With the failure of the Senate GOP’s health care bill last week, many Republicans, including House Speaker Paul Ryan, are eager to turn their attention to an issue on which they hope to be more united: tax reform. “Ryan signals readiness to move to tax reform,” The Hill — a Washington, D.C., newspaper — wrote Friday, the morning after the Senate’s dramatic rejection of its latest health care overhaul. “Moving past health care, White House looks to tax reform,” The New York Times reported Monday. “Yes, the time for the tax reform pivot has arrived,” Politico’s “Morning Tax” newsletter declared Monday morning.3

But the parenthetical that followed Politico’s bold declaration was more cautious: “Well, maybe.” There’s good reason to be skeptical. Republicans made similar promises to shift their attention to tax reform after an earlier version of their health care bill died in the House of Representatives, and again after the bill ran into trouble in the Senate; both times, they ended up returning to health care instead. There are signs that could happen again; White House budget director Mick Mulvaney said Sunday that the Senate shouldn’t take up any other issue until it votes again on health care.

Even when Congress and the White House do ultimately turn their attention to tax reform, it may be a long time before anything significant happens. As the health care debate made clear, Republicans can have a hard time agreeing on a plan, even on issues where they agree about the basic goals (repealing Obamacare, cutting taxes). Some Republicans in recent weeks have suggested that tax reform will be easier to address than health care — “so easy,” President Trump said last month — but such claims have drawn a knowing chuckle from tax experts. There’s a reason the U.S. hasn’t passed a major overhaul of its tax system in more than 30 years: Tax reform is hard. (The phrase has become so ubiquitous that tax nerds have begun using #TRIH as a hashtag on Twitter.)

None of that, however, will prevent us from hearing a lot about taxes over the next few months. So how will you know when to start taking the “tax reform” talk seriously? Here are three questions to help guide you:

Are there details?

When it comes to taxes, agreeing on broad principles is easy. It’s the details that are hard. Republicans generally agree that the U.S. should “lower the rates and broaden the base,” which means cut tax rates, but also eliminate loopholes that shield some income from being taxed altogether. The trouble is, every one of those loopholes has a built-in base of supporters with a financial incentive to preserve it. Want to get rid of the mortgage interest deduction? You’ll catch hell from home builders, real estate agents and, of course, homeowners. Want to end the deductibility of interest for businesses? Real estate developers, which benefit disproportionately from the provision, will lobby hard to stop you. The bigger and bolder the reform, the more industries it will affect — and the more opposition the change will inevitably face.

Last year, Republican leaders in the House released a detailed tax plan that tried to hash out at least some of the tradeoffs inherent in any serious reform effort. Trump, during his campaign, issued a plan that, while less fleshed-out than the House proposal, included some specifics. But more recently, the tax proposals coming out of Washington have been far less specific. Trump earlier this year issued a one-page statement of “goals” that provided almost no meaningful details. Last week, Republican leaders in both Congress and the White House issued a joint statement of principles that was just five paragraphs long and likewise contained few specifics. Until either Congress or the White House proposes an actual plan, it’s hard to take the tax-reform pivot seriously.

Do they have a way to pay for it?

One thing that pretty much all Republicans agree on is that taxes should be lower on businesses and many households. But there’s much less agreement about how to pay for those cuts. Some in the White House have raised the prospect of not paying for them, at least not directly. (The White House has argued that tax cuts would spur faster economic growth, which would boost revenue and pay for the cuts; economists on the right and left overwhelmingly reject that claim.) Republicans in Congress, however, have been resistant to any tax plan that adds to the deficit. But cutting taxes without increasing the deficit requires either raising other taxes or cutting spending, or both. Neither is likely to be easy.

Republicans came up with a couple of potential ways of raising revenue. Then they rejected both. Ryan wanted to pay for tax cuts in part through a border-adjusted tax, a complex scheme that would have raised billions of dollars in revenue by restructuring the corporate income tax. But the border-adjusted tax, which would have taxed imports but not exports,4 was hugely unpopular among retailers, who lobbied hard against it. Last week, they won: The statement of principles agreed to by GOP leaders formally abandoned the border tax. Congressional Republicans, meanwhile, quickly rejected a rumored proposal by Trump adviser Steve Bannon to raise taxes on the very rich.

Cutting spending, meanwhile, could be even harder. The majority of the federal budget is taken up by Social Security, Medicare and other hard-to-cut (and politically sensitive) “mandatory” items; most of what’s left goes to defense, where Trump wants to spend more money, not less. That leaves relatively little that can be cut — and government programs, just like tax breaks, all have constituencies that will fight for them. Beyond such practicalities, there are issues related to public perception: As the fight over health care showed, it is politically difficult to cut spending (which tends to affect lower-income Americans) to pay for tax cuts (which tend to benefit the rich disproportionately). You’ll know Republicans are getting serious about tax reform when they release a plan that addresses how to pay for their cuts.

Have they passed a budget?

Anyone who followed the health care debate closely got all too familiar with the arcane Senate procedure known as “reconciliation.” The simple version: Bills that go through the reconciliation process require just 51 votes to pass the Senate, instead of the 60 needed to approve most other measures. But the Senate can only use the process once per fiscal year,5 and this year’s reconciliation resolution was already dedicated to health care.

That means that to pass a tax reform bill via reconciliation, Congress will have to pass a budget first, a process that has barely begun (and that requires its own complex negotiations). Of course, the Senate could decide to skip reconciliation and try to pass a tax bill the old-fashioned way — something Utah Sen. Orrin Hatch suggested to reporters Tuesday. But that would require winning over several Democrats, which would make the task of reaching a deal even harder. Senate Majority Leader Mitch McConnell on Tuesday said he expected to try to pass tax reform without Democratic help. If he sticks to that, a budget will be a prerequisite for any tax deal.


Source: FiveThirtyEight

Leave a Reply