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Legislative Update

The Coming Battle over Pass-Through Income in Tax Reform

NSWA members understand how important the upcoming tax reform debate can be to the bottom line of small oil and gas producers.  The tremendous threat to percentage depletion, elimination of interest deductibility, and possible elimination of passive loss exemption are all significant issues facing the stripper well industry.  NSWA has been the national leader in fighting for the preservation of percentage depletion, and we are working with other groups to track and influence other issues as the debate develops.

One other major issue that will impact many stripper well producers, is upcoming changes to the treatment of pass through income.  As Congress considers major reductions to America’s corporate tax rate, small businesses are fighting to ensure business tax parity between corporations and pass through entities.  This difficult issue has become a major challenge as both Congress and the President are aiming for a 20% corporate tax rate while the president leaves personal tax rates as high as 35%.

The challenges of threading this needle were recently examined in a major paper from the Bipartisan Policy center.  This paper was designed to examine, “the best manner for taxing pass-throughs.”  Its findings lay out much of the challenge facing Congress to develop a small business and corporate tax code that is fair in the way it treats both large and small business.  The author, Warren Payne (former House Ways and Means staff), states that, "Policymakers must resolve concerns about raising taxes on pass-through businesses while also ensuring that any new rules or structures do not become an avenue of abuse."  His report highlights that among the issues that would need to be resolved if there's to be a special business tax rate - what should the rate be? What sort of business activity and what share of qualifying income would get that rate? And what kind of rules do you need to ward off abuse?

Meanwhile, the Tax Policy Center (joint operation of the Urban Institute and the Brookings Institution) released a direct attack on the argument of tax parity for pass through income and corporate tax rates.  The key point is that it's basically impossible to write strong enough rules to protect from abuse.  This point was highlighted by a recent research report on the impact of pass though tax reform in Kansas and the impact that had on both business behavior and tax income.

This debate has become one of the major sticking points to tax reform at the House Ways and Means Committee as they attempt to complete drafting legislative text for comprehensive tax reform.  While the fight on this issue is being led by groups like the National Federation of Independent Businesses (NFIB) and the S-Corporation Association, NSWA Washington will continue to focus on preserving percentage depletion but will seek and exploit opportunities to influence the broader issues facing small businesses as tax reform continues.