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Trump's Tax Plan Might Not Add Up

Trouble is brewing for the Republican tax plan, with critics from party factions stretching it in different directions at once.
Image: Donald Trump
President Donald Trump speaks about tax reform at the Indiana State Fairgrounds on Sept. 27.Alex Brandon / AP

WASHINGTON — The Republican tax plan is looking like an increasingly tough sell, with party factions pulling it in several directions at once. As it stands, there's no easy way to satisfy any one group without tearing the package apart.

The proposal, negotiated by the White House and congressional leaders, is intended to simplify and lower tax rates, especially for corporations and for pass-through businesses, the type of individually owned company President Donald Trump relies on to organize his own finances.

The catch is that the money to lower those rates has to come from somewhere — from cutting spending, raising tax revenues in other ways, or borrowing. Republicans passed a budget that would allow them to borrow $1.5 trillion by piling it onto the deficit over the next decade, and a bookkeeping trick might give them $500 billion more to play with.

But even then, it's going to be tough to make the numbers add up.

Fates of states

The most immediate problem is that a critical source of revenue for lowering rates looks like a serious political liability: ending the state and local tax deduction, which allows people to deduct from their federal taxes the amount they pay in taxes to states and municipalities.

Conservatives complain that the deduction artificially encourages states and cities to hike taxes, because it partly offsets the cost to residents.

"It's unfair people in low-tax jurisdictions subsidize people in high-tax jurisdictions," Sen. Pat Toomey, R-Pa., told NBC News. "Why should that be the case?"

The deduction would also primarily benefit those with higher incomes, because most Americans take the standard deduction, which would be expanded under the GOP framework. (To take the state and local tax deduction, taxpayers have to itemize their deductions, which is usually done by people with higher incomes.)

But it would reach people in the upper middle class, too, and there are plenty of Republican House members in high-tax states whose constituents would be disproportionately affected, like New York, New Jersey and California.

Democrats are zeroing in on the issue, and Republicans don't sound thrilled about the change, either. It's looking more likely now that at least some version of the deduction will stay.

"There's been a lot of talk about it, I'll put it that way," Senate Finance Committee Chairman Orrin Hatch, R-Utah, one of the negotiators, told reporters last week. "I think that it's possible that we might even keep it."

Sen. Rand Paul, R-Ky. a key conservative vote who is often willing to buck GOP leadership, has complained that the plan could produce winners and losers rather than tax cuts for everyone.

Experts say eliminating the deduction could add well more than $1 trillion in revenue over the next decade, meaning the math gets much harder if Republican leaders reverse themselves.

"It means there's fewer goodies to distribute out to the rest of the base," said Alan Cole, a former analyst for the Tax Foundation, a Washington policy institute.

Image: Sen. Bob Corker, R-Tenn.
Sen. Bob Corker, R-Tenn., might vote against the Republican tax plan.Joshua Roberts / Reuters

As it stands, the math might not work anyway: An estimate by the nonpartisan Committee for a Responsible Federal Budget pegged the cost of the initial framework at $2.2 trillion. The Tax Policy Center estimated that it would cost $2.4 trillion.

Sen. Bob Corker, R-Tenn., who isn't running for re-election, has also warned that he might vote against any tax bill that would increase the deficit. That's a big deal, as leaders can afford to lose only two Republican votes if no Democrats support the tax bill.

More middle-class issues

The state and local deduction isn't the only issue that could affect the middle class.

The GOP tax framework would double the standard deduction, to $12,000 per individual, but it would also get rid of a $4,050 personal exemption for each household member. As a result, taxpayers with two or more children could see more income taxed under the new plan, and at a higher starting rate of 12 percent rather than the current 10 percent.

To help avoid this problem, the framework calls for a larger child tax credit. But it offers few details, and the gains would depend a lot on the credit's overall size, how much of it would be refundable and what income levels could take advantage of it.

Sen. Marco Rubio, R-Fla., who has long pushed for an expanded child tax credit, is urging leaders to make the credit $2,000 and fully refundable against payroll taxes. Without it, the senator's office warned, the plan "risks raising taxes on some of these families."

But again, the problem is paying for everything. A larger, refundable child tax credit could apply to tens of millions of families, making even relatively small increases an expensive addition.

"The things people really want, which is just a large, straightforward reduction in their tax bill, are, by their nature, not cheap," Cole said.

Making up the cost

Putting added pressure on Republicans, Trump has made a big show of promising to focus tax cuts on the middle class rather than wealthy people like himself.

But the plan includes numerous provisions that would appear to help him and his family. By the plan's final year, 80 percent of the benefits would accrue to the top 1 percent of earners, according to an analysis by the Urban-Brookings Tax Policy Center.

Image: President Donald Trump
Sen. Marco Rubio, R-Fla., left, is pushing for an expansion of the child tax credit.Joe Raedle / Getty Images

If Republicans adjust their legislation to raise less revenue or spend more on middle-class cuts, many of the provisions for wealthier households and businesses could become hard to sustain, which could upset campaign donors and ideological conservatives.

The estate tax, which affects only large estates of $5.5 million or more, seems like a particularly easy target. The proposed 25 percent rate for pass-through businesses, which experts warn could create an expensive new loophole for the rich, also could become harder to pay for.

As it stands, conservatives are concerned that the plan doesn't go far enough. While they're happy to lower corporate tax rates, for example, analysts at groups like the Heritage Foundation complain that the plan would allow companies to immediately deduct new investments for only the next five years, rather than permanently.

Economists see an obvious problem with that approach. It could encourage a surge in investment over the next five years as businesses speed planned spending to take advantage of the deduction, but then cause a hangover when the deduction lapses and businesses scale back.

Republicans have time to work out the kinks, and there's still some flexibility in the framework, which left many parts vague, to tweak the numbers. But anyone who thought tax reform would be simpler than health care, on politics or policy, should have no illusions.

Even in a best-case scenario, it's going to be a hard sell to lawmakers.