates for more than 100 different products from mines wells and other 
natural deposits, including gold, silver, copper, iron ore, and other 
metal mines, sulphur, uranium, clay, bauxite, coal, lignite, rock 
asphalt, gravel, pumice, and sand.

The percentage depletion deduction is an essential component of 
domestic mineral and coal mining operations and must be retained. The 
percentage depletion tax deduction recognizes the unique nature of 
mining investments and recognizes that the next ore body or coal mine 
to be mined will be more costly since the reserve may be smaller and 
the geology more difficult. Mining requires significant financial 
commitments to long-term projects to deliver a competitive product at a 
low margin. Enormous amounts of capital must be expended at the front 
end of mining projects to realize future returns. With such sizable 
capital costs, cost recovery through percentage depletion has a 
significant effect on the margins and prices at which minerals can be 
profitably sold. The present-law percentage depletion deduction is 
vitally important to the competitiveness of the domestic mining 
industry and to the U.S. economy, it must be retained.

Interest Expense. The House tax reform blueprint proposes eliminating 
the net interest expense deduction on business indebtedness. Miners 
strongly believe that the interest deduction should be retained for 
both existing and new debt. Companies invest a tremendous amount of 
capital to start up new and replacement mines with some of the most 
modern equipment. In addition, maintaining existing mines also requires 
significant capital outlays due to the nature of mining. Consequently, 
the ability to obtain debt and restructure existing debt is a 
fundamental business need to the mining industry and too many domestic 
manufacturers beyond the mining sector. The loss of net interest 
expense deduction could devastate many mining companies.

Summary

Tax increases would jeopardize hiring in the mining industry and put 
the jobs, salaries and benefits of hundreds of thousands of miners at 
risk. Increased taxes on the miners through elimination of longstanding 
tax rules such as percentage depletion and the deduction for interest 
expense, would likely result in increased electricity prices and higher 
prices for consumers, sending crippling effects throughout the U.S. 
economy. Tax increases would not only affect the hundreds of thousands 
of people that the industry directly employs, but also negatively 
impact the additional secondary employment that is generated through 
demand for mining support services and generated by consuming 
industries through processing and refining activities and manufacturing 
operations.

                                 ______
                                 
National Multifamily Housing Council and National Apartment Association

                   NMHC/NAA Joint Legislative Program

                    1775 Eye Street, NW, Suite 1100

                          Washington, DC 20006

                              202-974-2300

                https://www.nmhc.org/NMHC-Policy-Agenda/

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 September 19, 2017, hearing 
titled ``Business 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 more 
than 160 state and local affiliates, NAA encompasses over 73,000 
members representing nearly 9 million apartment homes globally.

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, live in 
rental housing (whether in an apartment home or single-family home).\1\ 
There are 18.7 million renter households, or nearly 16 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\
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    \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 in the midst of a fundamental shift in our housing dynamics 
as changing demographics and housing preferences drive more people 
toward renting as their housing of choice. Today, demand for apartments 
is at unprecedented levels as the number of renters has reached an all-
time high. Since 2010, the number of renter households has increased by 
an average of more than 800,000 annually--almost as much as 1.2 million 
a year, by some measures.\5\ Meanwhile, apartment vacancy rates as 
measured by MPF Research fell or remained the same for 7 straight years 
from 2009 to 2016.\6\
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    \5\ NMHC tabulations of American Community Survey and Current 
Population Survey microdata.
    \6\ MPF Research.

Changing demographics are driving the demand for apartments. Married 
couples with children now represent only 19 percent of households. 
Single-person households (28 percent), single parent households (9 
percent) and roommates (7 percent) collectively account for 43 percent 
of all households, and these households are more likely to rent.\7\ 
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.\8\ Over half (58.6 percent) of the net increase in renter 
households from 2006 to 2016 came from householders 45 years or 
older.\9\
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    \7\ 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.
    \8\ 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.
    \9\ 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. Just-released research by Hoyt Advisory Services, Dinn Focused 
Marketing, Inc. and Whitegate Real Estate Advisors, LLC, U.S. Apartment 
Demand--A Forward Look, commissioned by NMHC/NAA shows that the nation 
will need 4.6 million new apartments by 2030, or an average of 328,000 
units a year.\10\ Just 244,000 apartments were delivered from 2012-
2016.\11\
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    \10\ Hoyt Advisory Services, Dinn Focused Marketing, Inc., and 
Whitegate Real Estate Advisors, LLC, ``U.S. Apartment Demand--A Forward 
Look,'' May 2017, p. 38.
    \11\ NMHC tabulations of 2016 Current Population Survey, Annual 
Social and Economic Supplement, U.S. Census Bureau.

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, 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. 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 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. We also urge the Committee to be mindful 
about how tax reform could impact existing investment and to focus on 
the critical transition rules that will be necessary to avoid 
disturbing the value of current assets. As outlined in the pages below, 
NMHC/NAA believe that any tax reform proposal must:

      Protect pass-through entities from higher taxes or compliance 
burdens;
      Retain the full deductibility of business interest;
      Ensure depreciation rules avoid harming multifamily real estate;
      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.

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, 2015.

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 
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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. Specifically, we would be troubled by 
proposals that would force pass-through income to be taxed at both the 
entity and individual levels or that would subjectively deem only a 
portion of such income received to qualify for a business tax rate that 
may be lower than individual tax rates. In other words, all legitimate 
business income, regardless of source (but taking into account 
reasonable compensation rules), should be eligible for a preferential 
business income tax rate.

Priority 2: Retain the Full Deductibility of Business Interest

Under current law, business interest is fully deductible. However, 
efforts to prevent companies from overleveraging are in part leading to 
an examination of whether the current 100 percent deduction for 
business interest expenses should be curtailed. Unfortunately, 
curtailing this deductibility--either in whole or in part--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, many of which do not have access to 
public equity markets. Although such entities can access some equity 
from investors that are largely private, 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. Indeed, according to the Federal Reserve, 
as of March 31, 2017, total multifamily debt outstanding was $1.21 
trillion.\13\ Reducing the full deductibility of interest would 
undoubtedly increase investment costs for owners and developers of 
multifamily housing and negatively impact aggregate construction.
---------------------------------------------------------------------------
    \13\ Board of Governors of the Federal Reserve System, ``Mortgage 
Debt Outstanding,'' by type of property, multifamily residences, 
2017Q1, June 2017.

Finally, in addition to the harm it would cause, there is little policy 
justification for curtailing interest deductibility for the multifamily 
industry. Multifamily real estate is generally not held through 
corporations. As a result, there is no preference in the tax code for 
debt over equity. In other words, corporations favor debt over equity 
because they are able to deduct interest but not dividends. That is 
simply not an issue for the pass-through entities that dominate the 
real estate industry. With no problem to be solved, there is no need to 
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effectively penalize the multifamily industry.

Priority 3: 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 Buildings Capital Consumption in the United States,'' 
which represents the first comprehensive study on this topic in nearly 
40 years.\14\ 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.
---------------------------------------------------------------------------
    \14\ David Geitner and Sheharyar Bokhari, MIT Center for Real 
Estate, ``Commercial Buildings Capital Consumption in the United 
States,'' November 2015.

Additionally, 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 or the INVEST 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.

While we support the INVEST Act of 2017, we would note that we would be 
extremely concerned if Congress opted to enact the measure while 
curtailing the full deductibility of business interest. This is 
particularly the case because while the INVEST Act is a worthy piece of 
legislation that would promote business investment, it does not 
accelerate the depreciation period of real property, including 
multifamily buildings. Additionally, depending on the details of final 
legislation, it may be the case that benefits gained from accelerated 
depreciation--even if it encompasses real property--could fall short of 
losses brought on by the curtailment of interest deductibility. The 
multifamily industry asks to work with the Finance Committee to ensure 
that tax reform--with all provisions taken as a whole--spurs investment 
rather than unintentionally impedes real estate activity.

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,\15\ and it is one of many non-recognition provisions in the 
Code that provide for deferral of gains.\16\
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    \15\ 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.
    \16\ 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:\17\
---------------------------------------------------------------------------
    \17\ 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.\18\ Put another way, a tax rate 
reduction financed by repealing like-kind exchange rules would, on a 
net basis, harm the economy.
---------------------------------------------------------------------------
    \18\ 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.'' \19\ 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.
---------------------------------------------------------------------------
    \19\ Ibid.
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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.\20\
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    \20\ 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.\21\ 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 \22\ with 
just under two-thirds of residents earning 40 percent or less of area 
median income.\23\ 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 wages and business income.\24\
---------------------------------------------------------------------------
    \21\ National Council of State Housing Agencies, ``2016 Housing 
Credit FAQ,'' February 25, 2016, https://www.ncsha.org/resource/2016-
housing-credit-faq.
    \22\ 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.
    \23\ Ibid, p. 24.
    \24\ Robert Dietz, ``The Economic Impact of the Affordable Housing 
Credit,'' National Association of Home Builders, Eye on Housing, July 
15, 2014, http://eyeonhousing.org/2014/07/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 45 affordable units for every 100 very low-income 
households (those earning up to 50 percent of area median income) in 
the United States in 2015.\25\
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    \25\ NMHC tabulations of 2015 American Community Survey public use 
microdata, IPUMS-USA, University of Minnesota, www.ipums.org.

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 LIHTCs 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, Isakson, 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. Notably, a recent study finds that 
repealing FIRPTA would increase international investment in U.S. real 
estate by between $65 billion and $125 billion while generating between 
$26 billion and $49 billion in economic activity and creating between 
147,000 and 284,000 direct and indirect jobs.\26\
---------------------------------------------------------------------------
    \26\ Kenneth T. Rosen, Randall Sakamoto, David Bank, Brett Fawley, 
Adam Eckstein, and Michael Stern, ``Unlocking Foreign Investment in 
U.S. Commercial Real Estate,'' June 2017.

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 
solely 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.\27\
---------------------------------------------------------------------------
    \27\ Public Law 114-113, Consolidated Appropriations Act, 2016, 
Division Q, Protecting Americans from Tax Hikes Act of 2015.
---------------------------------------------------------------------------

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.

                                 ______
                                 
                    National Retail Federation (NRF)

                  1101 New York Avenue, NW, Suite 1200

                          Washington. DC 20005

                              www.nrf.com

                           September 19, 2017

The Honorable Orrin Hatch           The Honorable Ron Wyden
Chairman                            Ranking Member
Committee on Finance                Committee on Finance
U.S. Senate                         U.S. Senate
Washington, DC 20510                Washington, DC 20510

Re: Hearing on ``Business Tax Reform''--September 19, 2017

Dear Chairman Hatch and Ranking Member Wyden:

    The National Retail Federation (NRF) strongly supports 
comprehensive reform of the federal income tax by lowering tax rates 
and broadening the tax base. Tax reform is vitally important to the 
U.S. economy and to retailers specifically, as consumer spending 
constitutes more than two-thirds of the U.S. economy. The U.S. economy 
cannot thrive when we have the highest corporate tax rate in the 
industrialized world. Income tax reform can have an immediate positive 
impact on economic growth, real wages and consumer spending. The NRF is 
opposed to efforts to shift the tax burden from businesses to 
consumers.

    By way of background, NRF is the world's largest retail trade 
association, representing discount and department stores, home goods 
and specialty stores, Main Street merchants, grocers, wholesalers, 
chain restaurants and Internet retailers from the United States and 
more than 45 countries. Retail is the nation's largest private-sector 
employer, supporting one in four U.S. jobs--42 million working 
Americans. Contributing $2.6 trillion to annual GDP, retail is a daily 
barometer for the nation's economy.

    NRF supports business income tax reform that eliminate tax credits 
and incentives that favor some industries over others, and supports 
replacing these ``tax expenditures'' with substantially lower tax 
rates, freeing businesses to make the most economically prudent 
investment decisions rather than having the tax code drive 
decision-making. Business tax reform should be neutral among different 
types of businesses, so that businesses are not favored based on their 
form of legal entity (e.g., C corporation vs. pass-through), how they 
own their property (e.g., leased stores vs. owned stores), or 
distribution channel (e.g., brick and mortar sale vs. remote sale). In 
addition, tax reform should provide adequate transitions rules, so that 
businesses do not face large tax burdens based on investment decisions 
made in years prior to the enactment of tax reform.

