Market News

Legislation Watch: Summer 2018

Recent Developments

Tariffs on imported metals from European Union, Mexico, and Canada now in effect. On June 1, the U.S. applied 25% excise taxes on steel imported from these trading partners and 10% tariffs on imported aluminum from these three sources. In response, Canada will impose tariffs on $12.8 billion of American goods effective July 1. The E.U. and Mexico also announced retaliatory tariffs on crops, metals, and cosmetics coming from the U.S.1,2

The “fiduciary rule” may be history. Vacated by a federal appeals court in March, the 2016 Department of Labor rule demanding that retirement advisors place client best interests ahead of their own was never fully implemented and may now be dead. No effort to challenge the appeals court ruling has emerged from the Trump administration. The Securities and Exchange Commission did offer a plan this spring – hundreds of pages thick – intended to preserve the spirit, if not the letter, of the rule. The SEC plan lists obligations for investment professionals regarding the integrity of advisor-client relationships, but does not define the term “best interest.”3

 

Federal Tax Law Adjustments

SALT deduction cap workarounds are being questioned. New York, Connecticut, and New Jersey have created legislative responses to offset the lowered $10,000 annual federal deduction limit for state and local taxes (SALT). These three states are permitting cities and towns to create charitable funds, and homeowners can contribute to these local funds and still receive a federal tax break. In notices issued in May, the Internal Revenue Service and Department of the Treasury said that they would propose new rules to address the emergence of these plans. I.R.S. Notice 2018-54 cautions that “despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.”4,5

Additional I.R.S. guidance on vehicle expenses and unreimbursed worker expenses. In June, the agency updated standard mileage rates for 2018: $0.545 per mile of business travel, $0.18 per mile for medical purposes, and an unchanged $0.14 per mile for miles driven in service to charities and non-profit groups. It notified taxpayers that in accordance with the 2017 Tax Cuts and Jobs Act, the $0.545 standard mileage rate cannot be used for itemized deductions for unreimbursed employee travel expenses this year and in all years through 2025. Also, that standard mileage rate cannot factor into itemized deductions for moving-related expenses, except in the case of active-duty service members moving in response to a relocation order.6

A bit of federal tax relief may be ahead for some college endowments. I.R.S. Notice 2018-55 states that the agency is working on regulations to restrict the impact of the new 1.4% excise tax on private college and university endowments. In its notice, the I.R.S. says that such endowments can likely use an asset’s fair market value at the end of 2017 as a basis for calculating tax on any resulting gain stemming from the sale of the asset. While normal basis rules will apply for calculating a loss, the new step-up in basis could lessen the amount of capital gain exposed to the new tax.7

 

Looking Ahead

The Volcker rule may soon be revised. In June, the Securities and Exchange Commission joined the Federal Reserve, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission, and the Federal Deposit Insurance Corporation in agreeing to amend this key regulation within the Dodd-Frank Act. The Volcker rule, finalized five years ago, prohibits banks from proprietary trading: selling or buying investments expressly for the bank’s potential benefit, rather than the potential benefit to customers. In its current form, the Volcker rule presumes that any positions held by banks for less than 60 days are proprietary. The proposed amendment would do away with that conclusion and allow lenders added possibilities to hedge market risk. A 60-day, public comment on the proposed amendment ends in early August.8

White House considers altering retirement benefits for federal employees. An Office of Personnel Management proposal recently sent to House Speaker Paul Ryan recommended changes to the Civil Service Retirement System (CSRS) and Federal Employees Retirement System (FERS) for federal government workers, with the goal of reducing budget shortfalls. The proposal, which Capitol Hill legislators could consider in the near term, suggests four notable modifications. One, cost-of-living adjustments to FERS pensions would be eliminated and COLAs for CSRS pensions would be cut. Two, the highest yearly pay over a consecutive, 5-year period, rather than a 3-year period, would be used in the calculation formula for CSRS and FERS pension benefits. Three, salary deferral rates into the FERS program would gradually rise to a maximum of 7.25% of pay. Four, most of the supplemental benefit payments given to FERS participants who retire from their jobs before age 62 would be eliminated.9

More states may lower corporate tax rates. As Dow Jones Newswires reports, the gap between the 21% federal corporate tax rate and higher state taxes on corporate business entities may slim in the coming years. A bill in Missouri would cut that state’s corporate rate from 6.25% to 4.0%. Georgia just reduced its corporate rate 0.25% to 5.75%. In related news, Tennessee’s legislature rejected a federal provision limiting interest deductibility for businesses, which could save companies based in that state a total of $1.2 billion through 2028.10

Investment funds can go paperless starting in 2021. In early June, the Securities and Exchange Commission adopted Rule 30e-3, which will give funds three options to fulfill their reporting duties to shareholders. Beginning in 2021, funds can satisfy this obligation by a) notifying shareholders that reports are online at their websites, and offering a link to access them; b) sending shareholder reports electronically to investors who opt for this delivery method; c) sending hard-copy reports through the mail. Funds may also use two or three of these delivery methods in combination.11

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Citations.

1 – nytimes.com/2018/05/31/us/politics/trump-aluminum-steel-tariffs.html [5/31/18]

2 – businessinsider.com/trump-tariff-trade-fight-european-union-mexico-tariffs-list-2018-6 [6/6/18]

3 – bloomberg.com/news/articles/2018-06-08/the-fiduciary-rule-may-sound-boring-but-its-collapse-threatens-your-retirement [6/8/18]

4 – cnbc.com/2018/05/23/irs-treasury-have-set-their-sights-on-blue-states-tax-workarounds.html [5/23/18]
5 – irs.gov/pub/irs-drop/n-18-54.pdf [5/23/18]
6 – accountingweb.com/tax/irs/irs-offers-guidance-on-vehicle-expenses [6/8/18]

7 – accountingtoday.com/news/irs-plans-regulations-to-ease-taxes-on-college-endowments [6/8/18]

8 – bloomberg.com/news/articles/2018-06-05/volcker-rule-changes-move-forward-after-sec-votes-on-overhaul [6/5/18]

9 – fool.com/retirement/2018/06/10/these-retirement-cuts-threaten-millions-of-workers.aspx  [6/10/18]

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