Republican tax negotiators believe they are closing in on an agreement to overhaul the U.S. tax code but remain at odds over whether reform would be enshrined permanently or automatically sunset after a period of years.
That's hardly an insignificant sticking point.
It's sort of like a married couple agreeing to buy a car but disagreeing on the make, model, and color.
Of the "Big Six" Republicans meeting periodically on Capitol Hill to hash out tax reform, only House Speaker Paul Ryan of Wisconsin and Ways and Means Committee Chairman Kevin Brady of Texas are wedded to passing permanent legislation that would rewrite how Washington collects taxes to generate enough revenue to fully pay for the ambitious cuts imagined for businesses and individuals.
Senate Majority Leader Mitch McConnell of Kentucky and Finance Committee Chairman Orrin Hatch of Utah, and perhaps more importantly, President Trump's two proxies in the talks, Treasury Secretary Steven Mnuchin and White House chief economic adviser Gary Cohn, are less concerned about permanence.
McConnell, Hatch, and the administration would appear to hold the higher ground in the debate. The Senate majority leader can lose only two Republican votes and still pass reform, and that's with Vice President Mike Pence casting the tie-breaking vote. Democrats aren't expected to support a GOP bill.
Senate Republicans know they hold all the cards. It's why the border adjustment tax, the radical business tax overhaul plan championed by Ryan and Brady, is probably already dead.
"I don't think that we're going to be limited to this revenue-neutral restriction," Sen. David Perdue, R-Ga., a key White House ally involved in the broader tax reform discussions, said in an interview with the Washington Examiner. "I think the border adjustment thing has been taken off the table."
House Republicans aren't giving up on permanence, however.
"One fault line is: Do we have a permanent tax code, or don't we have a permanent tax code?" quipped Ways and Means tax subcommitee Chairman Peter Roskam at a Thursday hearing. The Illinois lawmaker described arguments for a temporary tax cut as a "little bit of a siren song."
Ryan, the former Ways and Means Committee chairman, and senior members of Congress' chief tax-writing panel, insist they're in a stronger negotiating position than assumed because so many Republicans in the House are philosophically tied to passing reform that doesn't add to an already problematic federal deficit.
"If we want businesses and families to make decisions, whether it's savings or investment for the long term, these need to be permanent. And every business walking in the door says man, do not give us temporary tax cuts. It will not help us make the decisions we need," Brady said in mid-July in an interview with conservative radio talk show host Hugh Hewitt.
Brady has maintained that the talks are making progress toward the goal of permanence and comprehensiveness.
It has become something of a routine in the Capitol: Mnuchin arrives on the Hill with Cohn, and they file into McConnell's or Ryan's private suite of offices for another round of tax reform negotiations with the two leaders as well as Brady and Hatch.
As eager reporters loiter outside, the Big Six inside try to find a way to produce tax legislation that can avoid the same uncertain fate that has befallen efforts to repeal and replace Obamacare: infighting and foot-dragging that threatens to squander the political capital to do big things that comes with a president's first year in office.
The goal is to get tax reform legislation to Trump's desk this year, before the 2018 campaign season kicks into gear and legislating becomes next to politically impossible.
The group so far has managed to maintain relative secrecy about what decisions, if any, they've made. But the process soon could move into public view.
The legislative strategy agreed upon by McConnell and Ryan includes giving latitude to Hatch's and Brady's committees to write the legislation, governed by the guidelines determined by the Big Six's ultimate framework. How much latitude is still to be determined.
Hatch said in a recent speech that he wants a process that is more open than that which led to the Better Care Reconciliation Act, the Senate GOP's healthcare bill that was written largely behind closed doors at McConnell's direction. The Utah Republican has spoken to all members of the Finance Committee, of both parties, to solicit their priorities.
Still, he declined in an interview with the Washington Examiner to commit to a robust debate and amendment process when his panel takes up tax reform. "There are lots of ways of marking up; the full committee's one of them," Hatch said.
Over the past few weeks, the Big Six has been testing different options for tax reform. The emerging plan is fluid enough that McConnell, according to GOP sources, is telling conservatives in the Senate that the Obamacare taxes not repealed as part of the chamber's healthcare bill will be addressed in tax reform as a carrot to get their votes.
