It’s been more than a year since Rachelle Bernstein and the rest of the National Retail Federation realized there was a major error in the tax-code overhaul Congress had just passed.
Bernstein, vice president and tax counsel at the NRF, said her group discovered a drafting error that could potentially cost retail shops and restaurants millions when they renovate their property.
"This issue was identified in late December of 2017, probably within a week of the bill being enacted,” Bernstein said. “We had been in contact with the Hill to make sure that they viewed it as a technical correction.”
It’s called the “retail glitch,” and it’s one of dozens of errors in the overhaul that Congress would need to pass legislation to fix. But a comprehensive bill of “technical corrections” remains elusive amid political differences on a way forward and Democratic criticism of the way the GOP drafted the bill initially.
So far, lawmakers have taken a piecemeal approach, picking away at the list of errors individually until Congress can arrive at a broader consensus on a corrections bill.
Sens. Pat Toomey and Doug Jones introduced legislation on March 14 to correct the error that prevents businesses from fully and immediately deducting the cost of certain improvements—known as qualified improvement property—such as renovations to the interior of retail stores and restaurants and the common areas of office buildings. Beyond Toomey and Jones, the measure has bipartisan support, with Sens. Joe Manchin, Jeanne Shaheen, John Thune, Pat Roberts, and others cosponsoring.
“There are some technical corrections that are more likely to have bipartisan support and motivation to be fixed,” said Erica York, an analyst at the Tax Foundation. “For instance, what lawmaker doesn’t have restaurants or grocers or other types of businesses in their district affected by the retail glitch?”
The NRF and dozens of other groups have pressed lawmakers to find a solution, yet it’s still unclear if the Toomey-Jones bill will pass. Democrats have long said they would oppose changes, even corrections, to the tax bill unless Republicans are willing to make concessions on tax policy.
House Ways and Means Committee Chairman Richard Neal has said he wants his panel to examine every proposed technical correction in a hearing. Republicans like Senate Finance Committee Chairman Chuck Grassley balk at the proposal to raise taxes in exchange for fixes to the overhaul bill.
That leaves scant room to advance tax corrections in the divided Congress. The one major fix advanced by lawmakers happened a year ago, when Congress included language tweaking the so-called “grain glitch” in an omnibus spending package. That fix corrected an error in the tax law that allowed farmers a much larger deduction if they sold to grain cooperatives than to private companies.
The grain-glitch fix corrected an unintended consequence, but it was not a technical correction. To be deemed a technical correction, changes need to be identified as a drafting error by the Treasury and tax-writing committees in Congress. Technical corrections are also scored differently for budget purposes and are usually retroactive to when the original bill passed.
But if the retail glitch ends up anything like the grain glitch, Democrats and Republicans would arrive at a trade-off that includes Democratic policy goals. The deal for the grain-glitch fix also included an expansion of the low-income-housing tax credit.
“It’s certainly very possible, and that example was brought up to us in many meetings that we had with leadership folks, really on both sides of the aisle, talking about what happened with the grain glitch,” Bernstein said.
Democrats have also supported expanding the child tax credit and the earned-income tax credit.
Less controversial fixes like the retail glitch may advance, but a comprehensive technical-corrections bill remains unlikely, analysts say.
“From a policy standpoint, certainly you’d like to see that, but it’s not clear how large of a priority that is with the current makeup [of Congress] and what else might be attached to a bill,” said Joe Rosenberg, senior research associate at the Tax Policy Center.
That hasn’t stopped some lawmakers from trying. Just before stepping down as Ways and Means Committee chairman to make way for Neal, Rep. Kevin Brady released a draft bill proposing a fix to some 30 errors.
Past efforts to fix mistakes in tax legislation have gone more smoothly. In 1988, Congress passed a technical-corrections bill for the 1986 tax-code overhaul with bipartisan support.
The grain glitch and the retail glitch were arguably the highest-profile errors in the bill, but dozens more exist. Another major fix proposed by groups like the American Institute of CPAs, the National Retail Federation, and others is a change to the deduction for net operating losses, which are taken when a company’s losses are greater than its available tax deductions. Companies can typically use those extra losses to offset profits in other years for tax purposes.
Though many errors need a legislative fix, some can be resolved through administrative rulings, but affected groups have had varying results.
The tax overhaul prevented individuals and companies from writing off settlements and legal fees paid in sexual-harassment cases in which parties signed a nondisclosure agreement, but the language also mistakenly prevented plaintiffs from deducting their legal fees, which can run up to 40 percent of a settlement. Sen. Bob Menendez—who originally championed the amendment in the tax overhaul—proposed legislation to fix the error last year, but it failed to advance.
In early March, the IRS clarified its interpretation of the statute to say that recipients of settlements in those sexual-harassment or abuse cases can deduct attorneys' fees related to the settlement.
Bernstein said the NRF and some 300 other groups sent a letter to Treasury asking it to address the retail glitch administratively, adding that there is precedent for the department to delay auditing an issue for a few years to give Congress time to pass legislation.
“Treasury has said they don’t have the authority to write regulations other than those based on statutes, but I think they could have put out interim guidance that may have given businesses the opportunity to take a position until Congress ended up legislating,” she said.