Moving beyond tax reform: 2019 tax policy outlook

The 2018 midterms and partial government shutdown illustrate the intensified ongoing disagreements between the political parties on how to address many issues, including tax policy, healthcare, immigration and the environment. A key challenge facing the new 116th Congress and President Trump will be whether bipartisan agreements can be reached to enact significant legislation with a Democrat-controlled House and a Republican-led Senate.

Important questions facing the business community. Are further changes to the tax code on the horizon? Will political polarization necessitate changes to your business? How will global trade developments affect other legislative priorities?

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What should businesses think about as they approach a divided government in the United States? PwC's Todd Metcalf, former Democratic Chief Tax Counsel at the Senate Finance Committee and Janice Mays, former Democratic Staff Director and Chief Counsel on the House Ways and Means Committee, discuss key takeaways from November's midterm elections and what companies can expect in 2019.

An in-depth discussion

Divided government

Following the November 6, 2018 midterm elections, Democrats secured a net gain of at least 40 seats to win control of the US House of Representatives in the 116th Congress, while Republicans increased their majority in the US Senate by two seats. The First Session of the 116th Congress begins with 235 Democrats and 199 Republicans in the House, with North Carolina undecided. In the Senate, there are 53 Republicans and 47 Democrats (including the two Independents who caucus with Senate Democrats).

Looking ahead to the 2020 elections, all 435 seats in the House are up for election, with 34 Senate seats up for re-election. The Senate map for the 2020 elections is much more favorable to Democrats than it was for the 2018 midterm elections, when 10 Democrats ran in states won by President Trump.

Competitiveness of US systems

The US tax reforms enacted in 2017 contain key elements intended to promote stronger economic growth, including individual tax cuts and a globally competitive corporate tax rate with incentives for capital investment. The reforms also signaled a movement towards a territorial system of international taxation with anti-base erosion measures, accompanied by the unlocking of foreign cash with a mandatory deemed repatriation of unrepatriated foreign profits.

In recent years, a general bipartisan consensus developed that the US corporate tax rate needed to be lowered to a more competitive level, in line with other major economies. While some Democrats oppose any corporate rate reduction, House Ways and Means Committee Chairman Neal previously expressed support for a corporate rate reduction that would be fiscally responsible, and Senate Finance Ranking Member Wyden (prior to the 2017 act) introduced comprehensive tax reform legislation that would have lowered the corporate income tax rate to 24% (albeit with immediate taxation of a US firm’s worldwide income).

Other 2019 legislative issues to closely monitor

  • Infrastructure
  • Healthcare
  • Retirement
  • IRS reforms and tax administration
  • Budget constraints

 

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Looking ahead for 2019—will the political center prevail? Rohit Kumar, PwC's Tax Policy Leader and Todd Metcalf, former Democratic Chief Tax Counsel, discuss the prospects for bipartisan agreements on policy issues ranging from tax to trade and infrastructure.

The blowing trade winds

Securing a new trade agreement with Canada and Mexico to replace the North American Free Trade Agreement (NAFTA) and addressing a range of issues with China are key areas of focus for President Trump. The Administration also announced efforts to negotiate several new trade agreements, including with the European Union and Japan, as well as an intent to negotiate a future trade agreement with the United Kingdom if the UK leaves the EU. In 2018, The Trump administration also renegotiated a small part of the existing free trade agreement with South Korea.

President Trump is expected to continue relying on the authority provided by past Congresses to impose tariffs and other trade sanctions as he pursues his trade policy agenda. The US Court of International Trade last year began consideration of a lawsuit brought by steel importers and foreign producers, who argue that Congress improperly delegated too much of its constitutional authority over trade. The suit specifically challenges the legal authority cited by the Trump administration to impose steel and aluminum tariffs on the basis of national security concerns under Section 232 of the 1962 Trade Expansion Act. A ruling is expected later this year.

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Uncertainty around global trade policy continues to be a dominant theme for businesses, including heightened policy risks around NAFTA and escalating tariffs with China. Scott McCandless, PwC's Trade Policy Leader, and Jon Lieber, a Principal in Washington's National Economics and Statistics practice, discuss the trade outlook for 2019 and why it's necessary for companies to continue to monitor developments and prepare to react. 

Trade agreements currently in effect:

  • Trade Facilitation and Trade Enforcement Act of 2015
  • American Manufacturing Competitiveness Act of 2016
  • Transatlantic Trade and Investment Partnership
  • Generalized System of Preferences
  • Free trade agreements:
    • Australia Free Trade Agreement (AUFTA)
    • Bahrain Free Trade Agreement (BHFTA)
    • Central American - Dominican Republic Free Trade Agreement (CAFTA-DR)
    • Chile Free Trade Agreement (CLFTA)
    • Colombia Trade Promotion Agreement (COPTA)
    • Israel Free Trade Agreement (ILFTA)
    • Jordan Free Trade Agreement (JOFTA)
    • Korea Free Trade Agreement (KORUS)
    • Morocco Free Trade Agreement (MAFTA)
    • North American Free Trade Agreement (NAFTA)
    • Oman Free Trade Agreement (OMFTA)
    • Panama Trade Promotion Agreement (PATPA)
    • Peru Trade Promotion Agreement (PETPA)
    • Singapore Free Trade Agreement (SGFTA)
    • African Growth and Opportunity Act (AGOA) - effective through 2025

Translating US tax reform from the global perspective

The uncertainties for US and non-US multinational corporations (MNCs) created by global tax issues and disputes likely will remain for some time. Other countries continue to closely monitor the impact of US tax reform as they consider whether to introduce their own unilateral and multilateral reforms.

The OECD Inclusive Framework—which is committed to implementing the BEPS minimum standards—now includes over 120 member countries and continues to expand. Under a mandate of the G20, the OECD seeks consensus among this large and diverse group of countries on the implementation and monitoring of the BEPS Project and on the accelerated project reviewing the tax challenges of digitalization.

Meanwhile, the EU has taken a more active role in tax policy, implementing (and going beyond) the BEPS recommendations, reviewing and overruling domestic tax measures and rulings and seeking agreement among its members and the international community around short-term and long-term measures to tax digital activities.

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How do you solve a problem like DST? Pam Olson, PwC's Deputy Tax Leader and Leader of the firm's Washington National Tax Practice, sat down with Karl Russo, a director in Washington's National Economics & Statistics group, to discuss why the business community needs to pay attention to what has morphed from a project on the digital services tax during the Austrian presidency of the EU to a much broader discussion around taxing rights.

Post-tax reform state and local tax uncertainty

State fiscal conditions in 2018 showed significant improvement, with general revenue funds experiencing robust growth for the year. The near-term outlook remains strong, with revenues continuing to come in at or above budget levels. These enhanced revenues have allowed states to strengthen rainy-day reserves and increase general fund spending.

While state tax fiscal conditions have improved overall, a number of factors complicate state budget projections and policy trends, including the effects of the 2017 federal tax reform act, the impact of the 2018 midterm elections and the increase in sales tax collection in many states as a result of the South Dakota v. Wayfair decision.

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The state and local tax landscape continues to rapidly evolve, with November's midterm elections having a big impact. Maureen Pechacek and Rob Ozmun, both partners in PwC's State and Local Tax practice, discuss key takeaways and what the business community can expect in 2019.

Contact us

Pam Olson

US Deputy Tax Leader and Washington National Tax Services Leader, PwC US

Tel: +1 (202) 414 1401

Rohit Kumar

US Tax Policy Services Leader, PwC US

Tel: +1 (202) 414 1421

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