WOTC MAY BE POISED TO BECOME PERMANENT

CONGRESS TO TAKE UP TAX REFORM IN SEPTEMBER
WOTC MAY BE POISED TO BECOME PERMANENT

With the Senate appearing to table Healthcare reform for the foreseeable future, Congress is now preparing to move on to tax reform as the next item on their agenda. Negotiators for the Administration and Congressional Republicans appear to be reaching some common ground as to the broad structure of an agreement on both the basic components of a reform plan and the timing and method of moving forward.

By the time Congress returns from the summer recess the plan is to have the tax reform outline ready for release to the Congress and to the public. The expectation is that the plan will not be in legislative form nor is expected to cover all aspects of tax reform. The legislative drafting will be left to the staffs of the tax writing committees and the Joint Committee on Taxation. Given the goal of enacting tax reform by the end of 2017 some of the legislative drafting is expected to take place during the summer recess.

There is not yet a consensus on the new direction for tax reform, even among Republicans. The current cornerstone of a reformed tax system as advocated by Ways and Means Chairman Brady is the addition of a Border Adjustment Tax (BAT), which is strongly opposed by Retailers and other verticals and does not appear to have much support among Republicans in the Senate. Because of the enormous complexity of any major overhaul of the tax system, any legislation that is enacted will also likely be phased in over a number of years.

What appears to be certain is that the 15% corporate tax rate advocated by the White House is not reachable, and that the current thinking is to get any new rate as close to 20% as possible. In light of the difficulty Congress will face in reducing Federal expenditures, one of the main ways that Congress believes that it can get to a lower tax rate is to eliminate as many ‘tax expenditures’ (tax credits) as possible. One of the elements in the march to tax reform will be a though review of all existing tax credits with a goal of sunsetting those not worth keeping and making surviving ones permanent.

One of the few items that almost all Republicans, Democrats, House Members and Senators agree on is that the uncertainty caused by the temporary nature of worthwhile tax credits diminishes the good that they do.

WOTC is one of the existing tax credits that is positioned to be made permanent under tax reform. For several years, Mckenzie Chase Management – and its team of WOTC advocates – have been circulating the findings of a study performed by Wharton School Labor Economist Peter Cappelli. His study documents that over a 10 year period, the Federal and State governments save over $184 billion dollars in entitlement costs by putting people who have not been in the workforce to work through WOTC. Most recently, his findings were submitted to Republican Senate Finance Committee Chairman Orin Hatch. It is widely accepted across bipartisan lines that the savings from WOTC far outweigh the cost of the tax credit dollars that it costs, however, the impact of this truth is hampered by the fact that the current rules for ‘scoring’ costs by the Congressional Budget Office only looks at direct costs/savings at the entry point, and not at any savings achieved by other government agencies that result.

However, at the end of the day, tax reform could prove to be just as difficult as healthcare reform. There will be a large number of constituencies who will be lobbying for and against features, and re-arranging all of the moving parts may turn out to be too daunting. And, because healthcare dragged on much longer than anticipated, there is a short window to achieve results in 2017, and the general consensus is that it is too much to expect that enactment of legislation of this magnitude is likely in 2018, a mid-term election year with all 435 House seats and one-third of the Senate up for re-election. Even if reform gets to the finish line, with a likely multi-year phase in of the new and phase out of the old, once the ink dries on the bill you can expect feverish lobbying on behalf of issues wishing to avoid the sunset.

So what is the bottom line for WOTC? At the very least, WOTC will remain in effect through its current date of December 31, 2019, almost a year and a half from now. If tax reform fails, we probably fall into the 20+ year pattern of finding an extension once Congress agrees on a legislative vehicle. And if tax reform succeeds, there is better than a punchers chance that WOTC becomes a permanent feature of the tax code.

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