    A substantial reduction in the high U.S. corporate tax rate will 
drive economic growth. Because the U.S. corporate tax rate is the 
highest in the industrialized world, U.S. companies are choosing to 
make more investments outside of the United States and foreign 
companies are choosing to make more investments in countries with lower 
corporate tax rates rather than the United States, where they can 
achieve a better return on their investment (ROI). In 2016, the average 
statutory foreign corporate income tax rate in the OECD was 24.7% and 
several countries have enacted laws that schedule additional rate cuts 
over the next few years. Meanwhile, the United States has the highest 
statutory corporate tax rate in the OECD at 35% and when average state 
corporate taxes are added in that rate rises to almost 39%. According 
to an NRF analysis, in 2015 corporate taxes cost American workers up to 
$4,690 in wages.

    The United States has not reduced its corporate tax rate in more 
than 30 years. At the same time other industrialized nations have 
reduced their tax rates and in some cases, multiple times. Americans 
cannot sit by any longer and watch other nations continue to reduce 
corporate tax rates and attract our businesses and jobs. We must 
compete for this investment in our country and our workers.

    The National Retail Federation urges the Finance Committee to work 
expeditiously on tax reform and offers our full support in this 
endeavor.

            Sincerely,

            David French
            Senior Vice President
            Government Relations

                                 ______
                                 
                         Nonprofit Data Project

                            Aspen Institute

                    One Dupont Circle, NW, Suite 700

                          Washington, DC 20036

            ELECTRONIC FILING OF THE FORM 990 WILL INCREASE 

               NONPROFIT TRANSPARENCY AND ACCOUNTABILITY,

                      WHILE SAVING TAXPAYER MONEY

Thank you for this opportunity to submit a statement for the record on 
business tax reform. The Nonprofit Data Project of the Aspen 
Institute's Program on Philanthropy and Social Innovation brings 
together the major nonprofit research and data providers in the United 
States, including the Foundation Center, GuideStar, the Indiana 
University Lilly Family School of Philanthropy, and the Johns Hopkins 
Center for Civil Society Studies.

The Nonprofit Data Project writes to strongly support electronic filing 
of the Form 990 by all nonprofit organizations that file, and the 
release of these data in an open, machine-readable format by the 
Internal Revenue Service (IRS) to increase transparency and save 
taxpayer money.

This non-controversial, revenue-neutral provision (as rated by JCT) has 
been embraced by lawmakers on both sides of the aisle. It has been 
included in the:

      CHARITY Act of 2017, introduced by Senators John Thune and Bob 
Casey and co-sponsored by Senators Ron Wyden, Pat Roberts, and others;
      Taxpayer Protection Act of 2016, marked up by the Senate Finance 
Committee in April 2016;
      Business Income Tax Bipartisan Tax Working Group report, 
published by the Senate Finance Committee in 2015;
      Taxpayer Bill of Rights Enhancement Act of 2015, sponsored by 
Senators Thune and Grassley;
      Tax Reform Act of 2014, introduced by the former Chair of the 
House Ways and Means Committee, Representative David Camp; and
      Presidential budgets, from FY 2014-2017.

We urge you to make this commonsense proposal a part of business tax 
reform.

WHY 990 E-FILING MATTERS

The nonprofit sector is an invaluable resource in our society. Not only 
does the sector help millions of individuals in need, it represents 5 
percent of the nation's gross domestic product (GDP) and is a major 
source of jobs. According to the Bureau of Labor Statistics, nonprofits 
account for over 10% of all private sector employment.

One of the best sources of information on nonprofits is the Form 990, 
which most nonprofit organizations are required to file annually with 
the IRS and make publicly available upon request. Current law already 
requires very large nonprofit organizations (those that file at least 
250 returns during the calendar year and have over $10 million in 
assets) and very small nonprofit organizations (those with gross 
receipts of less than $50,000 annually) to file their tax returns 
electronically. Those in between are not subject to this requirement.

Until last year, the IRS made 990 forms available to the public by 
providing images of them in TIF format (Tagged Image File) via DVDs. A 
year's worth of 990s, both e-filed and paper-filed, cost over $2,000. 
Once purchased, the image-based 990s had to be re-processed to render 
them searchable, a practice that was not only expensive and 
inefficient, but also delayed access to the information and increased 
the potential for errors and omissions.

In June 2016, the IRS--in response to a federal lawsuit--began 
releasing electronically filed Form 990s as open, machine-readable data 
for free to Amazon Web Services. Today, this covers approximately 60% 
of all Form 990s. The remaining 40% of 990s are still paper-filed and 
are not released as open data.

The benefits of universal e-filing and open nonprofit data include:

      Increased Transparency: Nonprofit leaders, donors, businesses, 
policymakers, and the public can make better decisions, understand 
trends in the field and gauge where some nonprofits stand in comparison 
to their peers.

      Improved Efficiency/Cost-Reductions: Electronic filing lowers 
the cost of processing returns, saving the IRS and taxpayer money, 
while also enabling the agency to use resources more efficiently.

      Reduction of Fraud: E-filing makes it easier to detect and 
locate potential problems through computer analysis. More timely and 
accessible data will not only help the IRS and state charity officials 
address compliance concerns (as the National Association of State 
Charity Officials has noted), but it will also boost the public's 
ability to monitor charities. Furthermore, the Advisory Committee on 
Tax Exempt and Government Entities (ACT) observed in its 2015 report 
that the IRS utilized less than half of the information from the Form 
990 for data analytics functions, due to the constraints of manually 
entering data from paper forms. Electronic filing by all nonprofits 
will result in more information being available for electronic review, 
and thus higher utilization of 990 data for tax compliance and 
analytical purposes.

      Improved Accuracy/Reduced Errors: E-filed returns, as opposed to 
paper-filed returns, reduce inaccurate calculations and cut down on 
mistakes. Fewer errors and better front-end identification of such 
errors also reduce taxpayer burden in the filing process.

      More Innovation/Business Opportunities: Entrepreneurs and 
innovators will have data available to develop new, useful ``apps'' and 
products that can help solve problems in our communities and contribute 
to the economy.

      Improved Information for the Public: The development of tools 
that use, aggregate and combine Form 990 data with other data sets can 
provide a wealth of information, such as, pinpointing nonprofit trends, 
tracking the flow of philanthropic giving relative to need, and 
determining how the nonprofit sector impacts local economies.

CONCLUSION

We thank the Senate Finance Committee for its past support and 
appreciate this opportunity to submit a statement for the record on 
business tax reform. Adoption of mandatory Form 990 e-filing coupled 
with the release of the forms as open, machine-readable data will 
benefit the public and the nonprofit sector, while strengthening law 
enforcement and enhancing sector wide accountability.

Please contact Cinthia Schuman Ottinger at [email protected] for 
further information about Form 990 e-filing or the Nonprofit Data 
Project of the Aspen Institute.

Sincerely,

Nonprofit Data Project of the Aspen Institute

                                 ______
                                 
          Reforming America's Taxes Equitably (RATE) Coalition

                             P.O. Box 33817

                          Washington, DC 20033

                              866-832-4674

                         www.RATEcoalition.com

                         [email protected]

   Written Testimony of Dr. Elaine C. Kamarck and James P. Pinkerton 
                               Co-Chairs

Thank you, Chairman Hatch and Ranking Member Wyden, for convening this 
critical hearing today on America's broken business tax system.

It's a simple fact that at 35 percent, the U.S. has the highest 
statutory corporate tax rate in the industrialized world. Indeed, our 
combined state and federal corporate tax rate of 39.1 percent is almost 
50 percent higher than the OECD average of 24.1 percent. Yet, the rub 
comes when we compare the statutory tax rate with the effective tax 
rate. And here we sometimes see a dramatic difference. That is, despite 
the high ``sticker rate,'' some corporations are paying an effective 
rate in the single-digit range, sometimes, even, zero--or less.

Conversely, most corporations--especially those with mostly domestic 
operations--pay a much higher rate. That is, up there in the 30s, well 
beyond the international average.

It's this discrepancy--this unfairness--between tax rates that helps 
animate the drive for tax reform, including corporate tax reform.

To put it bluntly, it's crazy to let some companies pay tax at well 
below the international average, and others pay tax at well above the 
international average.

Companies that exploit our broken system to avoid paying taxes through 
loopholes should pay their fair share. Americans deserve the kind of 
reform that makes single digit--even zero--percent tax rates a thing of 
the past.

Yet, at the same time, many American companies--both large and small--
are paying abundantly more than their fair share. As such, it is clear 
that America's business tax system is broken.

As Washington prepares to consider the high cost of that broken tax 
system on businesses of all sizes and the workers they employ across 
the country, we are guided by a fundamental belief that America cannot 
continue to allow a higher tax rate to lower our position in today's 
globalized marketplace.

We have therefore made it our mission to reform the tax code by 
reducing the corporate income tax rate. Here's why:

      A September 2017 analysis conducted by the National Retail 
Federation found that high corporate tax rates push down wages of the 
average corporate worker by as much as $4,690 annually.
            The NRF found that in 2015, workers bore between $86 
        billion and $257 billion of the corporate tax burden.
      A September 2017 report by the Heritage Foundation found that 
``the corporate income tax harms workers through lower wages.''
      A 2015 NRF analysis conducted by EY found that the failure to 
reduce the U.S. corporate tax rate costs U.S. families $3,000 a year in 
spending power.
      A March 2013 study conducted by EY found that in the long run, 
the U.S. economy, as measured by U.S. GDP, would be smaller by between 
1.5% and 2.6% if the current corporate income tax rates remain in place 
(equivalent to a reduction in U.S. GDP of roughly $235 billion to $345 
billion each year.)
      A 2015 Business Roundtable report conducted by EY found that 
with a 25% tax rate, U.S. companies would have acquired $590 billion in 
cross-border assets over the past 10 years instead of losing $179 
billion in assets--a net shift of $769 billion in assets from foreign 
countries to the United States.
            The report also found that a 25% tax rate would have kept 
        1,300 companies in United States.
      A January 2015 National Association of Manufacturers study found 
that over a 10-year period, a pro-growth tax reform plan would increase 
GDP by more than $12 trillion relative to CBO projections, increase 
investment by more than $3.3 trillion, and add more than 6.5 million 
jobs to the U.S. economy.
      A September 2012 analysis by the American Action Forum estimated 
that a comprehensive tax reform plan that includes a move to a 
territorial tax system, with a statutory tax rate of at least 25% 
(revenue neutral--inclusive of growth effects) would lift economic 
growth by 1 percentage point. In the near term, this would translate to 
roughly 1 million more jobs.
      A 2015 simulation conducted by the Tax Foundation's TAG Model 
found that our GDP would increase by 3.3% or 4.3% if our corporate 
income tax rate mirrored the levels enjoyed in the UK and Canada 
respectively.

Put simply: Because American companies are paying the highest corporate 
tax rate in the industrialized world, the American worker is paying a 
steep price in the form of lower wages and lost opportunities. As a 
result, our federal government isn't just collecting taxes--it is also 
constricting our economy by keeping it on the wrong side of a global 
zero-sum game in which our loss can become quite literally any other 
country's gain.

It is therefore long past time to enact meaningful tax reform with a 
rate that is as competitive as our spirit--one that unleashes, not 
undercuts, American prosperity. The bipartisan resolve in your 
Committee and among your colleagues to seize this once-in-a-generation 
opportunity is a telling testament to the importance of doing so.

As more and more American businesses flee to more economical shores 
overseas, our global competitors--each and every country the world 
over--aren't just counting on Washington's continued inaction--they're 
hoping for it.

Let's prove them wrong by doing right by the American worker.

                                 ______
                                 
                          R&D Credit Coalition

                  1101 New York Avenue, NW, 4th Floor

                          Washington, DC 20005

                              202-293-7474

                     www.investinamericasfuture.org

Introduction

The R&D Credit Coalition appreciates the opportunity to provide 
comments to the Senate Finance Committee as part of the hearing on 
``Business Tax Reform.'' The R&D Credit Coalition is a group of trade 
and professional associations along with small, medium and large 
companies that collectively represent millions of American workers 
engaged in U.S.-based research throughout major sectors of the U.S. 
economy, including aerospace, agriculture, biotechnology, chemicals, 
electronics, energy, information technology, manufacturing, medical 
technology, pharmaceuticals, software and telecommunications. The 
Coalition welcomes the opportunity to provide comments regarding 
incentives for research and development.

