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Is highway bill possible route to business tax reform?

Is business tax reform possible via highway bill?

In recent months, there has been considerable talk on Capitol Hill of combining highway funding legislation with a sweeping overhaul of the tax rules affecting multinational businesses. The general concept—which has some bipartisan support—is that revenue raised by a deemed repatriation of untaxed foreign earnings of U.S. companies could be used to fund highway spending, while at the same time modernizing the international tax rules and enhancing incentives for innovation. This limited legislative success could then serve as a step towards more expansive tax reform in the future.


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A printable version [PDF 103 KB] of this report is available. 


The talk about enacting such “limited scope tax reform” escalated in July 2015 and can be expected to continue now that Congress has returned from the August recess and when it tries (again) to find a multi-year solution to highway funding concerns.  

Enacting even limited scope tax reform in the near future would be difficult and the chances of such reform becoming law this year, while not zero, appear to be small. The potential implications of the tax law changes being discussed, however, would be substantial, and some of the changes could affect businesses with solely domestic operations as well as those with multinational operations.  Further, proposals for international tax reform and innovation incentives, even if unsuccessful, could be building blocks for future legislative efforts. Thus, businesses would be well advised to monitor developments this fall.


In recent years, talk about tax reform generally has centered on reform of the entire Internal Revenue Code, including the provisions relating to the taxation of individuals. Nonetheless, as 2015 has progressed, congressional tax-writers appear to have abandoned efforts to enact comprehensive tax reform before the next presidential election. Among the many obstacles are the policy differences between the administration and congressional Republicans regarding the appropriate individual rate structure and revenue.

As a result, some members of Congress have shifted their focus to modernizing the tax rules applicable to multinational businesses and toward providing enhanced incentives for innovation in the near future—issues with respect to which there is some bipartisan agreement, at least as a “down payment” on enacting more comprehensive tax reform in 2017 or thereafter. Further, some lawmakers believe that a multi-year highway bill could be a vehicle for such legislation because repatriation could pave the way for multi-year highway funding.  

Why the interest in moving limited scope tax reform this year?

Although different lawmakers may have different reasons for trying to advance limited scope tax reform this year, some of the commonly cited reasons for the current effort include the following.

Interest in implementing a “patent” or “innovation” box:  Some lawmakers are concerned that action by some European countries with respect to their patent box regimes in light of the OECD base erosion and profits shifting (BEPS) project may result in the migration of technology jobs overseas. Very generally, these patent box regimes offer a reduced rate of tax on income attributable to certain intellectual property. Thus, some U.S. lawmakers are interested in enacting U.S. patent or innovation box legislation.

In fact, on July 29, two senior members of the Ways and Means Committee—Rep. Charles Boustany (R-TX) and Rep. Richard Neal (D-MA)—released for public comment a discussion draft, technical explanation, and request for feedback regarding an “innovation box” proposal. This draft proposal generally would substantially lower the rate of tax for C corporations with respect to dispositions and licenses of intellectual property (IP) and products produced using IP. The draft proposal would benefit many C corporations, including those with multinational operations. Read TaxNewsFlash-United States

Nevertheless, as currently drafted, the proposal does not appear to apply to individuals or passthrough entities. The proposed bill would add the deduction for innovation box profits to a new section in Part VIII of subchapter B of Chapter 1 of the Internal Revenue Code—this part of the Code relates to special deductions for corporations. Note that, under section 1363(b), an S corporation generally is treated as an individual for income computation purposes.  

OECD base erosion and profit shifting (BEPS) project: Congressional tax-writers have been closely watching the activities of the OECD’s BEPS project and considering possible implications for U.S.-headquartered companies and the U.S. tax base. Some are concerned that the U.S. government would be forced to respond legislatively to changes in tax laws that could be made in other countries under the auspices of the BEPS project’s recommendations.

Apparent belief that Congress and the White House actually could reach agreement on a package of multinational tax reforms:  Although the details of the international tax provisions in the comprehensive tax reform bill introduced last year by then Ways and Means Chairman Dave Camp (the “Camp reform bill”) and the Obama Administration’s most recent budget proposal differ, there is agreement among interested parties that the current system is broken in many respects and that there are substantial conceptual similarities between the proposed solutions. Read a KPMG chart [PDF 683 KB] showing similarities between the Camp reform bill and the administration’s budget proposal.

