The Playing Field

Congress returned today. Paul Ryan was re-elected Speaker in no surprise, and the House Republican Majority went to work.  Instead of immediately taking action to address the working class, rust belt Americans who helped elect Donald Trump and preserve the GOP Hill Majorities, the House GOP voted as its first order of business in secret to disband the House ethics committee. Although Republicans later reversed that vote after being called out by Trump himself, the action is a reminder of how out of touch many Republican Members remain with what is motivating people outside the Beltway.

On the other side of the Capitol, New Senate Miniority Leader Schumer delivered a speech on the Senate Floor designed to hold President Elect Trump accountable for all of his campaign promises.   As the most important Democrat now in Washington, Schumer will seek to cut deals with the Republicans – such as on infrastructure — but he will be looked at to carry the banner of the Democrat’s progressive policies.   If the Republicans seek bipartisanship at all on issues such as tax reform, Senator Schumer will be in the middle of the action.

As the 15th Congress begins, we still have many questions as to the shape and timing of tax reform.   We may not have many answers soon because Congress will be occupied with confirming Trump’s cabinet nominees, and many of those will be very contentious, including Steven Mnuchin as Treasury Secretary.  Nevertheless, because the nominees now cannot be filibustered, I expect them all to be confirmed.

The incoming Trump Administration is also expected to put a Supreme Court nominee in place, perhaps even before the Inauguration. That will start  a major fight early on.  And the nominee can be filibustered.

I also expect that the House will immediately put into the works the Congressional Review Act, as it seeks to replace regulations promulgated by the Administration within the past 60 legislative days. That could stretch back six months to June 2016.

The House and Senate are also dead set on taking up a stripped down budget resolution for FY2017 that would repeal the Affordable Care Act. Senator Enzi authored the budget resolution which was introduced today in the Senate.   It sets a date for the Committees of jurisdiction to prepare bill language by January 27 which would then be turned over to the budget committees to be folded into a bill. The budget resolution will be debated this week and probably next.  Once it passes the Senate, it will go directly to the House floor for a vote. Questions remain as to the effective date of any repeal, particularly as they relate to the taxes used to fund subsidies, such as the 3.8 percent tax on investment income. There is little doubt that the budget resolution calling for repeal will be passed. What eventually replaces Obamacare is still very much up in the air.

We also do not know yet when the Ways and Means Committee will release legislation language that implements the Blueprint. The staff either does not know or is not saying. It seems unlikely that we would see the language long before a Committee markup which would be scheduled after the next budget resolution is passed on or before April 15 for FY2018.  Why lay out the language for weeks and open it up to heavy lobbying? On the other hand, the Committee could issue discussion drafts and open them up to comment as happened prior to the time Dave Camp released his final bill.

The word we got from the Senate is that Chairman Hatch is not going to push his corporate tax integration proposal. Instead, following his one on one meetings with his fellow SFC Republicans, he and his staff will develop their own tax reform proposal. It became clear in his meetings that the GOP Members did not like the corporate tax integration proposal. They also have not bought into the House Blueprint.  Indications are that we will not see a tax reform proposal from the SFC until late Spring or summer.

As for the new Congress and how it interacts with the incoming Trump Administration, and its own tax proposals, several questions come up.

First, are we talking about tax cuts or tax reform?  President-elect Trump and congressional GOP leaders insist they will reform the US tax code in 2017. But real reforms such as eliminating tax preferences in return for rate reductions will be extremely controversial. Will lawmakers make those tough choices or just pass a big tax cut?  McConnell and Ryan have said that tax reform should be revenue neutral, in part to meet Senate rules that would limit tax reform to 10 years if the legislation loses revenue outside the 10 year budget window. But Trump has not yet said he would go along with revenue neutral tax reform. He also has not backed off his support for a $1 trillion infrastructure program, but incoming COS Rince Priebus did say that it would not be rolled out until the last half of the year.

Second, how about Timing. Trump aides and Hill leaders boldly predict that Congress will pass not one, but two, major tax bills by April. But making tax policy is notoriously complex and time-consuming. In addition, lawmakers and their staffs could well spend much of February and March bogged down in controversial Trump nominations and the Affordable Care Act repeal.

Third, who will get tax cuts? Trump’s nominee for Treasury Secretary, Steven Mnuchin, insists that high-income households won’t get an “absolute” tax cut. But the Tax Policy Center estimates that Trump’s most recent plan would cut millionaires’ taxes by an average of $317,000 in 2017. Will Congress pass a fundamentally different plan, or is Mnuchin wrong?

How much new debt will Republicans tolerate? This could prove to be the crucial question in 2017. Trump would add $7 trillion to the debt over a decade, even after accounting for economic effects, according to TPC. The House GOP blueprint would add $3 trillion. What is the upper bound that congressional Republicans, especially Senate deficit hawks, will tolerate?

Fourth, How will the bill be scored? Congressional Republicans will rely on dynamic scoring to measure the cost of their tax bill. But even including economic effects, tax cuts such as those offered by Trump and the House Republicans won’t generate as much growth as backers hope.  Indeed, TPC and the Penn-Wharton Budget Model found the Trump plan’s burgeoning debt would slow economic growth by 2025. Congress could try to solve this scoring problem by instructing the Joint Committee on Taxation to assume annual growth of, say, 4 percent when it models the cost of any tax bill. Such a projection would be worthless on the merits and damage JCT, but it could allow Trump and Congress to claim that their tax cut adds less to the deficit than it likely would.

How will business respond to Trumponomics? During the campaign, Trump repeatedly vowed to restore US-based manufacturing jobs. But his tax plan is likely to boost deficits and interest rates, which would raise costs to businesses. Similarly, a stronger dollar would make US exports less competitive as would tariff-induced broken supply chains. Will big tax cuts be sufficient to offset those effects, or will Trumponomics perversely slow US business investment and hiring?

Fifth, how will Congress treat specific tax preferences? Even a big tax cut is likely to target some existing tax breaks for businesses and individuals. But which ones, and by how much? Trump proposed a cap on individual deductions and promised to eliminate some unidentified business breaks. The House GOP has been largely silent on what preferences it would target. Most of the tax lobbying battles in 2017 will focus on these choices.

Sixth, will the tax cut attract Democratic support? Congressional Republicans blasted President Obama for cutting them out of the Affordable Care Act debate. The GOP is now faced with its own choice: Will it try to make any tax bill bipartisan by reaching out to Democrats? Will Democrats be willing to respond—and at what price?

James F. Miller
President
Tax Legislative Solutions, LLC
Phone: 202 489 3711
www.taxlegislativesolutions.com