The White House is thinking big on tax reform, but don’t expect any action soon.
President Donald Trump’s initial proposal to slash taxes for corporations, individuals and large estates is only the beginning of a process that could continue late into the year and will have to clear a number of difficult hurdles before passage.
For one thing, Trump’s tax plan is still barebones. It’s a page of broad goals like lowering individual tax rates to 10%, 25% and 35%, cutting the corporate tax rate to 15% and expanding it to smaller pass-through entities, and eliminating the estate tax, along with a variety of changes to rules and deductions.
But a lot of basic information is missing, making it difficult to fully evaluate.
The White House says it will take more negotiation to work out the details and the House and Senate will now have to begin the long process of crafting legislation based on the new framework and their own preferences. Treasury Secretary Steve Mnuchin said last week that it was “not realistic” to expect a bill to reach the president’s desk before August, but the goal is to finish things up before the end of the year.
The process is very different than it was for health care, where the White House worked directly with Speaker Paul Ryan to craft a bill and then tried to pass it as quickly as possible. On taxes, the White House has taken the lead on its own plan that contrasts with House Republican leaders, who put out a blueprint last year and were working on a related plan.
The Trump plan was missing something
In this case, the gap is significant because the House Republican plan centered on a key feature that the White House blueprint did not include. Ryan’s plan was to cut the top corporate tax rate to 20% but pay for it by using a new border adjustment tax (BAT) that would favor companies who export goods, like manufacturers, rather than companies who primarily import goods, like retailers. The Tax Policy Center, a nonpartisan think tank, estimated the BAT would have raised about $1.2 trillion.
Trump sent mixed signals on border adjustment after the election. Early on he said it was too complicated, then he said he was reconsidering. The White House plan this week left it out, but the administration hasn’t explicitly ruled out the idea in the future.
Senator Tim Scott (R-SC), a member of the Senate Finance Committee that handles taxes, told reporters on Tuesday that the drama over border adjustment was one reason the Senate had held off on drafting its own blueprint until now.
“The president made a few comments [and] several months of work went down the drain, from our perspective, on the border adjustability tax,” Scott said. “So the reality of it is we have decided to wait.”
Rep. Kevin Brady (R-TX), the chairman of the House Ways and Means Committee, has tried to downplay differences with the White House so far and praised Trump on Wednesday for “going bold” on tax reform. He told reporters the White House’s blueprint had at least “80% or higher shared goals” with the House framework.
But Brady’s not backing off his support for a BAT either, at least in some form, and has said he’ll continue to make the case for the policy.
One reason it’s an important part of the debate is procedural. As was the case with health care, Republicans plan to pass their tax bill through reconciliation, a procedure that means it can pass with a simple majority in the Senate but comes with certain constraints. One rule is that any changes have to not increase the deficit in order to become permanent law, otherwise they can only operate within a 10-year window.
How much will it cost?
Republican leaders in the House and Senate both have both talked up the importance of passing “revenue neutral” tax reform, which would require them to offset their cuts to the corporate tax rates elsewhere. And even as Brady praised Trump this week, he reiterated to reporters that his goal was to pass a tax bill that was “built to last” and would act in “a permanent way.”
You can’t do that with the White House plan, which some experts are already estimating would cost at least several trillion dollars. But finding new pay-fors is a whole lot harder (and a lot less popular) than finding new tax cuts.
Already, the White House plan is facing pushback on the offsets it does include: Rep. Peter King (R-NY) and other New York Republicans told Crain’s they don’t support a provision ending the individual deduction for state and local taxes, which would disproportionately affect states like New York with higher taxes. It doesn’t help that Trump is trying to tackle individual tax rates and corporate tax rates in the same bill.
Making the path to passage even harder, reconciliation requires bills not to increase the deficit beyond a 10-year window and Ryan’s tax counsel George Callas has warned that even temporary corporate tax cuts would violate this rule, since they would allow companies to carry over benefits into future years.
Republicans could potentially get around these rules, but it would require a fight over procedure that might be too much for more traditionalist senators. They could also turn to Democrats for help, but that would require a very different set of policy proposals before they’d consider participating. The White House plan would likely cut taxes for the wealthy far more than for middle-income and lower-income Americans, making it a no-brainer for Democrats to oppose.
"This is an unprincipled tax plan that will result in cuts for the one percent, conflicts for the President, crippling debt for America and crumbs for the working people," Sen. Ron Wyden (D-OR), the ranking Democrat on the Senate Finance Committee, said in a statement on Wednesday.
Finally, moving on to a reconciliation bill on taxes means giving up on the previous reconciliation bill, which is currently reserved for health care. That could be a difficult choice if several months from now the White House is still working to pass an Obamacare repeal-and-replace bill. Add it up, and the journey is long and uncertain on taxes, even as Republicans overwhelmingly agree on their broad goals.