States warily watching federal tax reform
Tax bill's $10,000 deduction cap to include state and local income and sales taxes, too

Tax reform will lead to tax law abuse. Duh!

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House and Senate tax conferees will officially meet for the first time this afternoon.

As the formal "mixing" of the two tax bills begins, let's get few things straight.

Neither H.R. 1, the Tax Cuts and Jobs Act, as passed by the House nor the version of that bill approved by the Senate is not real tax reform. It's mainly, per its name, a variety of tax cuts, particularly for big business and wealthier taxpayers.

Neither bill simplifies the Internal Revenue Code. In fact, in several instances it complicates things. Yes, I'm looking at you pass-through provisions.

Taxpayers, both business and individual filers, will find loopholes in whatever tax measure finally is enacted.

That's not just my opinion. It's the assessment of 13 tax scholars, practitioners and analysts, representing their different areas of expertise and viewpoints in a paper entitled "The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation."

Haste makes tax waste: The document, released Dec. 7 on the Social Science Research Network, begins with a critique of the process by which it was created.

Since the tax proposal, especially on the Senate side, was written quickly, legislators and the public had little time to analyze its provisions, many of which are highly complex. This likely will lead to unanticipated consequences and costs.

"Tax lawyers and accountants are already preparing to exploit ambiguous and poorly drafted provisions in the bill," say the paper's collective authors. "Because of these tax-planning opportunities, it is likely that the actual cost of this legislation will exceed the current projections of over $1 trillion."

Other proposed changes will likely face legal roadblocks, according to the paper, that will jeopardize critical elements of the legislation.

Finally, say the tax professors, technical glitches in the legislation may improperly and haphazardly penalize or benefit individual and corporate taxpayers.

Oh joy.

Problem areas: True to the paper's title, the authors divide the problems into three categories.

  1. Tax games. These describe some of the key areas where we believe tax planning is likely to occur.
  2. Roadblocks. These include areas in which the legislation may interfere with important non-tax policies and encounter legal roadblocks as a result; for example, by causing the United States to violate international trade law.
  3. Glitches. These are mistakes or ambiguity in the drafting that could lead to uncertainty and haphazard increases or decreases in taxes.

In particular, the paper highlights problems with the bill in the following areas.

  • Using corporations as tax shelters: If the corporate tax rate is reduced in the absence of effective anti-abuse measures, taxpayers may be able to transform corporations into tax-sheltered savings vehicles through a variety of strategies.
  • Pass-through eligibility games: Taxpayers may be able to circumvent the limitations on eligibility for the special tax treatment of pass-through businesses.
  • Restructuring state and local taxes to maintain deductibility: The denial of the deduction for state and local taxes will incentivize these jurisdictions to restructure their forms of revenue collection to avoid this change. This could undercut one of the largest revenue raisers in the entire bill.
  • International games, roadblocks and glitches: The complex rules intended to exempt foreign income of domestic corporations from U.S. taxation present a variety of tax planning and avoidance opportunities. For instance, one provision would encourage sales of products abroad, only for those products to be sold right back into the United States.
  • Arbitrage money machines: The variety of tax rates imposed on different forms of business income in different years invite arbitrage strategies, whereby taxpayers can achieve an economic benefit solely based on the timing and assignment of their income and deductions.
  • Other glitches: Other glitches in the proposed bills would haphazardly penalize taxpayers.

I'll let you read the details of and the authors' suggested remedies for the problems they see in the full 31-page paper.

More problems? You might even come up with some added areas that should be addressed since, as the paper notes, its enumeration of issues is not a comprehensive analysis.

"That would take much more time and space than we now have, and, on a number of these topics, we are confident that more time and more writing will only lead to identification of more such problems," they say.

In fact, The New York Times Upshot column just came up with some ways to hack the tax plan, listing 13 ways to profit off the Republican tax bill.

Feel free to add to the list by sharing your ideas in the comments section below.

And don't forget to let members of the conference committee and your Senators and Representatives who will vote on a final product also know what you think.

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