Although the R&D Credit Coalition is diverse, the member companies 
which the coalition represents share a major characteristic: they 
collectively spend billions of dollars annually on research and 
development, which provides high-wage and highly skilled jobs in the 
United States. The high U.S. corporate income tax rate and, until 
recently, the temporary nature of the U.S. R&D tax credit, compared to 
the lower corporate income tax rates and more stable and robust 
research incentives in most other developed countries, are key factors 
that companies consider in determining where they are going to create 
and maintain R&D jobs.

Under current law, a taxpayer can deduct the cost of research expenses 
in the year incurred (Section 174 of the Internal Revenue Code 
(hereinafter referred to as ``the Code'')). In addition, the tax code 
provides an incremental R&D tax credit for up to 20% (14% under an 
easier to calculate elective Alternative Simplified Credit (``ASC'')) 
of qualified research costs over a base amount; 20% of ``basic 
research'' payments; and 20% for amounts for energy research (Section 
41 of the Code). However, if the taxpayer elected to utilize the R&D 
tax credit, the taxpayer's deduction is reduced by the amount of any 
R&D tax credit (Section 280C of the Code). For 2016 and beyond, certain 
small business taxpayers can claim the R&D credit against their 
Alternative Minimum Tax liability and qualified small businesses can 
use their R&D credit to offset a portion of their payroll tax 
liability, subject to limits.

The Coalition believes that the U.S. economy has benefited greatly from 
tax policies, such as the deduction under Section 174 and the R&D tax 
credit under Section 41, that incentivize investments in innovative 
research activities that create new and higher wage jobs. These 
investments and the innovations and advancements derived from the 
research have beneficial spillover effects to the economy and society. 
The Coalition strongly believes Congress should support a strengthened 
and permanent R&D tax credit as well as continue with the current law 
practice of allowing R&D costs to be deducted in the year incurred.

In particular, the Coalition has strongly advocated for bipartisan 
legislation in both the Senate and House to make the R&D tax credit 
permanent and increase to 20% the ASC. The Coalition appreciates the 
longstanding support of Chairman Hatch, Ranking Member Wyden, and other 
Finance Committee members for the R&D tax credit. The Coalition is 
pleased that the Congress, with the enactment of the PATH Act (Pub. L. 
114-113), permanently extended the current law R&D credit to provide 
much needed certainty to taxpayers engaged in research activities. In 
addition, the Coalition supports legislation introduced in the 115th 
Congress by Representatives Pat Tiberi (R-OH) and John Larson (D-CT), 
the Research and Experimentation Advances Competitiveness at Home 
(REACH) Act of 2016 (H.R. 2821), to increase the ASC to 20% and make 
needed clarifications to the credit to ease the administration and 
compliance of the credit for both taxpayers and the IRS.

As the Administration and Congress consider tax reform alternatives, 
the Coalition recommends adopting proposals, such as H.R. 2821, that 
make the credit more effective at incentivizing additional research 
activities and rejecting proposals that would limit or hinder companies 
from making research investments.

The R&D tax credit is a proven incentive to maintain and create high-
paying jobs and stimulate positive economic benefits. The Coalition 
recommends increasing the ASC rate from 14% to 20% as a means to both 
enhance the benefits of the credit and improve efficiency and credit 
compliance. The calculation for the ASC is much simpler for taxpayers 
to comply with compared to the regular credit and using the ASC would 
help improve credit administration. Importantly, given that Congress 
has made the regular credit option and the ASC option permanent, 
providing parity for both options at a 20% rate would enhance the 
incentive effect of the credit.

Additionally, the Coalition is concerned about proposals that would 
reduce the attractiveness of investing in U.S. research projects such 
as previous proposals to limit the use of the R&D tax credit or require 
lengthy amortization of research costs.

Discussion

The Coalition appreciates that an objective of tax reform is to achieve 
a reduction in the corporate statutory rate and balance the rate 
reduction with offsetting reforms. Reducing the U.S. corporate tax rate 
from the highest in the world is a necessary reform to enhance the 
competitiveness of U.S. based businesses and to attract investment. In 
today's global economy with greater demand for investment in research 
activities, there is significant global competition for R&D jobs. 
Companies have an array of choices on where to locate such jobs and 
where to invest research dollars as many countries have highly educated 
and skilled workforces. It is clear that investments in research and 
innovation have positive spillover effects in the U.S. economy. 
Likewise, tax or other incentives to attract that investment enhance 
those spillover effects.

With increased global competition, it is vital to ensure that the 
United States is the best place for companies to do business and 
conduct research. There are many other countries that offer both lower 
corporate tax rates and more attractive R&D incentives.\1\ For example, 
Australia provides a 40% tax credit for all eligible R&D expenditures 
and a corporate tax rate of 30%. If the United States is to retain and 
attract global R&D activities across all sectors of the economy, there 
is a growing need for the certainty provided by a tax code that is 
favorable to R&D investment. Retaining current year expensing and 
providing a strengthened R&D tax credit would enhance the 
attractiveness of the United States for investment and stimulate job 
creation to grow the economy and keep the U.S. competitive.
---------------------------------------------------------------------------
    \1\ Deloitte, ``Global Survey of R&D Tax Incentives,'' December 
2015.
---------------------------------------------------------------------------

R&D Tax Credit as an Economic Incentive

The United States must maintain a globally competitive tax system that 
supports high-skilled, high-paying jobs. The R&D tax credit, originally 
enacted in 1981, was designed to be an important incentive in spurring 
private sector investment in innovative research by companies of all 
sizes and in a variety of industries. The enactment of this incentive 
helped establish the United States as a world leader in 
cutting-edge research that created high-paying jobs here in the United 
States. During the 1980s, the United States was the leader among OECD 
countries in providing the best R&D incentives for companies. However, 
in recent years, many other countries have instituted more generous R&D 
incentives. For example, South Korea has a 40% tax credit for current 
year R&D spending that exceeds the 3-year average and Canada has a 15% 
tax credit for all eligible R&D spending. As a result, according to an 
OECD study in 2016, the United States ranked 25th for large firms and 
26th for small and medium-sized enterprises in research incentives 
among industrialized countries.\2\
---------------------------------------------------------------------------
    \2\ OECD, ``Measuring Tax Support for R&D and Innovation,'' http://
www.oecd.org/sti/rd-tax-incentive-indicators.htm; ITIF, ``Why Expanding 
the R&D Tax Credit is Key to Successful Corporate Tax Reform,'' July 
2017.

Several OECD countries have enacted a variety of tax incentives to 
attract research activities, including tax credits that can be as high 
as 50% of research expenses, super deductions that can be as high as 
300% of research expenses, extending the credit to providers of 
contract research services, as well as other incentives to encourage 
research spending.\3\ A National Science Board report concluded that 
the United States' lead in science and technology is ``rapidly 
shrinking'' as R&D jobs and overall R&D spending continue to increase 
faster outside the United States than here at home. The report shows 
that ``between 1999 and 2009 . . . the United States share of global 
research and development (R&D) dropped from 38 percent to 31 percent, 
whereas it grew from 24 percent to 35 percent in the Asia region during 
the same time.'' \4\
---------------------------------------------------------------------------
    \3\ Deloitte, ``2017 Survey of Global Investment and Innovation 
Incentives,'' March 2017.
    \4\ National Science Foundation press release, ``New Report 
Outlines Trends in U.S. Global Competitiveness in Science and 
Technology,'' January 17, 2011.

The R&D tax credit has a significant impact on private R&D spending and 
the creation of valuable research jobs. According to a study by Ernst 
and Young (EY), ``In total, the overall policy--the existing credit 
plus strengthening the ASC--is estimated to increase annual private 
research spending by $15 billion in the short term and $33 billion in 
the long term.'' \5\ Moreover, it is important to note that the R&D tax 
credit is largely a jobs credit--70 percent of credit dollars are used 
to pay the salaries of high-skilled R&D workers in the United States. 
The EY study also stated that, ``the credit and its enhancement is 
estimated to increase research-related employment by 140,000 in the 
short term and 300,000 in the long term.'' \6\
---------------------------------------------------------------------------
    \5\ Ernst and Young, ``The R&D Credit: An effective policy for 
promoting research spending,'' September 2011, p. i.
    \6\ Ernst and Young, ``The R&D Credit: An effective policy for 
promoting research spending,'' September 2011, p.11.

The Coalition supports a permanent R&D credit that strengthens the ASC 
to 20 percent to encourage more domestic innovation, job creation, 
economic growth, and to enhance U.S. competitiveness. Along with 
enhancing the credit, current eligibility for the types of research 
---------------------------------------------------------------------------
expenditures that qualify for the credit must be retained.

For example, software development activities contribute billions of 
dollars to the U.S. economy and employ millions of highly skilled 
workers. Companies, universities and other organizations spend billions 
of dollars a year in research activities to develop new computer 
software and create new applications for existing software that is 
innovative. Software development is a critical component of numerous 
products and services and is critical to just about every industry 
segment, including medical, manufacturing, automotive, aerospace and 
defense, telecommunications, and others. In particular, software is a 
key element in advanced manufacturing and the United States is a leader 
in software development. The Coalition recommends that research 
expenditures related to the use and development of computer software 
continue to be treated as qualified research expenditures eligible for 
the credit.

In addition, research activities require people, mainly highly skilled 
scientists, to conduct research, but also require testing equipment, 
raw materials, instruments, and a variety of inputs necessary to carry 
out the process of experimentation. Since the original enactment of the 
credit, Congress has recognized that supplies can be an integral part 
of conducting scientific research and thus are treated as qualified 
research expenses. While it has been clear that supplies qualify for 
the credit, the lack of clear guidance on the issue has created 
uncertainty in complying with the credit. Recent guidance has helped to 
clarify the prior uncertainties regarding the treatment of supplies. 
Given this history and the fact that companies must continually invest 
in process and product improvements to maintain competitiveness in the 
worldwide market, the Coalition recommends that research expenditures 
related to supplies continue to be treated as qualified expenditures 
eligible for the credit.

Section 174 Deduction

In enacting section 174 to allow research costs to be deducted in the 
year incurred, ``Congress was pursuing two related objectives. . . . 
One was to encourage firms to invest more in R&D than they otherwise 
would. The second objective was to eliminate or lessen the 
difficulties, delays, and uncertainties encountered by businesses 
seeking to write off their research expenditures. . . .'' \7\ Expensing 
R&D costs reflects the tax and accounting realities inherent in 
bringing a new product to market. With R&D, amounts are expended to 
create an asset with a future benefit. In most other instances this 
would result in the capitalization and recovery through amortization of 
such costs. The inherent issue with expenses incurred in research and 
development is whether an asset of any value is being (or will be) 
created. At the time the amounts are expended, such a determination is 
often impossible. Further, research and development costs usually are 
incurred with the goal of creating a new or improved product, service, 
process or technique, but more often than not, the efforts do not 
result in success. As such, U.S. Generally Accepted Accounting 
Principles (``GAAP'') do not require the capitalization and 
amortization of R&D costs on company financial statements.
---------------------------------------------------------------------------
    \7\ Senate Budget Committee, ``Tax Expenditures, Compendium of 
Background Material on Individual Provisions,'' 2012, p. 90 (The 
Compendium).

Continuing the expensing of research costs is consistent with the 
proposals put forward to allow all investment costs to be immediately 
expensed. Proposals to limit the ability of companies to deduct the 
costs of U.S. based research activities for tax purposes will act as a 
disincentive to research investment, particularly for small firms with 
limited cash flow, some of which may not benefit from the credit and 
---------------------------------------------------------------------------
further risks the movement of investments and jobs abroad.

The Coalition believes that, given the inherent uncertainly around 
experimental research, these costs should continue to be allowed to be 
immediately expensed as under current law.

Conclusion

R&D incentives, such as the R&D tax credit and the expensing of 
research costs, are designed to ensure that companies from varied 
industries, including manufacturers and services businesses, conduct 
their research activities in the United States and create highly paid, 
highly skilled jobs. The original purpose of the tax credit still holds 
true today. It is vitally important that U.S. policy makers support 
proposals that enhance the attractiveness of the United States as a 
place to invest in research activities. A strengthened research and 
development tax credit, such as increasing the ASC to 20%, that is 
enacted as soon as possible and the continued ability to deduct 
research expenses are critical to competitiveness, innovation and U.S. 
jobs. In the global economy many companies have a choice as to where 
they are going to do their research--and with many other countries 
offering both lower corporate income tax rates and more robust R&D 
incentives, the U.S. tax system must provide globally competitive R&D 
incentives that can be counted on by businesses. Broad and sweeping 
changes to the tax credit that leave out innovative research activities 
and diminish the value of the credit reduce its effectiveness. The R&D 
Credit Coalition looks forward to assisting the Administration and 
Congress in gaining a more detailed understanding of the competitive 
pressures faced by companies as well as of the research and development 
tax credit and its impact on U.S. jobs. We also look forward to working 
together to advance legislation to enhance the U.S. position as an 
attractive location for investment and a leader in research and 
innovation.

