Legislative update: The impact tax reform will have on WOTC

With the start of a new administration, we have received several inquiries from clients concerning the impact the Trump tax reform proposals will have on WOTC.  The fact is that no one yet knows for sure what is going to happen, but we feel it’s important to provide a comprehensive overview of what we know so far and our expectations for the future.

Here’s what we know…

Tax Reform is coming...

One of President Trump’s primary campaign pledges was for a major tax reform.  As it turns out, beyond the pledge there has been very little information provided.  In general, Trump indicated he wanted to reduce the number of tax brackets and reduce corporate taxes to a 15% rate.  However, exactly how that would happen remains unclear at this point.

Tax Reform is complicated...

The reality is that a complete overhaul of our tax code is a very complicated task and it’s easier said than done.  Since President Trump has not championed one proposal over another, we believe that the only real possibility to get tax reform through Congress this year is to start with the existing House plan.  Speaker of the House, Paul Ryan, has laid out a time table to vote on a tax reform package within 200 days, prior to the August recess.  The Senate Majority Leader Mitch McConnell, has also expressed his desire to take up tax reform this year, even though it is anticipated it will take much longer to get a vote in the Senate.

Revenue Neutrality likely to be included in tax reform...

One thing that has changed with the new President is less insistence that the plan have revenue neutrality. Revenue neutrality is a budgetary process used by Congress.  When budget and tax laws are proposed, the Congressional Budget Office will “score” or estimate what the financial impact will be based upon a set of specific rules. The original idea of the House plan was to use the elimination of several types of tax credits and deductions to reduce the overall effective tax rate, thus resulting in the same net revenue to the government.  Toward that end, the House began holding hearings on various tax credits to either make them permanent, as they did for the R&D credit, or to propose elimination.  WOTC fell into a somewhat ambiguous intermediary state where it received a long-term extension, but not outright permanency; thus, leaving the long-term status of WOTC unclear.

New President is open to Stimulus via tax cuts…

President Trump has been much more open to the argument that tax cuts stimulate economic growth, thus increasing revenue over time.  However, many conservatives in the Republican party believe that the deficits are too high, and that it would be a mistake to deficit finance a tax cut.  Exactly how the legislators will manage this difference of opinions remains unclear.  However, it does appear that the strong insistence on a revenue neutral bill, as defined by Congressional Budget Office (CBO) rules, has been weakened because of Mr. Trump’s presidency.

The end of the temporary nature of tax extenders is near…

Generally speaking, the practice of temporary extensions to our tax code is viewed as bad policy; therefore, we believe it will continue to be heavily scrutinized as Congress moves forward with legislation.  This means that a guiding principle of tax reform efforts will likely make tax extender programs permanent or allow them to expire.  As such, we anticipate that the tax reform effort, if successful, will result in either a permanent WOTC program or its termination at the end of the current extension through December 31, 2019.  

The case for making WOTC permanent is strong...

There are several strong arguments to make WOTC permanent.  First, it is hard to consider tax reform and not also consider entitlement reform.  If there is entitlement reform, WOTC is one of the few programs that promotes shifting individuals from entitlement programs and economic dependence into gainful employment.  Second, under a more relaxed set of revenue neutrality rules, WOTC makes sense. While under Congressional Budget Office (CBO) rules, WOTC has an annual cost of just over $1 billion dollars, studies have shown that when entitlement costs are also factored in, WOTC in fact reduces the cost to the U.S. taxpayer.  President Trump seems to be supporting a more relaxed approach to tax reform legislation.  Last, but not least, WOTC has widespread support in Congress.  This is especially true in the Senate, where each individual Senator has a stronger impact. 

Next Steps…

We hope you find this information useful. As your trusted advisor, we are committed to monitoring and reporting pertinent information concerning the future of WOTC as we become aware of new facts.

As always, do not hesitate to contact us if you have any questions.

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