David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Worldwide Tax Daily. This week — the Tax Cuts and Jobs Act, six months later. President Trump signed the Tax Cuts and Jobs Act on December 22nd, 2017, saying that the law would be a boon for the economy. Now that the law has been in effect for a little while, I'm joined by Tax Notes Today Editor in Chief Brett Ferguson to talk about where things stand. Brett, welcome back to the podcast.
Brett Ferguson: Good morning, Dave.
David Stewart: Has the TCJA lived up to its promises?
Brett Ferguson: It depends on your situation. There's no question and that the tax cut was big for the vast majority of people and businesses. It's going to make tax filing a lot easier for both individuals. But if you run your own business, there's a lot of outstanding questions about who can use this new section 199A passthrough deduction. And that's going to complicate tax planning for the year.
Remember, we're already halfway through the year, and with the 199A regs expected to come out any day now, there's going to be a lot of planning going ahead still, and people are trying to sort that out. I mean, among the questions that they have is, who even qualifies for the deduction? It all depends on what kind of business you are, what kind of work you're in, how much you earn, and that's going to raise a lot of issues for people. And since we're already halfway through the tax year, there's going to be some planning that has to happen on the back end to kind of adjust things for what they’ve already done for the first half of the year.
For corporations, they got a big tax cut, but for multinationals, provisions are meant to prevent profit shifting, and that's going to raise some complicated issues for some of those companies because they're just kind of stuck in a holding pattern while they're trying to figure out how these provisions affect them, and how it kind of interacts with the rest of the code and other issues throughout their operations across the world.
Right now, we're still waiting on a lot of guidance from the IRS, and they’re expected to answer most of the big questions, if not all of it, by the end of the year. But most people think that this is going to go on for at least a couple of years because there's just so many complicated elements of this law that it's going to take a couple of years to really sort out what all of it means.
David Stewart: We're not going to get too deep into the politics of this all, but we can't ignore the elephant and/or donkey in the room. This is an election year after all.
Brett Ferguson: Yeah, absolutely. Both Republicans and Democrats are still trying to feel things out in how they approach this topic in discussing it with voters. For Republicans, it’s clearly a big win, but they understand that not everyone is feeling the positive effects yet. And they're trained to emphasize how the bill is putting more money in voters’ pockets. One example that Steve Cooper got for Tax Notes Today: Representative Kenny Marchant, who is representing an area outside Dallas, and he noticed that a number of the constituents in his area are salaried workers who tend to notice every little change in their paychecks because of the consistency. Wage-earning workers, on the other hand, tend to not notice those changes. And so, one thing that he and other Republicans are trying to do is really emphasize that the increase is already being seen in those paychecks and really trying to drive that point home to hourly wage workers.
For Democrats, the strategy is a little more complicated. They're highlighting the tax cuts as being mainly a benefit for the biggest corporations and for high-income households, but they're also being very careful to not try to paint them as entirely a bad thing. And they're really focused right now on what can we explain to people in terms of how these could have been better. And for example, Representative Richard Neal, the ranking member of the House Ways and Means Committee, has said that one of their focuses is going to be on trying to show that these tax cuts were mainly for high-income people and corporations. And their strategy is going to be to not focus on repeal-and-replace like Republicans did with the Affordable Care Act, but instead, how they can fix some of the inconsistencies and problems in the law, and especially focus on the state and local tax deduction, which has been a big issue for especially Democrats on the coast because of high tax rates there.
David Stewart: Let's talk a little bit more about the corporate side, because a big promise of this bill was it would free companies to invest more in the United States and boost hiring. What's happening there?
Brett Ferguson: Well, that's one of the biggest questions in the first six months since the bill was enacted. There is no debate that companies are paying less in tax, and companies are hiring. The question that we have, though, is how much of that hiring is a result of the tax cuts? And economists say the data so far is inconclusive. It's going to be very hard to figure out whether this is hiring that was already occurring or was going to happen anyway, and if the tax cuts have anything to do with that. And there's plenty of data that show it's really up in the air right now as to how that's working. I think one of the areas that we did a nice job on is a story on the mergers and acquisitions side that shows the cross-border activity and overall deal volume has actually fallen in the first six months of the new law. There's a lot of reasons why that could be happening, and we went into some good detail all about that. But it doesn't fit with the narrative that the backers of the tax cuts have been pushing.
David Stewart: Have there been any other unintended consequences of the bill?
Brett Ferguson: There's a few items in the package that were meant to help, but they've created a little unease for some people. One is the exemption levels for the estate tax. That's going to be a big help for families that have an estate valued at — for at least on the individual side — $5 to $10 million, give or take a few with inflation adjustments. But if the owner dies before 2026, when the higher threshold expires, that's when you get the benefit. If you don't die in the next eight years, it doesn't mean much to you. And that creates some problems for estate planners. Another issue for some of the estate planners is whether any of the large gifts that people could give their family on this law will be subject to a clawback provision once it expires. People are still waiting on IRS to provide that guidance. And so, a great deal of uncertainty about what to do. In the meantime, estate planners are staying very busy trying to make adjustments for their clients. But it's all work that could have to be redone in the next few years.
And again, it's kind of a hard thing to do. How do you make an entire plan based on the idea that you might be dead in the next eight years? And if you're not, you have to create an entirely new estate tax plan.
On the business side, there's also a provision that allows private company employees to defer taxes on stock options. It's actually left companies, though, with a sense of dread that they're going to be forced to use it. To qualify for the break, stock options must be available to 80 percent of the company's employees, and the requirements are so restrictive that tax advisers are seeing very little interest in using the provision.
David Stewart: Where can listeners learn more about all this?
Brett Ferguson: We have a great package in the June 25th editions of all the Tax Notes publications. The package includes stories from our Capitol Hill team led by Stephen Cooper, Ryan Finley, and Amanda Athanasiou of Worldwide Tax Daily. Jonathan Curry and Stephanie Cumings of Tax Notes Today, and Amy Hamilton and Jad Chamseddine of State Tax Today.
David Stewart: Excellent. Thank you for being here.
Brett Ferguson: Thank you, Dave.
David Stewart: That's it for this week. You can follow me on Twitter @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. Be sure to subscribe to us on iTunes or Google Play, to make sure you get the next episode of Tax Notes Talk.
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