Links to Studies:

Ernst and Young, ``The R&D Credit: An effective policy for promoting 
research spending,'' http://www.investinamericasfuture.org/PDFs/
EY_R&D_Credit_Report_
2011_09_16.pdf.

OECD, ``Measuring Tax Support for R&D and Innovation,'' http://
www.oecd.org/sti/rd-tax-incentive-indicators.htm.

ITIF, ``Why Expanding the R&D Tax Credit is Key to Successful Corporate 
Tax Reform,'' July 2017, https://itif.org/publications/2017/07/05/why-
expanding-rd-tax-credit-key-successful-corporate-tax-reform.

Deloitte, ``2017 Survey of Global Investment and Innovation 
Incentives,'' https://www2.deloitte.com/content/dam/Deloitte/us/
Documents/Tax/us-tax-surveyof-global-investment-and-innovation-
incentives.pdf.

National Science Foundation press release, ``New Report Outlines Trends 
in U.S. Global Competitiveness in Science and Technology,'' http://
www.nsf.gov/nsb/news/news_summ.jsp?cntn_id=122859&org=NSB&from=news.

OECD, Ministerial Report on the OECD Innovation Strategy, May 2010, 
http://www.oecd.org/dataoecd/51/28/45326349.pdf.

OECD, ``Science, Technology, and Industry Scoreboard,'' October 2015, 
http://www.oecd.org/sti/scoreboard.htm.

U.S. Department of the Treasury, ``Investing in U.S. Competitiveness: 
The benefits of Enhancing the Research and Experimentation (R&E) Tax 
Credit,'' http://www.investinamericasfuture.org/PDFs/
TreasuryRDReportMarch25.PDF.

                                 ______
                                 
               Retail Industry Leaders Association (RILA)

                  1700 North Moore Street, Suite 2250

                          Arlington, VA 22209

                              703-600-2057

                       [email protected]

The Retail Industry Leaders Association (RILA) applauds the Committee 
for holding this hearing on business tax reform and welcomes this 
opportunity to express our strong support for the enactment of 
comprehensive tax reform. We appreciate your leadership and that of the 
Committee as you engage on the critical work to enact comprehensive tax 
reform.

RILA is the trade association of the world's largest and most 
innovative retail companies. RILA members include more than 200 
retailers, product manufacturers, and service suppliers, which together 
account for more than $1.5 trillion in annual sales, millions of 
American jobs, and more than 100,000 stores, manufacturing facilities, 
and distribution centers located both domestically and abroad.

The retail industry supports more than 42 million American jobs. With 
more than $553 billion in labor income and more than $3.8 trillion in 
sales, retail is one of America's most powerful economic engines. In 
fact, consumer spending represents two-thirds of U.S. gross domestic 
product (GDP).

Addressing Global Anti-Competitiveness Faced by U.S. Companies

Retailers have long supported comprehensive tax reform that will 
benefit industry and consumers alike. We continue to call for a 
significant reduction in the corporate tax rate with a fresh scrutiny 
of all deductions and credits in the code, particularly ones that are 
not applicable to all taxpayers.

American companies are at a huge competitive disadvantage with our 
international competitors. This is directly a result of the U.S. 
statutory corporate tax rate being extremely high by international 
standards. The U.S. top combined federal and average state corporate 
income tax rate of 38.9 percent is the highest among the 35 member 
countries of the Organisation for Economic Co-operation and Development 
(OECD) and is 14.7 percentage points above the OECD average of 24.2 
percent. In fact, the U.S. corporate tax rate is the third highest 
among countries throughout the world. Furthermore, the United States 
stands virtually alone among countries in taxing companies on their 
worldwide income rather than just on income earned domestically.

The retail industry's treatment under the current tax code belies its 
prominent place in the economy and stifles job creation, investment, 
and consumer spending/savings. A few years ago, RILA commissioned 
PricewaterhouseCoopers (PwC) to conduct a study on the tax rates paid 
by the retail industry. The study, entitled ``U.S. Retail Trade 
Industry: Employment, Taxes, and Corporate Tax Reform,'' concluded that 
the retail industry's effective tax rate of 36.4 percent is the fourth 
highest domestic effective tax rate of all the 18 major U.S. industrial 
sectors--nearly 10 percentage points higher than the average rate.

The high effective tax rate imposed on the retail industry largely 
undermines U.S. competitiveness. A growing number of U.S. retailers are 
expanding into the global marketplace through the establishment of both 
retail operations in other countries as well as subsidiaries that 
strengthen the supply chain of goods and services they provide to their 
customers in this country. Our current system in the U.S. of taxing 
worldwide income not only constrains a retailer's ability to grow but 
also costs the U.S. well-paying jobs that a company must add to oversee 
such global operations.

Similarly, foreign-based retailers are entering the U.S. market with 
advantages over U.S. businesses due to a favorable tax structure in 
their home country. While these foreign-based companies compete on a 
level playing field in the United States, the favorable tax conditions 
under which they operate in their home country ease the task of 
generating profits there, and those profits are in turn invested in 
U.S. expansion and aggressively competing with U.S. based retailers.

To improve U.S. international competitiveness, RILA supports 
comprehensive tax reform that includes the following principles: 
significantly reduces the corporate tax rate; eliminates special 
credits and deductions in the code that favors some industries at the 
expense of others; addresses the tax rules applicable to all business 
types, as well as to individuals; simplifies and stabilizes the tax 
code; and institutes a territorial tax system, where the U.S. taxes 
corporate income earned only in the United States.

In addition, RILA is opposed to any limitation on the deduction for 
business interest expense. Businesses, large and small alike, borrow to 
finance their operations. The tax code has long recognized this, 
treating interest expense as an ``ordinary and necessary'' deductible 
business expense. Some have argued that interest expense should be 
eliminated and ``traded'' for 100 percent expensing of capital 
equipment. This misses the key point that expensing is an accounting/
timing difference while the interest deduction has a permanent impact 
on financial statements for companies and ensures the proper 
measurement of income.

Retail Sector's Role in the Economy and in the Community

There are few industries that have a greater impact on the United 
States economy than retail. The retail industry employs millions of 
Americans throughout the supply chain and provides American consumers 
with the products they want to buy at the price they want to pay on 
demand. Retailers pay billions of dollars in federal, state, and local 
taxes each year, and collect and remit billions more in sales taxes to 
state and local governments. Brick and mortar retailers, large and 
small, provide a significant tax base for core local and state services 
such as police, fire and rescue, and schools.

According to the September Bureau of Labor Statistics jobs report, 
87,000 retail workers lost their jobs so far in 2017. In addition, over 
5,000 stores have closed or will close in 2017, an increase of 165 
percent compared to last year. Given the enormous employment footprint 
of the retail industry, comprehensive tax reform that significantly 
reduces the corporate tax rate could stimulate job growth in the retail 
sector and the industries supported by retail.

Retailers often serve a central role as stewards of communities. Beyond 
investing resources in store operations and job creation, brick and 
mortar retailers: provide billions of dollars annually to tens of 
thousands of local and national charities; hire American veterans; 
sponsor local sports and recreation teams; provide tangible goods 
donations to schools and homeless shelters; support community workforce 
development and training programs; and often provide shelter during 
storms and are the first on the ground after disasters strike to 
provide families with relief and help communities rebuild. 
Additionally, even the largest retailers rely on small business vendors 
in communities, such as plumbers and electricians, to keep stores open 
and operating.

Conclusion

No industry supports and desires comprehensive tax reform more than the 
retail sector. For retailers, as a driver of the U.S. economy and one 
of America's largest job creators, operating under the current high 
effective tax rate is growing untenable. The retail industry is on the 
front lines with the U.S. consumer and undergoing rapid transformation 
to compete in the 21st-century marketplace--the U.S. federal tax code 
should help foster this growth, innovation and investment, not kill it.

RILA and its member companies are eager to work with Members of the 
Senate Finance Committee in this once in a generation effort to reform 
the tax code in a comprehensive manner that promotes economic growth 
and enhances U.S. competitiveness.

                                 ______
                                 
                Small Business Council of America (SBCA)

                      4800 Hampden Lane, 6th Floor

                           Bethesda, MD 20814

The Small Business Council of America (SBCA) appreciates the 
opportunity to submit this statement.

The SBCA is a national nonprofit organization which has represented the 
interests of privately held and family-owned businesses exclusively on 
federal tax, health care and employee benefit matters since 1979. The 
SBCA, through its members, represents well over 20,000 enterprises in 
retail, manufacturing and service industries, virtually all of which 
provide health insurance and retirement plans.

When embarking on business tax reform, the SBCA urges the Committee to:

  Not make changes to the small business retirement plan system that 
could destroy the retirement security of millions of employees and 
protect the federal tax laws that the system depends on.

The qualified retirement plan system, has been very successful in 
providing retirement security for a significant number of Americans. 
One of the primary things that motivates small business owners to 
establish, and continue sponsoring, retirement plans are the current 
tax incentives associated with doing so. Most small business owners 
view the administrative costs associated of maintaining a plan and the 
meaningful contributions that they make for non-key employees as the 
price of being able to save in a qualified retirement plan for 
themselves. If the tax laws are changed by reducing the amount that a 
small business owner can save in a qualified retirement plan or the 
financial appeal of saving in a plan or by making owners concerned 
about saving too much in a plan, the owners will be much less likely to 
continue an existing plan or start a new plan. The same will be true if 
small business owners are given other, more favorable options for 
saving, such as through the proposed creation of a pre-tax savings 
account with no withdrawal limitations.

When a small business closes down its retirement plan, the owners are 
not likely to increase the pay of the non-key employees to account for 
the loss of the plan contributions, meaning that these employees will 
be losing a valuable benefit that would provide them with needed funds 
during their retirement but will not gain any more disposable income.

  Protect the deductions for retirement plan contributions and health 
insurance premiums.

Under the current tax system, when an employer contributes towards an 
employee's health insurance premiums and/or retirement plan, it is a 
win-win for the employer and the employee. The employer gets to deduct 
the contributions and the employee gets the benefit of being able to 
exclude the contribution from his or her income, in the case of health 
insurance premiums, or defer taxes on the contribution and allow it to 
grow tax free, in the case of a retirement contributions. The non-zero-
sum nature of this arrangement is a big reason why many employers make 
these types of contributions. In short, with no detriment to 
themselves, employers are able to provide a big benefit to employees, 
many of whom would not be able to afford health insurance or to 
significantly save for retirement without their employer's 
contribution.

If the tax laws are modified to either eliminate the benefit employers 
get from making the contributions (by eliminating or reducing their 
deductibility) or reduce the benefit that these contributions provide 
to the employee (by making them taxable to the employee) it would cause 
employers, particularly small business employers who tend to work on 
narrower margins, to reduce, or think twice, about making the 
contribution. Health insurance and retirement savings are critical to 
the economic stability of this country and the precious equilibrium 
that allows many individuals to get these benefits, when they otherwise 
might not, should not be disturbed in an effort to raise revenue for 
other tax cuts.

Moreover, when it comes to contributions to retirement plans, there is 
a major distinction between a tax expenditure where the tax is never 
recaptured by the system and the qualified retirement system where all 
of the funds in the plan are taxed--just usually outside the budget 
window because of the long-term nature of retirement savings. It would 
be fundamentally bad policy to eliminate the retirement plan deduction 
simply because it helps to raise money within the budget window when it 
does not result in any long term revenue gain outside the budget window 
and doing so could greatly harm the retirement security of many 
Americans.

  Ensure that the impact of changing the tax rate for pass-through 
entities does not bring an end to the small business retirement plan 
system.

Both the President and the House have proposed reducing the tax rate 
for pass-through entities by introducing a distinction between ``active 
business income'' and ``reasonable compensation for services.'' The 
SBCA is generally in favor of reducing tax rates for pass-through 
entities and creating greater parity between pass-through entities and 
C corporations. However, we have two primary concerns about these 
proposals.

