Back to Government Affairs: Mobility and the U.S. Administration
22 May 2017
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Dear Worldwide ERC® Member:
In this Government Affairs Community Update, we are focusing on the North American Free Trade Agreement (NAFTA) and tax reform, with an indication of the impact on mobility for both items.
It’s essential that we continue to monitor critical events that affect our industry’s work, and we hope you will extend the learning by sharing our Government Affairs Community Updates with others in your company, and with your clients and colleagues. We’ll be back on June 5 with another Update.
Peggy Smith, SCRP, SGMS-T
Worldwide ERC® President and CEO
North American Free Trade Agreement
On May 18, the Trump Administration took the first step toward the U.S. entering into talks with Canada and Mexico to renegotiate the North American Free Trade Agreement (NAFTA). U.S. Trade Representative Robert Lighthizer sent letters to congressional leaders notifying Congress of the intent of the administration to initiate negotiations. The administration is required to give Congress a 90-day notification before discussions can begin. Negotiations on reopening NAFTA could therefore begin on August 16.
The notification allows the Trump Administration to use fast-track trade negotiating authority as sanctioned under the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA). Congress passed TPA to assist the then-Obama Administration on the U.S. entering into agreement on the Trans-Pacific Partnership (TPP) pact. That agreement, however, later met congressional resistance with President Trump officially pulling the U.S. out of the TPP through executive order on January 23.
The letter from Lighthizer does not provide many specifics on the objectives of the administration in the negotiations. The letter provides a general objective of seeking to “support higher-paying jobs in the United States and to grow the U.S. economy” in the new agreement. The letter does outline several areas to be addressed, like digital trade, which had just emerged as NAFTA was first negotiated; as well as areas with significant change and interest to Congress and voters such as labor and environment.
President Trump had named renegotiation of NAFTA as one of his top campaign trade platforms when running for office.
How this will impact mobility
Trade agreements between countries provide the opportunity for progress and expansion that augment what governments can achieve individually. Properly executed and supported, they can advance economic health and drive growth and development, which opens doors for talent mobility.
On May 18, the House Ways and Means Committee held its first hearing on tax reform proposals. The hearing addressed broad topics, rather than specific proposals, with testimony primarily from business groups.
Testimony from businesses, which included the American Made Coalition, a group of over 25 large manufacturers, supported the creation of an international tax system along the lines proposed in the House Republican Blueprint. However, businesses also advised the Committee to focus on revenue-neutral tax reform that would be permanent, arguing that temporary tax cuts would foster continuing business uncertainty and reduce the effectiveness of tax changes. A similar message was delivered by the Committee for a Responsible Federal Budget, which argued that deficit-financed tax cuts can be counterproductive, and recommended that tax changes be revenue-neutral, or even raise revenue. In the latter case, the excess should be devoted to reducing the federal budget deficits.
Democrats on the Committee focused on delivering tax relief to middle- and lower-income taxpayers, and also argued for revenue neutrality. They also took aim at whether large business tax cuts would actually create more jobs, citing studies that technological advances and automation would inevitably result in fewer jobs despite lower taxes.
Another topic that generated some debate was the proposed elimination of business interest expense deductions, which has become a flash point within the business community. Chairman Brady said that if interest is made nondeductible, the Committee is working on language to grandfather existing debt.
The Committee will hold another hearing on May 23, devoted to the proposed “border adjustment” tax regime proposed in the House Republican Blueprint. No hearings thereafter have yet been scheduled, nor has the Committee released any proposed legislative language or new suggestions beyond the Blueprint.
However, other sources continued to weigh in on specific topics.
For example, tax practitioners at an American Bar Association Tax Section program on employee benefits, citing sources among Congressional Republicans, said that the elimination of all pretax benefits from retirement plans is being discussed. There would be no exclusions or deductions for retirement plan contributions. Instead, all such plans would be treated like Roth IRAs, in which contributions are nondeductible but all distributions are nontaxable. Such a change would be highly controversial. And while it appears to raise a lot of revenue, much of the revenue lost from allowing upfront tax breaks is eventually recovered through taxing distributions.
Another new study from the Lilly Family School of Philanthropy at Indiana University suggests that the Administration and House Republican plans, although they promise to retain deductions for charitable contributions, would likely result in a reduction of those contributions by up to 4.7% for church congregations and up to 4.4% for other contributions. The reasons are that the suggested doubling of the standard deduction would reduce itemizers and likely their contributions, and that the lower tax rates would make such deductions less valuable for those who continue to itemize.
Finally, a new analysis from the Tax Policy Center (TPC), which is part of the Urban Institute & Brookings Institution, addresses the likely revenue results of Administration and House Republican plans to tax business income of pass-through businesses (sole proprietorships, partnerships, LLCs, S-Corporations) at 15% (Administration) or 25% (House Republicans) instead of at the individual tax rate of the recipient. The results depend on definitions of pass-through income, but according to the TPC, if such income is broadly defined, the 10-year cost at the 15% rate would be about $1.36 trillion, with a potential additional $580 billion loss due to some wage income being recharacterized as business income. At the 25% rate, the total revenue loss would be about $660 billion. However, if pass-through income is narrowly defined, the 10-year revenue loss is reduced to $1.04 trillion at a 15% rate, and to $410 billion at a 25% rate. These numbers illustrate that the debate over this provision will not be easy, and that there will need to be provisions, perhaps complicated, to reduce the shifting of income from wages to business income.
How this will impact mobility
As the details of possible tax changes emerge, potential effects on transferees and mobility-oriented businesses become clearer. Changes to retirement plan contributions would affect the recruitment of employees, as well as company benefits plans. Changes to interest deductibility would increase tax costs for many businesses in the mobility space that typically finance growth through borrowing. And a new regime for pass-through income would encourage attempts by employees to convert their status to independent contractors, with some resulting difficulties for employers.
Our next Government Affairs Community Update will be delivered to Worldwide ERC® members June 5, 2017. Previous Updates can be found here.