Do Tax and Budget Reforms Spell Doom for Accountants?

In his latest version of "Path to Prosperity," Wisconsin Congressman Paul Ryan touches virtually every third rail in politics. Whether this will mean political death for Ryan and his fellow Republicans will be determined this fall, but what if reform advocates take over and enact their proposals for budget and tax reform?

Ryan's plan not only would income-test entitlement programs – meaning the rich, who can obviously afford their own medical insurance, even in old age, would no longer receive a full complement of Medicare benefits – it would also means-test the tax code. The wealthiest Americans would no longer be eligible for tax breaks like the mortgage interest deduction, but would have lower income tax rates. Under the Ryan plan, there would be two rates for federal income taxes – 10% for the middle class and 25% for the rich.

Ryan believes his plan will promote economic growth, but would a simpler tax code actually shrink the accounting industry? We asked a couple of local accounting executives, who offered varying opinions.

"It's an interesting question and it's one we hear about in every election cycle," said Ed Maginot, a partner with Grant Thornton. "It's something that, obviously, we talk about in the industry, whether formally or informally, with colleagues."

 

Coming up short-term

It's a poorly kept secret in the local accounting industry that national firms are well represented in Wisconsin because of the complexity of the state's tax code, but a simpler federal code probably would not harm the industry in the short run, according to Maginot.

In the short term, said Maginot, any change in the tax code would have a stimulating effect in the accounting industry, much like Sarbanes-Oxley, the 2002 federal law that addressed the corporate scandals that were unfolding at the time. The reason that even simple-sounding tax code changes provide a stimulus for the accounting industry is because they are new and different, and accountants have to devote additional time to understanding them.

"Our job in the accounting industry is to interpret the rules and regulations, and make it so that the clients can understand, because once you have the technical language, oftentimes it's convoluted," Maginot said. "Even as I read it for the first time, I need help interpreting it. That's why we have a national office – to help us interpret esoteric regulations."

By short term, Maginot means a two-year window – an initial year of understanding and explaining the implications, and a second year of assisting clients with any implementation, different activities, and different transactions they might enter into.

Gordon Meicher, managing partner of Meicher & Associates, agreed that in the short term, these reforms would mean greater reliance on accounting expertise. He referenced an earlier plan for a flat tax of 19%, and said that theoretically, the flat tax would be a catastrophe for the nation.

"The problem is all this stuff about a flat tax, it will increase our business because we're going to have to define what is subject to the 19% or whatever level they choose," he said. "If you have rental property, is it 19% of the gross rent? No, of course not. Is it 19% of your gross business? No, so what you will do is have all these people who are running more and more items in the business, so there will actually end up being more [accounting] work."

While Ryan has not advocated a flat tax, his rate structure is flatter than the existing code, but Meicher believes that both Ryan and President Obama are floating dangerous proposals to eliminate and reduce the mortgage interest deduction. Why? The potentially devastating impact on home values, Meicher said.

"Home values are already in the sewer," he noted. "If you're not going to allow people to deduct their mortgage interest, they are not going to purchase a home. The value of real estate is going to go down significantly."

Reminded that Ryan would means-test various tax breaks, Meicher said "that doesn't mean anything."

"Here's the point," he continued. "In Obama's jobs bill, he proposes reducing the mortgage deduction, effectively. They get a credit, but the credit reduces the value of the mortgage deduction, depending on what you are, between 20% and 25%. So if the value of my mortgage interest deduction goes down 20% to 25%, what does that do to the value of the property you have for sale? It takes the value of your $800,000 or $900,000 home and makes it $700,000. Now if an $800,000 or $900,000 home is now worth $700,000, and a $700,000 home is now worth $550,000, the point is that it's just going to cascade and it's going to kill real estate."

Talking in code

Long term, the proposed tax changes might not be so beneficial to accountants, Maginot stated. "Certainly if it was a simplification of the tax code, long term there would be less need for accountants when just trying to get through the computation and to produce the forms," he acknowledged. "I just don't know in our system, where there are so many incentives provided, or certain detriments, and where the tax code is just filled with special exemptions and exclusions because Congress can push favorable or unfavorable laws for certain industry groups. I do believe long term, there would be less of a need for people doing the pure compliance aspect.

"As far as consulting, there is always going to be a need for consulting because as people and businesses conduct their activities, they want to know the most tax-advantaged way of doing that. So with those consulting services, even with a simplified tax code, there are still going to be these types of questions that arise."

In the long run, Meicher said tax simplification "might wade out a few W-2s," but clients still are going to need business and rental schedules and the like. "You're still going to need financial reporting and you're going to need forensic reporting," he noted. "What it will do is take 10% to 15% of a CPA's business in one sector and move it to another. I don't think it will have any long-lasting negative effect."

One idea that refuses to die is contained in a federal proposal that does not appear to be headed for passage. Essentially, it would eliminate charitable deductions for people who make more than $250,000, a provision that Meicher believes would devastate both society as a whole and nonprofits in Madison and elsewhere.

"It's taking money and it's removing charitable deductions for rich people, essentially," he noted. "You get a substantially reduced credit, so what it's going to do is take money from volunteer organizations and organizations that are trying to help the social good, and give it to the government, where people are being paid many times what people in these charities are being paid. It is going to take vast sums of resources that are going for the social good, and take it and put it into government, where you don't have volunteerism. You have bureaucracies that function as bureaucracies."

In limbo

Some business groups have been vocal in their criticism of the Affordable Care Act, especially the long regulatory rollout and the lack of guidance that companies have received from federal agencies. That uncertainty will take on a different form if the U.S. Supreme Court rules against all or part of the ACA. Maginot would describe the subsequent disruption as moderate, because while businesspeople have been introduced to the law's concepts, they still have not received enough guidance from federal agencies to know "how the specifics are going to work."

Explained Maginot: "If they say that we fall back to the old [health care] system, well, all that work in preparing for this anticipated change, that just stays in limbo and we have to determine what's ahead of us. You often hear the economy will respond when there is consistency, when people feel that things aren't going to change. Well, people don't know how the rules are going to change, and that puts us in a very difficult position because planning for businesses happens two or three or four years in advance. If they don't know what's going to happen in three or five years, they won't have an effective strategy, given that uncertainty."

Meicher, who does his best to avoid being political, said the health care bill "unfortunately is a boon to the accounting industry." He said accountants already are being required to provide analysis on health care costs with many of the corporate returns they prepare.

"Some of the returns we prepare for small businesses are with fees 20% higher in trying to determine whether they qualify for the insurance credit," Meicher said. "Unfortunately, it's more work for us that small business has to pay for. Honestly, I'm against small businesses having to pay us for any more than they already do."

30-year itch

Since the income tax was established in the early 1900s, there have been movements to reform the tax code every 30 or 40 years, including in 1954 and 1986. Based on that pattern, Paul Ryan's latest policy thrust could signal the beginning stages of yet another reform.

Even though such change is good for the accounting industry, Maginot often wishes that at least one year would go by without change. Just when one new change is mastered to the point where an accountant's knowledge can be applied, yet another modification goes into effect.

"There is so much change, and it's so rapid, it almost changes at the speed of technology," he stated. "The computers and software can do so much more, [lawmakers] can create a much more complex tax code because they are trying to provide benefits and detriments to a whole host of industries in order to affect a public policy."

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