First, retirement plan contributions need to be deducted from the 
reasonable compensation for services tranche. Under this proposed 
change, small business owners would be required to treat a certain 
portion of the money they receive from the business as reasonable 
compensation for services which would be taxed at the individual tax 
rates and the remaining amount would be treated as active business 
income and taxed at a lower rate--possibly as low as 20%-25%. If 
contributions that are made to the retirement plan do not count against 
the amount allocated to the reasonable compensation for services 
portion before they get to the lower active business income rate, there 
will be no motivation for small business owners to make contributions 
to the retirement plan because they will instead be able to take that 
money and only pay minimal taxes on it and then reinvest it in an area 
with greater potential for earnings and more favorable tax treatment 
than a retirement plan. In other words, few small business owners will 
make contributions into a retirement plan system for themselves and 
their employees where the deduction is going against a 20%-25% tax rate 
when it will come out and be taxed at a far higher rate. Economically, 
this would make no sense and the fuel behind the small business 
retirement plan system is tax incentives. As discussed further below, 
few small business owners will sponsor a retirement plan when they will 
get no financial benefit from saving in it. Rather, the small business 
retirement system is dependent on small business owners seeing the 
retirement plan as a way to secure their own future.

Additionally, if Congress is going to move towards establishing a 
distinction of ``active business income'' and ``reasonable compensation 
for services'' the statute itself needs to clearly delineate how this 
distinction is made. Simply creating the distinction and leaving it to 
the IRS to promulgate rules to help businesses determine how to 
navigate it is a prime recipe for increasing the complexity of the tax 
system in this area and increasing the burden on pass-through entities. 
Throughout any tax reform bill, the SBCA strongly encourages Congress 
to be specific in its statutory language and to avoid delegating the 
authority to IRS to flesh out all of the rules by regulation in order 
to avoid efforts towards simplification being marred in the future by 
complex regulations. As discussed below, small business is still trying 
to figure out how to deal with the hundreds of pages of regulation that 
were promulgated under the brief statutory language of IRC Sec. 409A. 
This type of absurdly complex regulation comes about far more easily 
when IRS is given little direction in the statutory language.

  Reject the idea of excluding certain types of pass-through entities 
from receiving a lower pass-through rate.

If Congress enacts a new lower rate for pass-through income, this rate 
should equally applicable to all pass-through entities.

Treasury Secretary Steven Mnuchin has suggested excluding certain types 
of professional service firms from a new lower pass-through rate. Not 
only would this proposal be unfair to certain types of businesses, it 
would directly undermine the goal of simplifying the tax code.

Professional service firms play a critical role in providing essential 
services and growing the economy. Despite common misconceptions, these 
businesses make significant investments in equipment and resources to 
keep their businesses running and there is no reasonable justification 
for treating them differently.

Moreover, establishing different rates for different types of pass-
throughs and determining which pass-throughs are eligible for which 
rates would add an unnecessary level of complexity to an already 
complicated tax area and require small businesses to spend even more on 
accounting and compliance costs than they already do.

The SBCA strongly urges Congress to reject the notion of stratifying 
the pass-through rates and urges Congress to enact a single lower rate 
for all pass-through entities.

  Amend Section 409A to exclude small businesses from its 
requirements.

Section 409A was introduced to stop public companies, like Enron, from 
manipulating deferred compensation to avoid creditors and obtain lower 
tax rates. Unfortunately, the broad drafting of Section 409A means that 
small businesses, that were not the culprits of the type of abuses that 
Section 409A was designed to stem, get caught up in its onerous 
penalties and excessive compliance costs. The restrictions of Section 
409A prevent small businesses from being nimble and entering into 
compensation arrangements with employees that appropriately reflect the 
nature of the new or growing business. Worse, many small businesses and 
their advisors do not even realize that Section 409A applies to them 
because they've been told it only applies to deferred compensation 
plans which, due to the tax code, are seldom adopted by small 
businesses. We think this phantom code section in the small business 
world could eventually become a huge and unnecessary trap for small 
business employees.

To eliminate burdensome and unnecessary restraints on business growth, 
Section 409A should be modified to apply only to publicly traded 
companies or, at very least, to include an exception for small 
businesses.

  Protect the cash method of accounting.

Over the past number of years there have been multiple proposals to 
limit the availability of the cash method of accounting for certain 
pass-through entities and personal service organizations. Proposals 
like these are a step in the wrong direction and would be harmful to 
small business.

Particularly for service based companies that often do not receive 
payment for their services until months or even years after they are 
performed (and worse often do not receive full or any payment for 
services rendered), forcing these businesses to use the accrual method 
of accounting would be very challenging, as well as basically unfair. 
Without the availability of the cash method, these businesses would 
need to set aside money to pay the tax liability for services rendered 
but not paid for yet, if ever.

There is little justification for requiring pass-through entities or 
personal service organizations to be forced to move to the accrual 
method of accounting, for example, because their average gross annual 
receipts are in excess of a certain amount. Moreover, such a change 
would force dollars that are needed to run the business to be paid 
instead to internal and external staff and professionals to navigate 
the much more complex tax situation that the businesses would face 
under the accrual method.

The SBCA strongly urges Congress to keep the existing rules on cash 
method of accounting for pass-through entities and professional service 
organizations. If anything, Congress should increase the annual income 
threshold for which corporations can use the cash method of accounting 
above $5 million to ensure that this simpler method is available for 
all small businesses.

  Reject proposals to reduce the amount that individuals can save in 
retirement plans pre-tax or subject existing retirement plan savings to 
taxes.

There have recently been proposals to try to move the bulk of the 
defined contribution retirement plan system towards Roth--i.e., to 
limit how much can be saved in a defined contribution plan pre-tax or 
subject existing defined contribution plan balances to taxes now, 
rather than waiting for them to be taxed at the time of withdrawal.

The SBCA strongly urges the Committee to reject these proposals. 
According to a 2011 EBRI study, over 60 percent of respondents 
indicated that the ability to contribute to a retirement plan pre-tax 
was ``very important'' to encouraging them to save for retirement (see 
EBRI Notes, Vol. 32, No. 3). The same study found that over 25% of 
respondents would reduce their retirement plan savings or stop them 
altogether if they were no longer able to contribute to a retirement 
plan on a pre-tax basis.

If small business owners aren't able to contribute to a retirement plan 
pre-tax, they will be less likely to sponsor one and, even if they do, 
employees will be less likely to save in the plan if they are unable to 
do so pre-tax. In short, it will decrease the perceived benefit of an 
employer-sponsored retirement plan for both employer and employees. 
Given that employees are far more likely to save in an employer-
sponsored plan than to set up an IRA for themselves to save in, this is 
very concerning. America is aging and we need to do everything we can 
to increase retirement savings. Proposals like these, that would 
eliminate the motivation to save, could be truly catastrophic.

  Increase the availability of cafeteria plans for small business 
employees by allowing small business owners to be eligible to 
participate in cafeteria plans.

While employees of large businesses, mid-size employers, non-profits, 
schools, universities, and the federal government can take advantage of 
the valuable benefits provided by cafeteria plans, only small business 
owners are not allowed to participate in a cafeteria plan. As with 
retirement plans, small business owners will be disinclined to take on 
the administrative costs and concerns to sponsor a plan that they can't 
participate in. Cafeteria plans provide a wide array of meaningful 
benefits for employees and it is unfortunate that the exclusion of 
small business owners from plan participation has resulted in many 
small business employees not being offered these benefits.

During the tax reform process, the SBCA urges Congress to resolve this 
inequity and to allow small business owners to participate in the 
cafeteria plans that they would be more likely to sponsor.

  Protect the business interest deduction.

Both the President and the House have proposed to eliminate the 
business interest deduction and instead move towards a system of full 
and immediate expensing. While the SBCA has no problem with the concept 
of immediate expensing, eliminating the business interest deduction 
would represent a large change to the tax laws that could strike a 
significant blow to America's small businesses and make it more 
difficult for new businesses to get started.

Small businesses rely heavily on traditional debt financing, rather 
than equity financing. Alternative, or creative, funding options are 
often not available to small businesses, particularly in their early 
years. Moreover, debt financing does not require small businesses to 
give up ownership interests in the way that equity financing does. 
Eliminating the business interest deduction would mean that the amount 
paid out in interest would continue to be taxable income to the small 
business and then also be taxed as income to the lender. In other 
words, the interest would be taxed twice. Because of this treatment and 
increased costs, the borrowing options offered by those lenders that 
typically service small business clients, such as community banks, are 
likely to be reduced, making it more difficult for small businesses 
owners to get a traditional loan to get their business started or keep 
it afloat. The SBCA does not believe there is a valid reason to link 
the provisions for immediate expensing and the loss of the interest 
deduction.

As the expression goes, the devil is in the details. Tax reform could 
help small businesses thrive and continue to provide jobs and 
meaningful benefits for millions of Americans. However, if not properly 
and thoughtfully crafted, tax reform could instead prove to be 
catastrophic to small businesses and their employees, leaving them to 
bear the burden of tax reform that is targeted at benefiting large 
businesses. We urge this Committee to be mindful of the role that small 
business plays in our economy and ensure that small business interests 
are considered and protected in any efforts towards business tax 
reform.

                                 ______
                                 
               Small Business Legislative Council (SBLC)

                      4800 Hampden Lane, 6th Floor

                           Bethesda, MD 20814

    Please accept the foregoing statement of the Small Business 
Legislative Council (SBLC) for the record in response to the U.S. 
Senate Finance Committee's September 19, 2017 hearing on ``Business Tax 
Reform.''

    The SBLC is a 35-year-old permanent, independent coalition of over 
40 trade and professional associations that share a common commitment 
to the future of small business. SBLC members represent the interests 
of small businesses in such diverse economic sectors as manufacturing, 
retailing, distribution, professional and technical services, 
construction, transportation, and agriculture. SBLC policies are 
developed by consensus among its membership.

    While the SBLC strongly supports efforts to make the tax system 
simpler and more manageable, it is critical that tax reform not come at 
the expense of small businesses and their employees. Already, in the 
House Blueprint and the President's outline, there have been proposals 
that are deeply concerning for small business and that could undermine 
small business' role as a critical driver of growth and job creation in 
this country. As discussed further below, the SBLC urges the Committee 
to reject these problematic ideas and use tax reform as a vehicle to 
help, rather than hinder, small businesses.
Tax Rates for Pass-Through Entities
    Greater parity is needed between the tax rates for pass-through 
entities and C corporations. However, if a new system is created for 
taxing pass-through entities, the new lower rates should be available 
to all pass-through entities and the applicable rules should be clearly 
outlined in the legislation itself and structured to ensure that they 
do not have the unintended effect of disrupting the small business 
retirement plan system.

    Under the current tax laws, pass-through businesses, which 
constitute the large majority of business enterprises and employ over 
half of the employees in the United States,\1\ are at a disadvantage 
when compared to publicly and privately held C corporations. Unlike 
pass-through entities, regular C corporations separately report their 
taxable income and pay income tax on that taxable income. Under current 
law, the top marginal rate for C corporations is 35%, whereas the top 
marginal rate for income earned through S corporations, partnerships 
and sole proprietorships is 39.6% (passive investors are also subject 
to an additional 3.8% net investment tax). This gap needs to be 
narrowed or eliminated. If the C corporation rate is going to be 
reduced through tax reform, the rate for income from pass-through 
entities must be as well.
---------------------------------------------------------------------------
    \1\ Drs. Robert Carroll and Gerald Prante, ``The Flow-Through 
Business Sector and Tax Reform,'' at pg. 5, Appendix B, Ernst and Young 
(April, 2011).

    Both the President's outline and the House's Blueprint include 
proposals to reduce the tax rate for pass-through entities by creating 
a distinction between ``active business income'' and ``reasonable 
compensation for services.'' This type of system would require owners 
of pass through entities to take compensation for their services, which 
would be taxed at their personal income tax rate, and then allow them 
to receive other business income subject to a much lower tax rate. 
Provided that the reservations discussed below are adequately 
---------------------------------------------------------------------------
addressed, the SBLC strongly supports this concept.

    First and foremost, if a new structure, like the one noted above, 
is going to be introduced for taxing pass-through entities, it is 
essential that the rules for its application be clear and outlined in 
the legislation itself. While the concept of distinguishing between 
``active business income'' and ``reasonable compensation for services'' 
sounds relatively simple, the rules for determining what constitutes 
reasonable compensation for services have the potential to become very 
complex. Small businesses do not have the same financial or 
administrative capacity to navigate complicated rules that their larger 
counterparts do. It is therefore important that the rules be clear and 
easily understood and applied. To ensure that this is the case, it is 
important that Congress clearly articulate the framework in the law 
itself rather than delegating the power to the IRS to do so. Even if 
the current Administration has given assurances that new tax 
regulations will not be overly complex, delegating authority to the 
agencies to add detail to a tax reform law leaves open the possibility 
(and we would argue makes it likely) that, over time, the law's goal of 
simplification will be lost amidst increasingly complex regulations.

