Ask an Accountant: PATH Act of 2015

By Steve Geisenberger, Principal - Tax Services, Walz Group

Recently, both the U.S. House and Senate passed the Protecting Americans from Tax Hikes (PATH) Act of 2015. There is no shortage of opinions regarding the effects of this legislation, so let me begin with the disclaimer that the thoughts expressed in this editorial are my own and not necessarily shared by all of my associates at the Walz Group. They are, however, a reflection of what I have experienced as a tax Principal and as an observer of tax politics, including my own lobbying efforts during my 36 years in the profession.

First of all, kudos to Congress and the President for making more of the tax code permanent and less subject to year to year changes in the form of Extenders. Good, bad or indifferent, there are now rules we can plan on unless or until they are changed.

This brings me to my next point. Many in Washington including Speaker Ryan, House Ways and Means Committee Chairman Brady and President Obama (not to mention every presidential candidate who talks about postcards as tax returns) have at least in the past publicly supported long-term tax reform which most of us understand to be a reduction of rates in exchange for significant simplification, a reduction in tax credits and a reduction in tax deductions. Of course, the devils are in the details when it comes to whose rates should be reduced, and which credits and deductions to either limit or eliminate.

My concern is that the "Protecting Americans from Tax Hikes Act of 2015" bill may be the end of tax reform and not the beginning. I look forward to eating these words if I am wrong.
Let's face it, this bill is a big win for capital intensive businesses and those that invest in research and development. The ability to write-off in one year most if not all of your capital purchases will allow capital intensive growing businesses to manage their tax liabilities significantly better than in the past. I am grateful for the planning opportunities it affords many of our clients. Hopefully it provides the stimulus to create good paying jobs with the theory being that any increase in the deficit ($680 billion over 10 years is the estimate) will be more than offset with additional taxes created through job creation. The cynics say that this will hurt job creation by creating more incentives to replace man (or woman) with machines. Time will tell.

For all of its benefits, there are many things it does not accomplish. It does nothing to make business tax rates more competitive in the U. S when compared with the rest of the world. Additionally, it does not reduce the tax burden on the service sector or businesses where capital equipment investment is not significant. I shouldn't complain because it adds to the complexity of the Code and our clients will need more of our services, but that doesn't exactly seem like it was the goal of the legislation. To the extent the economy as a whole expands the overall demand for services will increase, which is awesome, except for somewhere in the neighborhood of 50% of those additional profits will go to taxes and those service businesses have less opportunity to manage their liabilities, at least in terms of the changes made permanent in this tax act.

One thing that is certain is that the legislation has created more winners who now become potential losers in rate reducing tax reform, such as those who invest heavily in capital equipment are not going to want to return to the days of having to write-off equipment over five years or more and those who benefit from the R&D credit will not want to give that up either. Others who benefited in this act include middle class taxpayers with college age students, low income workers with expanded child and earned income tax credits, alternative energy producers, low income housing developers and the industry that funds them through tax credits, and the list goes on. That's a pretty big army of lobbyists and their clients (taxpayers) who are not going to want to give up those benefits unless the rate reduction is more significant than the benefit received which to me seems pretty unlikely.

Of course, this is just the tip of the iceberg. You have U.S. corporations with international operations who have found ways to deal with the high U.S. corporate rates;, the residential real estate industry and home owners who love mortgage interest and real estate tax deductions; charitable institutions, including churches, who would never part with the charitable deduction; those who want to protect or favor elimination of the taxation of capital gains and dividends; and if I haven't offended you yet by failing to mention your favorite deduction, which would allow us to obtain reasonable highest marginal tax rates in the 20% to 30% range (depending on who you are talking to), then I apologize for the oversight. Actually, I don't mean to offend anyone. I am just explaining the odds on changing course from where we have been going for the last 30 years, which is away from tax reform.

The politics of winning legislative approval is a majority of 435 Representatives, 60 Senators to prevent a filibuster and a President, who can all agree on which credits and deductions will go by the wayside. Reagan and O'Neill pulled it off in 1986. The tax code today is way more complicated, way more lobbied, and there is far less consensus in terms of what the changes to deductions and credits might look like.

I am convinced that most people and certainly no businesses will be filing a postcard tax return anytime soon. So, despite my own opinion which is that lower rates with lower preferences for deductions and credits would make for both a "fairer" system for most individuals and businesses and incentivize more growth in the economy, I will be shocked if the next President and Congress will get there (or even make any significant progress in that direction) regardless of who is elected.

In the meantime, call your CPA to help you sort out all the deductions and credits you are entitled to under the code. At least now we can tell you what the law is and that in itself is progress.