Further, from public comments made and the apparent level of private dialogue taking place among the various interested parties, it appears that some congressional Republicans and officials at the White House believe they may be able to reach consensus on some sort of international tax modernization package. 

Why the potential link between highways and limited scope tax reform?

Revenues currently dedicated to the “highway trust fund” recently have been falling billions of dollars short of highway funding needs each year.  With many members of Congress averse to increasing the gas tax, lawmakers are looking for additional ways to fund highway spending. Some lawmakers believe that deemed repatriation of the estimated over $2 trillion of foreign earnings of U.S. multinational corporations could provide revenue that could be used to fund a multi-year highway spending bill.  Some lawmakers, however, also believe that from a political and revenue standpoint, deemed repatriation to fund highway spending can work only if it is part of a larger package that also addresses modernization of the current international tax rules, prevents future U.S. tax base erosion, and provides enhanced incentives for U.S. innovation.

The potential link between highway funding and international tax modernization was apparent in recent negotiations between the House and the Senate on the short-term highway bill that was enacted in July 2015. 

  • Senate leadership generally supported a six-year highway bill, the costs of which were offset for three years; the offsets included both tax and non-tax provisions, and some were perceived as controversial.
  • The House, however, sought only a short-term extension, which Ways and Means Chairman Paul Ryan reportedly suggested would “buy time” for Congress and the president to try to reach agreement on international tax reform that would include deemed repatriation to fund infrastructure. 

Facing highway funding that was set to expire at the end of July, the House and Senate ultimately agreed to a short-term bill, by extending highway funding until October 29, 2015.  The president signed this extension into law.

As a result,  Congress will have to re-visit highway spending again in the fall, and repatriation, international tax modernization, and innovation boxes are likely to be discussed as Congress considers (again) how long to extend highway funding and how to offset the costs of that spending.  

What might limited scope tax reform encompass if addressed this year?

If Congress does put together a multi-year highway spending bill that includes limited scope tax reform, what kinds of tax provisions might the bill include? Although it is impossible to know with certainty, possibilities include:

  • Deemed repatriation of accumulated earnings at an as yet undetermined rate, but no tax on repatriation of future foreign earnings
  • Taxation (potentially at reduced rates) of some future foreign earnings of multinationals to balance base erosion and competitiveness concerns (e.g., income from mobile intangible property)
  • Some form of innovation box regime, likely based on the discussion draft released by Reps. Boustany and Neal
  • No reduction in C corporation tax rate
  • Tightening of section 163(j) interest limitation rules
  • Other items, such as extension of expired provisions, reform of the Foreign Investment in Real Property Tax Act (FIRPTA) rules, and miscellaneous items

How difficult would enacting limited scope tax reform this year be?

There are those who believe that enacting limited scope tax reform this year would be very difficult.  For example, from a “big picture” perspective, some of the issues and obstacles that would need to be confronted are:

  • There is not much time left on the congressional calendar, and Congress already has a busy schedule for the remainder of the year (including passing legislation to fund the government and potentially to increase the “debt limit”).
  • Given that next year is an election year, some members of Congress may be reluctant to vote on limited scope tax reform that includes controversial revenue raisers or that is not perceived as helping individuals or small (“Main Street”) businesses.
  • Some members of Congress may be reluctant to vote on using tax revenues from deemed repatriation to fund highway spending, because they have pledged not to increase taxes to offset spending and/or because they may be concerned as to how using tax revenues to fund highways could factor into negotiations regarding non-defense spending levels more generally.
  • Although some key players in the Senate support modernizing the international tax rules and providing enhanced innovation incentives as a general matter, they have expressed opposition to using repatriation to offset the costs of highway spending.
  • Some parts of the domestic business community may be concerned that, if an international tax modernization package is enacted, much of the impetus for broader tax reform may dissipate.

Moreover, even if these issues could be surmounted, there could be other difficult issues relating to the design of an innovation box and multinational tax modernization package.  For example:

  • How would a repatriation provision be structured to raise enough money to fund a long-term highway spending bill—as well as (possibly) to offset the costs of implementing an innovation box and other components of a modernization bill? 