    Another consideration that the SBLC urges the Committee to address 
in considering a new tax system for pass-through entities, is the 
implications that a reduced tax rate for business profits could have on 
the small business retirement plan system. Most small business owners 
view the administrative costs associated with maintaining a plan and 
the meaningful contributions that they make for non-key employees as 
the price of being able to save in a qualified retirement plan for 
themselves. If the small business owner has the opportunity to take 
profits out at a rate that is significantly lower than his or her 
individual tax rate that would apply to retirement funds at the time 
they are withdrawn, the small business owner is going to take the money 
out of the business at the reduced rate and invest it elsewhere. In 
turn, if the small business owner has no financial motivation to save 
in a retirement plan, the small business is much less likely to create 
a new plan or continue to offer an existing plan. This would be a 
significant blow to employees and be counter to the goal of encouraging 
increased retirement savings. To avoid this problem, if a small 
business owner is going to be required to take a certain amount from 
the business as ``reasonable compensation for services'' before the 
reduced tax rate will apply, it is important that the contributions 
towards the retirement plan count towards reasonable compensation for 
services. Logically, this makes sense as the idea behind the 
distinction is to ensure that a certain amount of the business' income 
is being taxed at the business owner's standard individual rate and 
anything that is saved in a retirement plan will be subject to the 
individual rate when it is withdrawn. Additionally, it will continue to 
motivate small business owners to sponsor retirement plans that will 
allow them, and their employees, to save for the future.

    Finally, if a new system is introduced to provide lower rates for 
certain pass-through income, that lower rate should be available for 
all pass-through businesses. Attempting to exclude certain types of 
pass-through businesses from a new lower rate would be unjust and would 
require the introduction of yet more complex tax rules that small 
businesses already struggle to navigate.
Business Interest Deduction
    Small businesses rely on debt financing not equity to establish 
themselves and survive. The elimination of the business interest 
deduction would therefore be severely damaging to small business growth 
and success.

    Both the President's outline and the House Blueprint have proposed 
to eliminate the business interest deduction in lieu of a move towards 
allowing full and immediate expensing. While the SBLC supports 
immediate expensing, eliminating the business interest deduction would 
result in dramatic loss of financing options for small businesses, 
making it much more difficult for new businesses to start and existing 
businesses to thrive.

    Small businesses rely heavily on traditional debt financing. Unlike 
equity financing, debt financing allows small business owners to 
maintain their ownership of, and control over, their businesses. 
Moreover, many alternative or creative funding options aren't available 
to small businesses, particularly in their early years. Eliminating the 
business interest deduction would result in a double tax on the 
interest itself. Without the business interest deduction, before being 
paid as interest, the amount would be taxable to the business, but then 
would still be taxed as income to the lender. As the result of this 
treatment, and the increased costs and decreased gains that it will 
cause, those lenders that traditionally service small business clients, 
like community banks, are likely to reduce their borrowing options. 
This will make it more difficult for small businesses to get the debt 
financing they need and will strike a significant blow to the small 
business economy on which a huge part of the national economic 
stability depends.
Last In First Out (LIFO)

    The last in first out method of inventory accounting (or LIFO) 
allows businesses in industries that face rising prices to most closely 
match the cost of goods sold with the cost of replenishing inventory. 
In other words, LIFO helps businesses maintain the status quo. Without 
LIFO, by allowing businesses to avoid being taxed on the portion of 
their sales attributable to inflation and instead use that money to 
acquire or produce inventory to replace that which was sold.

    The majority of the businesses using the LIFO inventory method are 
organized in the form of pass-through entities, such as partnerships or 
S corporations and are therefore taxed at the individual rate. 
Proposals to fund a reduction in the corporate tax rate by repealing 
LIFO would leave pass-through entities shouldering most of the burden 
of a rate reduction while receiving none of the gain.

    Moreover, looking to prior proposals to eliminate LIFO, most of the 
revenue would be raised by a one-time recapture tax. This is a short 
sited approach that would be devastating for a wide range of 
businesses. Specifically, not only will the long term revenue stream 
created by a LIFO repeal be significantly smaller than the one-time 
recapture, but the one time recapture will also result in an 
unprecedented retroactive tax on businesses using LIFO. These 
businesses, have relied on existing tax laws, including the 
availability of LIFO, to manage their revenue streams, inventories and 
expenditures. Requiring them to go back and pay taxes on the past 
benefits that they received from the use of LIFO would wreak havoc on 
cash flows, capital reserves, expansion opportunities and job creation 
for American businesses using this method of accounting.
Health Insurance Premium Deduction/Exclusion
    The current system which allows employers to deduct health 
insurance premiums and employees to exclude health insurance premiums 
from their income, has the very positive effect of encouraging 
employers to contribute towards health insurance premiums, and should 
be maintained.

    Under the current system, an employer contribution towards an 
employee's health insurance premium provides a win for both the 
employer and the employee. The contribution helps the employee get 
health insurance and can be excluded from the employee's income. In 
turn, the employer gets to deduct the contribution, so, although it is 
providing a huge benefit to its employees, it is able to do so at a 
lower cost.

    If the tax laws are changed in a way that would eliminate or reduce 
the benefit that employers get from contributing towards employee 
health insurance or reduce the benefit of these contributions to 
employees by making them taxable, it would cause many small business 
employers to give second thought to making such contributions. Employer 
contributions towards health insurance premiums are critical to helping 
many Americans afford health insurance and any change that would deter 
employers from making these contributions would be a move in the wrong 
direction.
The Small Business Retirement Plan System
    The qualified retirement plan system has been very successful in 
providing retirement security for a significant number of Americans. It 
is important that those provisions that have encouraged plan 
sponsorship among small businesses and saving by small business 
employees are not negatively impacted by tax reform.

    As noted above, most small business owners are motivated to 
establish plans, and make contributions for their employees, by a 
desire to save for their own retirement. If the tax laws are changed to 
reduce the ability or appeal of saving in a retirement plan, small 
business owners will be much less likely to continue an existing plan 
or start a new plan.

    Accordingly, so as not to disturb the current successful small 
business retirement system, the SBLC urges Congress to:

    -  Reject attempts to decrease the amount that can be saved in a 
qualified plan. If the amount that small business owners can save in a 
qualified plan is reduced, small business owners will be motivated to 
freeze or terminate plans once they themselves have hit that cap. This 
will mean that less small business employees will be offered a plan.

    -  Avoid changes that would quickly force saving out of a plan 
after the owner's death or otherwise do anything to make owners fearful 
of saving too much in a retirement plan. If small business owners are 
concerned that at their descendants who inherit their plans will be 
forced to take the money out over a short period of time and therefore 
face negative tax consequences, the owner will save less in the plan. 
This means that retirement savings overall will decrease, as will plan 
sponsorship.

    -  Protect the deductibility of employer contributions. As with 
health insurance, under the current tax system, when an employer 
contributes to an employee's retirement plan it is a win-win because 
the employer gets a deduction and the employee grows his or her 
retirement plan balance. If the deduction for the employer contribution 
is eliminated, employers will be far less likely to contribute towards 
an employee's retirement savings.

    -  Reject proposals to try to limit how much can be saved in a 
defined contribution plan pre tax or subject existing defined 
contribution plan balances to taxes now, rather than at the time of 
their withdrawal (i.e., to move the bulk of the defined contribution 
retirement plan system towards Roths). Again, if small business owners 
don't see a tax benefit for themselves to save in the plan, they will 
be less likely to sponsor a plan. Moreover, if employees are taxed on 
contributions to a plan, they will be less likely to save, which, given 
that people are far more likely to save in employer-sponsored 
retirement plans than in any other vehicle, would reduce retirement 
savings overall.
Conclusion
    As Congress tackles the challenge of tax reform this fall, we urge 
the Committee to consider how each proposed change could impact small 
businesses and their employees. Tax reform that pursues a lower 
corporate rate at the cost of eliminating the critical provisions that 
small businesses rely on to grow and succeed will be a move in the 
wrong direction. We look forward to working with this Committee to 
achieve meaningful tax reform that will benefit businesses of all 
sizes.

    For more information, please contact Paula Calimafde, President and 
General Counsel, 301-951-9325, [email protected].

                                 ______
                                 
               Letters Submitted by the Tax Ag Coalition

                           September 19, 2017

U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200

Re: Senate Finance Committee Hearing on Business Tax Reform

Dear Chairman Hatch and Ranking Member Wyden:

The Tax Ag Coalition commends the Senate Finance Committee for your 
recent hearing on reforming the business tax code, and would like to 
participate by offering comments on several items of particular 
interest to agricultural producers and rural small business owners.

While it is not our intent to offer a comprehensive statement on tax 
reform, the Tax Ag Coalition firmly believes that a fair and equitable 
tax code must recognize the unique financial challenges of agricultural 
production. Below is a list of our Coalition priorities and additional 
information can be found in the enclosed letters.

1.  The Coalition supports a full, permanent repeal of the federal 
estate tax. The benefits of repeal should not be eroded by elimination 
of or any restrictions to the use of stepped-up basis.

2.  The Coalition supports maintaining interest deductions as a 
legitimate business expense.

3.  The Coalition supports maintaining critical provisions in the tax 
code that allow farmers and ranchers to match income with expenses and 
manage through low income years, such as cash accounting, like-kind 
exchanges, and income averaging.

4.  The Coalition supports reducing the capital gains tax.

5.  The Coalition supports maintaining the Section 199 deduction for 
domestic production activities.

6.  The Coalition supports several tax provisions related to renewable 
energy and environmental mitigation.

Thank you for your time and attention to this matter.

Sincerely,

Danielle Beck
Director of Government Affairs
National Cattlemen's Beef Association
1275 Pennsylvania Ave., NW, Suite 801
Washington, DC 20004

                                 ______
                                 

                           September 19, 2017

The Honorable Orrin G. Hatch        The Honorable Ron Wyden
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510                Washington, DC 20510

Dear Chairman Hatch and Ranking Member Wyden:

On behalf of our nation's family farmers and ranchers, the undersigned 
agricultural producer groups urge your support for maintaining the 
Section 199 deduction for domestic production activities income as part 
of any tax reform plan.

The Section 199 deduction was enacted as part of the American Jobs 
Creation Act of 2004 as a domestic production and jobs creation 
measure. The deduction applies to proceeds from agricultural or 
horticultural products that are manufactured, produced, grown, or 
extracted in the United States, including dairy, grains, fruits, nuts, 
soybeans, sugar beets, oil and gas refining, and livestock. Farmer-
owned cooperatives are able to apply their wages to the calculation of 
the deduction, and then choose to pass it through to their farmer 
members or keep it at the cooperative level, making it extremely 
beneficial to both.

The Section 199 deduction is limited to the lesser of 9 percent of 
adjusted gross income or domestic production activities income or 50 
percent of wages paid to produce such income. Reducing or eliminating 
the domestic activities deduction would result in a significant 
increase in taxable income for all farms that currently employ non-
family labor. On the other hand, the benefit of the deduction would 
increase if agricultural producers were able to count non-cash wages 
paid, such as crop share payments of commodities.

The Section 199 deduction serves as both a domestic production and jobs 
creation incentive and has provided needed relief for producers in 
times when prices are depressed. Section 199 benefits are returned to 
the economy through job creation, increased spending on agricultural 
production, and increased spending in rural communities.

Thank you for your continued efforts in support of our nation's 
agricultural producers. We look forward to working with you on this 
important issue.

