Business Tax Professionals Predict Tax Reform in Next Several Years

WASHINGTON - Business tax professionals expect tax reform in the next several years, with 2017 being the most likely year for enactment, the latest Tax Reform Business Barometer from The Tax Council and Ernst & Young LLP found.

The Barometer is based on a survey completed by 111 leading U.S. tax executives and practitioners between Sept. 29 and Oct. 8. The respondents were asked about their views on the likelihood of different stages and elements of tax reform, which was defined as "legislation that substantially broadens the tax base or changes the tax rate for either corporate or individual taxpayers."

Business tax professionals gave a 74% average likelihood that tax reform will happen in 2018 or earlier, and they expect a greater chance of tax-reform enactment in the first two years of the next presidency than in President Obama's final two years in office. These findings are similar to the Barometer from March of this year, according to a report on the survey from TTC and EY.

On average, the professionals gave a 27% likelihood of tax-reform enactment in 2017, the highest percentage given for any single year, TTC and EY said.

Municipal market participants have been concerned about tax reform because it could curb or eliminate the tax exemption for municipal bonds. One recent tax-reform proposal -- from outgoing House Ways and Means Chairman Dave Camp, R-Mich. - would essentially cap the value of the tax exemption at 25% and would eliminate the ability to issue tax-exempt private activity bonds after 2014. President Obama has proposed in his fiscal 2015 budget to cap the value of the tax exemption at 28%.

The professionals were also asked about their thoughts on the chances of different congressional actions happening by the end of 2015. The median responses on House actions were a 50% likelihood that the incoming House Ways and Means Committee chairman will release a tax-reform proposal, a 40% likelihood that the committee starts to consider legislation, a 25% likelihood that the committee would approve a bill, and a 20% likelihood that the full House would pass it.

The respondents said the Senate is less likely to put forth or pass tax-reform legislation than the House, giving median responses of a 48% likelihood that the Senate Finance Committee chairman will release a proposal, a 30% likelihood that the committee starts considering a bill, a 20% likelihood that legislation is approved by the committee, and only a 10% likelihood of the full Senate passing a bill.

Slightly more than half of the respondents expect a tax-reform bill to contain changes to both the individual and corporate tax systems. Roughly one-third of the respondents said they think reform will focus only on business tax changes that would affect both corporate income and income reported on individual tax returns from pass-through entities. Twelve percent predicted tax reform will only focus on corporate income taxes, TTC and EY said.

Muni and tax experts differ on how bonds would be affected by corporate-only tax reform. Some have said that munis would be unlikely to be affected, while others have suggested they could face some risk.

The Obama administration has been emphasizing a need for corporate tax reform recently because it argues reform is necessary to address the problem of corporate inversions in which U.S. companies merge with foreign business and then reincorporate in foreign business' country, primarily to lower their taxes. Among those who completed the Barometer, 63% responded that they believe tax reform is more likely because of the attention on inversions.

Democrats say tax reform should raise revenue while Republicans are pushing for a revenue-neutral approach. In the October Barometer, 64% of respondents said they think tax reform will be revenue neutral, a major change from the November 2013 version of the survey, when 60% of respondents reported thinking that tax reform will be revenue raising, TTC and EY said.

A number of tax provisions known as "extenders" expired at the end of last year. Several of the provisions are related to bonds, state and local governments and Puerto Rico, including new annual volume for qualified zone academy bonds, empowerment zone tax incentives, the deduction for state and local sales taxes, a deduction for domestic production activities in Puerto Rico, and the temporary increase in the limit on cover over of rum excise taxes in Puerto Rico and the Virgin Islands.

Seventy-three percent of respondents indicated they believe that if major expired tax provisions are extended in 2014, the extension will be through next year, according to the report.

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