In a cost estimate dated July 14, 2015, the Congressional Budget Office (CBO) estimated that implementing the Senate six-year highway bill (S. 1647) would cost about $157 billion over a five-year period and about $256 billion over a 10-year period. As indicated below, it is not clear how much an innovation box would cost; however, depending upon the scope and the amount of rate reduction provided, it could be substantial. Keep in mind that the Joint Committee on Taxation (JCT) estimated that a previous proposal for elective repatriation at a reduced rate for a temporary period of time would lose revenue. That proposal was not part of a broader overhaul of the international tax rules.  By contrast, in the context of a broader tax reform proposal, the JCT estimated that a mandatory (deemed) repatriation of offshore earnings at reduced rates would raise about $170 billion in revenue1 (not taking into account possible macroeconomic effects).2

  • What rate would apply to “old” foreign earnings that are deemed repatriated, and would such earnings be treated differently depending upon whether or not they have been invested in illiquid business assets?
  • What future foreign earnings would be subject to U.S. tax, and at what rate?
  • Could a repatriation proposal, along with the rest of the provisions in an international tax modernization bill, be designed in such a manner that the entire business community—including multinationals that have invested significant overseas earnings in operations—could support the overall bill?  Note that, in connection with a June hearing on the repatriation of foreign earnings as a source of funding for the highway trust fund, held by the Select Revenue Measures Subcommittee of the Committee on Ways and Means, several business groups expressed opposition to the use of repatriation to fund infrastructure.
  • Could meaningful modernization of the international tax rules be accomplished without lowering the C corporation income tax rate?   Reducing the effective tax rate on foreign earnings without reducing the C corporation rate could provide an incentive to move business operations offshore.  In the past, reducing the C corporation income tax rate has been an important component of international tax reform discussions.  However, lowering the C corporation income tax rate would increase the revenue cost substantially, possibly requiring the inclusion of additional base-broadening provisions that would be politically unpopular. Moreover, it could be politically difficult to reduce the C corporation income tax rate without also addressing the individual income tax rate at which many owners of passthrough entities pay tax.
  • Might providing a lower rate through an innovation box serve as a proxy for reducing the C corporation rate?  What kind of feedback will lawmakers receive on the current innovation box discussion draft—and might an innovation box ultimately be drafted so as to benefit passthrough businesses? If not, how might this affect support for such legislation?  Keep in mind that, given revenue constraints, there may be a trade-off between the scope of an innovation box (i.e., what taxpayers and what income benefits) and the tax rate benefit provided (i.e., a “wide” box is likely to be more “shallow” than a narrow box).
  • How would innovation box rules be coordinated with the existing research credit and domestic manufacturing deduction? 
  • What other revenue raisers might be included—and how would these affect support for the bill?
1 The Camp reform bill proposed that, as part of the transition to a territorial system, accumulated, untaxed foreign earnings would be deemed to be repatriated to the United States. Those earnings would be taxed at one of two reduced rates, depending on how the CFC had deployed the earnings.  Earnings in cash or cash equivalents would be taxed at 8.75%, while other earnings, perhaps invested in plant and equipment, would be subject to a 3.5% rate.  The resulting tax could be paid in installments over eight years.  The JCT estimated that, in the context of the larger Camp tax reform bill, this proposal would raise approximately $170 billion over 10 years.
2  Under the Budget Resolution passed by Congress earlier this year, in the case of “major” tax legislation, the JCT and the CBO are required “to the extent practicable” to produce a point estimate of the revenue effect that takes into account macroeconomic changes.  This estimate is the official estimate of the budgetary effects of such legislation for the House, but is used for informational purposes only for the Senate. The White House’s Office of Management and Budget (OMB) does not use macroeconomic estimates for tax law changes. However, query whether the White House might ultimately accept the use of macroeconomic scoring for limited scope tax reform done in conjunction with a highway bill if congressional Republicans were to agree to take into account the macroeconomic impact of increased infrastructure spending.  If so, query whether or not this might make it significantly easier to put together an international tax reform bill from a revenue perspective.


As indicated above, tax-writers are giving significant attention to issues associated with intellectual property and international tax modernization.  

Further, even though enacting limited scope tax reform this year could be very difficult, congressional efforts on these issues today can be expected to shape tax reform discussions in the future—and technical design decisions made by policymakers now could be hard to change in the future.  Thus, businesses would be well advised to stay tuned to what lawmakers continue to say—and do—now that Congress has returned from recess. 

For more information, contact a member of KPMG’s Washington National Tax (WNT) Federal Legislative and Regulatory Services group:


John Gimigliano | +1 202-533-4022 |

Carol Kulish | +1 202-533-5829 |

Tom Stout | +1 202-533-4148 |

Jennifer Bonar Gray | +1 202-533-3489 |

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