Respectfully,

Agricultural and Food Transporters 
Conference                          National Pork Producers Council
Agricultural Retailers Association  National Potato Council
American Farm Bureau Federation     National Renderers Association
American Mushroom Institute         National Sorghum Producers
American Sheep Industry Association Panhandle Peanut Growers 
                                    Association
American Soybean Association        Southwest Council of Agribusiness
American Sugarbeet Growers 
Association                         South East Dairy Farmers 
                                    Association
California Association of Winegrape 
Growers                             United Egg Producers
Cobank                              United Fresh Produce Association
National Barley Growers Association U.S. Canola Association
National Cattlemen's Beef 
Association                         U.S. Rice Producers Association
National Corn Growers Association   U.S. Sweet Potato Council
National Cotton Council             USA Rice Federation
National Council of Farmer 
Cooperatives                        Western Growers
National Milk Producers Federation  Western Peanut Growers Association
National Peach Council              Western United Dairymen

                                 ______
                                 

                           September 19, 2017

The Honorable Orrin G. Hatch        The Honorable Ron Wyden
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510                Washington, DC 20510

Dear Chairman Hatch and Ranking Member Wyden:

America's farmers and ranchers rely on various tax code provisions to 
survive the constant financial and economic ups and downs that come 
with farming and ranching. The undersigned agricultural groups ask for 
your robust support of these critical provisions that ensure their 
long-term financial well-being.

Cash accounting allows farmers and ranchers to improve cash flow by 
recognizing income when it is received and recording expenses when they 
are paid. This provides the flexibility needed to plan for future 
business investments and in many cases provides guaranteed availability 
of agricultural inputs. Loss of cash accounting would create a 
situation where a farmer or rancher would have to pay taxes on income 
before receiving payment for sold commodities.

Like-kind exchanges help farmers and ranchers operate more efficient 
businesses by allowing them to defer taxes when they sell land, 
buildings, equipment, and livestock or purchase replacement property. 
Without like-kind exchanges some farmers and ranchers would need to 
incur debt in order to continue their farm or ranch businesses or, 
worse yet, delay mandatory improvements to maintain the financial 
viability of their farm or ranch business.

Farm and ranch businesses operate in a constant world of uncertainty 
with ongoing expenses and a fluctuating income. Income averaging, which 
permits revenue to be averaged over 3 years, allows farmers and 
ranchers to level out their tax liability and produces a more 
dependable and consistent revenue stream that aids financial 
management.

As Congress moves forward with its tax reform proposals and debate, we 
urge your support for these important tax provisions. Thank you for 
your continued efforts to support our nation's farmers and ranchers 
whose work allows us to enjoy the safest, most abundant and affordable 
food supply in the world. We look forward to working with you on these 
important issues.

Sincerely,

Agricultural and Food Transporters 
Conference                          National Potato Council
Agricultural Retailers Association  National Renderers Association
American Farm Bureau Federation     National Sorghum Producers
American Mushroom Institute         Panhandle Peanut Growers 
                                    Association
American Sheep Industry Association Southwest Council of Agribusiness
American Soybean Association        South East Dairy Farmers 
                                    Association
American Sugarbeet Growers 
Association                         United Egg Producers
California Association of Winegrape 
Growers                             United Fresh Produce Association
Cobank                              U.S. Apple Association
National Barley Growers Association U.S. Canola Association
National Cattlemen's Beef 
Association                         U.S. Rice Producers Association
National Corn Growers Association   U.S. Sweet Potato Council
National Cotton Council             USA Rice Federation
National Council of Farmer 
Cooperatives                        Western Growers
National Peach Council              Western Peanut Growers Association
National Pork Producers Council     Western United Dairymen

                                 ______
                                 

                           September 19, 2017

The Honorable Orrin G. Hatch        The Honorable Ron Wyden
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510                Washington, DC 20510

Dear Chairman Hatch and Ranking Member Wyden:

The undersigned agricultural organizations urge your support for 
several tax provisions related to renewable energy and environmental 
mitigation as part of any broader tax reform plan taken up by Congress.

U.S. farmers and ranchers and the companies that process agricultural 
products provide food, feed, fiber, and fuel for our nation and the 
world. Like all businesses, we must continue to innovate, establish new 
markets, and improve efficiency to remain viable and competitive in 
today's global market. Whether it is to help reduce regulatory 
compliance costs or to incentivize renewable energy and conservation 
benefits, there are a number of tax provisions that have been 
implemented or proposed for agricultural products and practices.

In recent years, regulators have applied increasing pressure on the 
agriculture sector to reduce output of nutrients like nitrogen and 
phosphorus to improve water quality in various watersheds around the 
country, from the Chesapeake Bay to the Great Lakes region. To help 
solve this problem, tax-writers in Congress have introduced bipartisan 
legislation to spur adoption and help cover the upfront capital costs 
of nutrient recovery technologies, as well as biogas systems that 
mitigate the environmental impacts of farming by transforming manure 
into stable fertilizer for crops, bedding for cows, and fuel and 
electricity for farms and nearby homes.

Tax incentives, such as the biodiesel tax credit, have also existed to 
support renewable energy and fuel derived from agricultural feedstocks, 
including animal fats. These renewable energy sources help diversify 
our fuel supply, establish new markets and add value to farm products, 
create jobs, and boost economic development, particularly in rural 
America. U.S. biodiesel producers have unused production capacity that 
stands ready to be utilized. Putting that capacity to work will 
encourage further market growth for agricultural products and create 
thousands of new jobs and billions of dollars in economic activity.

As you move forward with tax proposals, U.S. farmers and ranchers 
support the inclusion of these tax provisions that help our businesses 
meet regulatory requirements, provide conservation benefits and 
incentivize renewable energy production. Thank you for your continued 
efforts in support of our nation's farmers and ranchers. We look 
forward to working with you as the process on tax reform continues.

Respectfully,

Agricultural and Food Transporters 
Conference                          National Renderers Association
Agricultural Retailers Association  Panhandle Peanut Growers 
                                    Association
American Farm Bureau Federation     Southwest Council of Agribusiness
American Mushroom Institute         South East Dairy Farmers 
                                    Association
American Sheep Industry Association United Egg Producers
American Soybean Association        United Fresh Produce Association
American Sugarbeet Growers 
Association                         U.S. Canola Association
Cobank                              U.S. Rice Producers Association
National Barley Growers Association U.S. Sweet Potato Council
National Corn Growers Association   USA Rice Federation
National Council of Farmer 
Cooperatives                        Western Growers
National Milk Producers Federation  Western Peanut Growers Association
National Peach Council              Western United Dairymen
National Pork Producers Council

                                 ______
                                 

                           September 19, 2017

The Honorable Orrin G. Hatch        The Honorable Ron Wyden
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510                Washington, DC 20510

Dear Chairman Hatch and Ranking Member Wyden:

On behalf of the nation's farmers and ranchers, the organizations 
listed below are writing today regarding one of our priorities for 
federal tax reform: a reduction in capital gains taxes.

Capital gains taxes have a significant impact on production agriculture 
and producers' long-term investments in land, breeding livestock and 
buildings. We believe a reduction of the tax rate on capital gains and 
assets indexed for inflation would enable producers to better respond 
to new market opportunities and facilitate the transfer of land to 
young and beginning farmers.

Taxation for capital gains upon the sale of farm assets creates a 
number of problems, particularly when an asset sale causes a sharp 
transitory spike in income that pushes farmers and ranchers into a 
higher than usual tax bracket. USDA has found that 40 percent of family 
farms have reported some capital gains or losses, compared to 13.6 
percent for an average individual taxpayer.

Another problem is the ``lock-in'' effect where the higher the capital 
gains tax rate, the greater disincentive to sell property or 
alternatively to raise the asking price. in today's agriculture 
economy, starting a farm or ranch requires a large investment due to 
the capital-intensive nature of agri-business, with land and buildings 
typically accounting for 79 percent of farm and ranch assets. Given the 
barrier created by the capital gains tax, landowners are discouraged to 
sell, making it even more difficult for new farmers to acquire land and 
agriculture producers who want to purchase land to expand their 
business to include a son or daughter. This lose-lose scenario also 
interferes with capital that would otherwise spur new and more 
profitable investments.

At a time of heightened financial stress in our agriculture economy, it 
is more critical now for farmers and ranchers to have the flexibility 
to change their operations to respond to consumer demand in an 
increasingly dynamic market. Because of the capital gains taxes imposed 
when buildings, breeding livestock, farmland and agricultural 
conservation easements are sold, the higher the tax rate the more 
difficult it is for producers to cast off unneeded assets to generate 
revenue, upgrade their operations and adapt to changing markets.

As you continue your work on legislation to reform the tax code, we 
urge you to carefully consider our recommendations to address these 
concerns regarding the inadequacies and inefficiencies of current 
capital gains tax provisions. We acknowledge the extremely complex task 
of crafting legislation to adopt comprehensive tax reform and 
appreciate your support of America's farmers and ranchers.

Sincerely,

Agricultural and Food Transporters 
Conference                          National Corn Growers Association
Agricultural Retailers Association  National Cotton Council
American Farm Bureau Federation     National Council of Farmer 
                                    Cooperatives
American Farmland Trust             National Milk Producers Federation
American Mushroom Institute         National Peach Council
American Sheep Industry Association National Pork Producers Council
American Soybean Association        National Potato Council
American Sugarbeet Growers 
Association                         National Renderers Association
California Association of Winegrape 
Growers                             National Sorghum Producers
Cobank                              Panhandle Peanut Growers 
                                    Association
National Barley Growers Association Southwest Council of Agribusiness
National Cattlemen's Beef 
Association                         South East Dairy Farmers 
                                    Association
United Egg Producers                U.S. Sweet Potato Council
United Fresh Produce Association    USA Rice Federation
U.S. Apple Association              Western Growers
U.S. Canola Association             Western Peanut Growers Association
U.S. Rice Producers Association     Western United Dairymen

                                 ______
                                 

                           September 19, 2017

The Honorable Orrin G. Hatch        The Honorable Ron Wyden
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510                Washington, DC 20510

Dear Chairman Hatch and Ranking Member Wyden:

On behalf of our nation's family farmers and ranchers, the undersigned 
groups would like to thank you for your efforts to reform the U.S. tax 
code in a meaningful way for individuals, corporations, and small 
businesses alike, including the 3.2 million farmers who generate food, 
fuel, and fiber for Americans and people around the world. With that in 
mind, we write today to express our concerns regarding the House 
Committee on Ways and Means blueprint proposal to eliminate the 
deduction for interest payments as a business expense.

Agricultural production is capital-intensive. While financing 
requirements will vary among the different commodities, the majority of 
family-owned farming operations are heavily reliant on credit. Even for 
everyday business, agricultural producers utilize credit in the form of 
operating and inventory loans. According to the United States 
Department of Agriculture (USDA), net farm income in 2017 is forecast 
to decline for the fourth consecutive year by 8.7 percent to $62.3 
billion. In a weak farm economy, income is restricted to cover family 
farmers' living expenses and the repayment of debt. During tough times, 
producers are often forced to take on substantial annual interest 
expense. Interest paid on these loans should be deductible because 
interest is, and has historically been, considered a legitimate 
business expense.

In addition, family farmers continue to grow their operations in order 
to remain profitable. Equipment and land acquisition necessary for 
long-term expansion is only possible through financing. USDA predicts 
that in 2017, farm real estate debt will reach a historic high of 
$240.7 billion, a 5.2 percent increase from 2016. Eliminating the 
interest deduction will place further financial stress on an already 
debt-burdened industry, and prevent producers from staying profitable 
in challenging economic times.

Finally, the need for debt financing is particularly important for the 
next generation of agricultural producers. Less than 2 percent of the 
U.S. population is directly employed in agriculture. Consistent with a 
30-year trend, the average age of principal farm operators is 58, 
making farmers and ranchers among the oldest workers in the nation. As 
older producers exit the workforce, financing will be critically 
important for new and beginning farmers and ranchers looking to 
establish businesses. Eliminating interest deductions creates a 
significant barrier for the next generation.

As Congress works to enact comprehensive tax legislation, the positive 
reforms made should not be undermined by negative, unintended 
consequences as a result of eliminating the business interest deduction 
for agricultural entities. It is our hope that future legislative 
proposals do not ignore this important sector of the nation's economy, 
and that they will consider the unique utilization and importance of 
credit management across the entire agriculture sector.

Thank you for your continued efforts in support of our nation's 
agricultural producers. We look forward to working with you on this 
important issue.

Respectfully,

Agricultural and Food Transporters 
Conference                          National Barley Growers Association
Agricultural Retailers Association  National Cattlemen's Beef 
                                    Association
American Farm Bureau Federation     National Corn Growers Association
American Mushroom Institute         National Cotton Council
American Sheep Industry Association National Council of Farmer 
                                    Cooperatives
American Soybean Association        National Peach Council
American Sugarbeet Growers 
Association                         National Pork Producers Council
California Association of Winegrape 
Growers                             National Potato Council
Cobank                              National Renderers Association
Farm Credit Council                 National Sorghum Producers
Panhandle Peanut Growers 
Association                         U.S. Rice Producers Association
Southwest Council of Agribusiness   U.S. Sweet Potato Council
South East Dairy Farmers 
Association                         USA Rice Federation
United Egg Producers                Western Growers
United Fresh Produce Association    Western Peanut Growers Association
U.S. Apple Association              Western United Dairymen
U.S. Canola Association

                                 ______
                                 

                           September 19, 2017

The Honorable Orrin G. Hatch        The Honorable Ron Wyden
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510                Washington, DC 20510

Dear Chairman Hatch and Ranking Member Wyden:

On behalf of our nation's family farmers and ranchers, we come together 
now to ask your support for including permanent repeal of the estate 
tax in any tax reform legislation moving through Congress this year. In 
addition, we ask your help to make sure that the benefits of repeal are 
not eroded by the elimination of or restrictions to the use of the 
stepped-up basis.

Family farmers and ranchers are not only the caretakers of our nation's 
rural lands but they are also small businesses. The estate tax is 
especially damaging to agriculture because we are a land-based, 
capital-intensive industry with few options for paying estate taxes 
when they come due. Unfortunately, all too often at the time of death, 
farming and ranching families are forced to sell off land, farm 
equipment, parts of the operation or take out loans to pay off tax 
liabilities and attorney's fees.

As you know, the American Taxpayer Relief Act of 2012 (ATRA) 
permanently extended the estate tax exemption level to $5 million per 
person/$10 million per couple indexed for inflation, and maintained 
stepped up basis. While we are grateful for the relief provided by the 
ATRA, the current state of our economy, combined with the uncertain 
nature of our business has left many agricultural producers guessing 
about their ability to plan for estate tax liabilities and unable to 
make prudent business decisions. Until the estate tax is fully repealed 
it will continue to threaten the economic viability of family farms and 
ranches, as well as the rural communities and businesses that 
agriculture supports.

In addition to full repeal of the estate tax, we believe it is equally 
as important for Congress to preserve policies which help keep farm 
businesses in-tact and families in agriculture. As such, tax reform 
must maintain stepped-up basis, which limits the amount of property 
value appreciation that is subject to capital gains taxes if the 
inherited assets are sold. Because farmland typically is held by one 
owner for several decades, setting the basis on the value of the farm 
on the date of the owner's death under stepped-up basis is an important 
tax provision for surviving family members.

U.S. farmers and ranchers understand and appreciate the role of taxes 
in maintaining and imp roving our nation; however, the most effective 
tax code is a fair one. For this reason, we respectfully request that 
any tax reform legislation considered in Congress will strengthen the 
business climate for farm and ranch families while ensuring 
agricultural businesses can be passed to future generations.

Thank you for your continued efforts in support of our nation's 
agricultural producers. We look forward to working with you on this 
very important issue.

Respectfully,

Agricultural and Food Transporters 
Conference                          National Milk Producers Federation
Agricultural Retailers Association  National Peach Council
American Farm Bureau Federation     National Pork Producers Council
American Sheep Industry Association National Potato Council
American Soybean Association        National Renderers Association
American Sugarbeet Growers 
Association                         National Sorghum Producers
Livestock Marketing Association     National Turkey Federation
National Association of State 
Departments of Agriculture          Panhandle Peanut Growers 
                                    Association
National Barley Growers Association South East Dairy Farmers 
                                    Association
National Cattlemen's Beef 
Association                         Southwest Council of Agribusiness
National Cotton Council             U.S. Apple Association
National Council of Farmer 
Cooperatives                        U.S. Canola Association
U.S. Sweet Potato Council           U.S. Rice Producers Association
United Egg Producers                Western Growers
United Fresh Produce Association    Western Peanut Growers Association
USA Rice Federation                 Western United Dairymen

                                 ______
                                 
                Tax Innovation Equality (TIE) Coalition

                          Washington, DC 20005

                         [email protected]

                         202-530-4808 ext. 109

The Tax Innovation Equality (TIE) Coalition\1\ is pleased to provide 
this statement for the record of the Finance Committee's hearing on 
Business Tax Reform. The TIE Coalition comprises leading U.S. 
technology and bio-pharma companies that rely on and invest in 
intellectual property and intangible assets. Such investments help make 
companies innovative, successful, and globally competitive. The TIE 
Coalition supports comprehensive tax reform that will modernize the 
U.S. tax system and help American businesses compete in a global 
market. The TIE Coalition believes that the U.S. must: (i) implement a 
competitive territorial tax system; (ii) lower the U.S. corporate tax 
rate to a globally competitive level; and (iii) not pick winners and 
losers in the tax code by discriminating against any particular 
industry or type of income--including income from intangible property 
(IP).
---------------------------------------------------------------------------
    \1\ The TIE Coalition is comprised of leading American companies 
and trade associations that drive economic growth here at home and 
globally through innovative technology and biopharmaceutical products. 
For more information, please visit www.tiecoalition.com.

Unfortunately, some past proposals would tax IP income adversely 
compared to income from other types of assets, creating an unfair 
advantage for companies who don't derive their income from IP, and 
significantly disadvantaging innovative U.S. companies, especially 
compared to their foreign competition. For example, the Tax Reform Act 
of 2014 (H.R. 1) as introduced by former House Ways and Means Chairman 
Camp would seriously disadvantage innovative American companies. Under 
that proposal, Chairman Camp chose the anti-base erosion option known 
as ``Option C.'' The problem with ``Option C'' is that it would 
significantly disadvantage U.S. IP-based companies who compete globally 
and it would result in more inversions of U.S. companies and more 
foreign acquisitions of U.S. companies. The TIE Coalition is opposed to 
``Option C'' because it would have a devastating impact on both 
innovative technology companies and the nation's leading 
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biopharmaceutical companies.

Section 4211 of H.R.1 specifically targets ``foreign base company 
intangible income'' for higher taxation by creating a new system in 
which that income will be immediately taxed in the United States at 
much higher rates (15% or 25%) rather than the 1.25% tax rate for all 
other foreign income, which is only taxed upon distribution back to the 
United States. The provision does not provide a definition of an 
intangible asset. Instead it uses a formula which essentially provides 
that if a company earns more than a 10% return on its foreign 
depreciable assets, the income over the 10% threshold will be 
considered ``intangible income'' and subject to the higher immediate 
U.S. tax. Many innovative companies have higher margins and earn more 
than 10% on their depreciable assets, so they will be 
disproportionately affected by this adverse provision.

To understand the full scope of ``Option C,'' the TIE Coalition 
commissioned a study by Matthew Slaughter, the Dean of the Tuck School 
of Business at Dartmouth. See, ``Why Tax Reform Should Support 
Intangible Property in the U.S. Economy,'' by Matthew J. Slaughter, 
http://www.tiecoalition.com/wp-content/uploads/2015/07/IP-White-
Paper_January-2015.pdf. According to the study, ``Policymakers should 
understand the long-standing and increasingly important contributions 
that IP makes to American jobs and American standards of living--and 
should understand the value of a tax system that encourages the 
development of IP by American companies'' (Executive Summary).

The study found that ``Option C'' in the Camp legislation would 
fundamentally (and adversely) change the measurement and tax treatment 
of IP income earned by American companies abroad and would disadvantage 
IP income earned abroad by U.S. companies in three ways. First, it 
would tax IP income at a higher rate than under current law. Second, it 
would tax IP income more than other types of business income. Third, it 
would impose a higher tax burden on the IP income of U.S. companies 
compared to their foreign competitors. As a result, the study found 
that ``Option C'' ``would aggravate the nettlesome issue of corporate 
inversions and would create additional incentives for foreign 
acquisitions of U.S.-based IP-intensive companies'' (Executive 
Summary).

According to the Slaughter study, since globally engaged U.S. companies 
have long performed the large majority of American's IP discovery and 
development, it is increasingly important to America's economic success 
that these companies operate profitably overseas. The Slaughter study 
finds that the ``United States, not abroad, is where U.S. 
multinationals perform the large majority of their operations. Indeed, 
this U.S. concentration is especially pronounced for R&D, which 
reflects America's underlying strengths of skilled workers and legal 
protections such as IP rights that together are the foundation of 
America's IP strengths, as discussed earlier'' (page 30). The Slaughter 
study concludes that the overseas operations of these companies 
complement their U.S. activities and support, not reduce, the inventive 
efforts, related jobs, and positive economic impact of their U.S. 
parents on the U.S. economy.

In addition to ``Option C,'' other international tax reform proposals 
have singled out income from IP for adverse treatment. In 2012, Senator 
Michael Enzi (D-WY) introduced an international tax reform bill, S. 
2091. While the Enzi bill did not propose lowering the corporate tax 
rate, it did propose a territorial system with a 95% dividends received 
deduction (DRD) for qualified foreign-source dividends. Unfortunately, 
while the bill reduced the scope of the current law Subpart F regime in 
some respects (by eliminating the current foreign base company sales 
and services income rules under Section 954), it proposed creating a 
new category of Subpart F income under which all income of a controlled 
foreign corporation (CFC) would be immediately taxable in the U.S. at 
the full U.S. rate unless the CFC's effective tax rate (ETR) exceeded 
half of the maximum U.S. corporate rate. Under Senator Enzi's bill, the 
ETR in the foreign country would have to be more than 17.5% to qualify 
for territorial tax treatment with a 95% DRD and avoid immediate 
taxation at the maximum U.S. tax rate.

However, ``qualified business income'' (as defined in the bill) would 
be excluded from this punitive tax treatment and qualify for the 95% 
DRD. But, ``qualified business income'' specifically would not include 
``intangible income'' as defined in Section 936(h)(3)(B). As such, 
Senator Enzi's proposal effectively repeals deferral for intangible 
income earned by CFC's and denies territorial tax treatment with the 
95% DRD for intangible income, clearly discriminating against income 
from intangible assets. In addition to discriminating against income 
from intangible assets, the Enzi bill would result in significant 
additional disputes between the IRS and taxpayers regarding whether 
income is from intangible property as broadly defined in Section 
936(h)(3)(B) and if so, how much of that income is attributable to 
intangible property.

In designing a competitive territorial tax regime, both Congressman 
Camp and Senator Enzi decided that anti-base erosion provisions needed 
to be included to protect the U.S. tax base, but they both chose 
options that discriminate against IP income. The TIE Coalition has 
offered several anti-base erosion proposals that do not discriminate 
against income from intangibles. Two anti-base erosion measures that we 
could support are ``Option D'' and ``Option RS.'' If base erosion is a 
concern, it is a concern for all income, not just income from 
intangibles.

``Option D'' proposes a territorial system with a graduated DRD based 
upon the effective tax rate paid by the CFC. The general rule of a 95% 
DRD would apply to foreign source dividends paid from a CFC that has an 
effective tax rate equal to or greater than 15%. But if the effective 
tax rate of the CFC is less than 15%, the DRD exemption would be 
reduced using a simple sliding scale. Under ``Option D,'' if the CFC 
tax rate is at least 7.5% but less than 15%, the DRD would drop to 85%. 
If the CFC effective tax rate is less than 7.5%, the DRD would be 75%. 
If the CFC effective tax rate is less than 7.5% and the CFC is 
domiciled in a jurisdiction that does not have a tax treaty/possession 
status/TIEA (or similar relationship) with the United States, the DRD 
would be 60%. All low-tax active foreign income is treated similarly. 
Income from intangibles is not singled out for especially harsh 
treatment.

Under ``Option RS,'' low-taxed foreign income of a CFC would be subject 
to immediate U.S. tax unless it is derived from a substantial local 
business in the foreign jurisdiction where the income is reported and 
subject to tax in that jurisdiction. Income would be considered low 
taxed if the foreign effective tax rate (ETR) is 15% or less. The 
substantial local business activity test would be met if all three of 
the following tests are met: (1) the income is derived in the active 
conduct of a trade or business in the foreign country; (2) substantial 
local activities are conducted in the foreign jurisdiction; and (3) the 
income is treated as taxable in the foreign country.

In conclusion, the TIE Coalition supports comprehensive tax reform that 
modernizes the U.S. tax system, allowing American businesses to compete 
in global markets in a manner that does not discriminate against any 
particular industry or type of income, including income from intangible 
property. At a time when many other countries are adopting tax rules 
designed to attract IP companies to their shores, it would be 
especially harmful to the U.S. economy to adopt a tax policy that will 
hurt, not help, American IP companies who compete globally. Now is not 
the time to drive high paying American jobs overseas.

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