Chief among the considerations are which tax deductions to eliminate. The key question is how much money an axed carveout would be generated for the federal treasury, which can be scored as paying for a lowering of tax rates. The tax cuts are the easiest elements for Republicans to agree to and are likely to be extended to individuals, corporations, and small businesses, or "pass-throughs."
"McConnell has always been insistent that it's not just a tax cut for big corporations," said a Republican operative familiar with leader's thinking. "He's not going to support a bill that cuts taxes for General Electric but leaves GE's [small business] customers at [a] 40 percent rate." McConnell's view isn't controversial; Ryan and Trump have shared similar sentiments.
Beyond that, the choices lawmakers have to make are difficult. An inability to make such decisions have stymied past tax reform efforts. The U.S tax code hasn't been overhauled since 1986.
In most cases, lowering rates would be expected to speed up economic growth. That, in turn, would yield more revenue, as businesses reported greater taxable income and more workers paid income taxes. So, lower rates could partially pay for themselves. Some tax breaks are actually harmful to the economy, so getting rid of them could raise even more revenue than it might appear at first glance.
But judging just how much federal revenue is at stake in any tradeoff between tax breaks and rate cuts is central to the Big Six's thinking, knowing as they do that they must keep special interests on board while not adding to the deficit that rank-and-file members freak out about. Weighing changes to revenues is the "overriding consideration," said Rep. Kenny Marchant of Texas, a member of the Ways and Means Committee.
To find out just how much money is at stake, the Big Six are turning to tax models maintained by professionals, including those who serve Congress at the Joint Committee on Taxation, Congress' in-house panel of tax experts. Thomas Barthold, the committee's nonpartisan chief of staff, has sat in one at least one Big Six meeting, as shown by a photo of the gathering released by Ryan on Twitter.
Hatch said the group "constantly" is running numbers by the committee. At this point, he said, "we know pretty well where we're going."
The biggest trade-off the group has to weigh is that of getting rid of the deduction for state and local taxes paid, which the Trump administration has said it would support doing.
Seven New York Republicans in the House, led by Rep. Dan Donovan of the 11th District in Staten Island and Brooklyn, have banded together to warn the Big Six against limiting the deduction for state and local taxes.
Taxpayers who itemize deductions on their federal returns can deduct the property taxes and income or sales taxes they pay to states and cities. The deduction mostly benefits relatively high earners in high-tax blue states.
Eliminating it likely would buy the Big Six about $1.8 trillion with which to cut rates, according to the Tax Foundation, an outside think tank. The Tax Foundation's tax model uses anonymized taxpayer data and is meant to approximate one of the models used by the Joint Committee on Taxation.
Even in federal government terms, $1.8 trillion is a lot. In the tax reform blueprint that Ryan advanced last summer, that $1.8 trillion paid for almost all of the individual tax cuts he proposed, including lowering the top rate from 39.6 percent to 33 percent, reducing the tax brackets, and lowering capital gains taxes.
In other words, if the break is not eliminated, Congress would have to add $1.8 trillion to federal deficits to get those rate reductions. That's not a great option, given that many Republicans see the existing $20 trillion national debt as a threat to the country's future.
Eliminating the state and local deduction might be more realistic in the Senate, where there are few blue-state Republicans. But plenty of Republicans from high-tax, liberal states are in the House, and if the proposal isn't dropped, a bill could lose too many votes to pass in the lower chamber.
Even for lawmakers from low-tax states, it would prove a difficult vote. The housing lobby, among many others, is rallying to save the break for property taxes, which helps keep home values higher. Lobbyists seeking to preserve the break could accuse Republicans of raising taxes on families such as those with police officers or nurses — ones that aren't rich, but earn enough to use the deduction in high-tax states.
Simply eliminating the break would be a stretch for leadership, said Dean Zerbe, a former tax counsel for the Senate Finance Committee who is now the national managing director for the tax consultancy Alliantgroup. "You're just getting yourself on the javelin receiving team if you do that."
But McConnell and Ryan do have options other than simple repeal. One might be to disallow the deduction for families with a certain level of earnings, such as $250,000.
The drawback of that approach is that the tax code would not be simplified as much as it could be. The attraction is that it would still raise revenue with which to lower rates. For every such compromise on revenue-raisers, Republicans would have to also compromise on rates.
Trump's promise to lower the corporate tax rate from 35 percent to 15 percent would quickly become impossible if McConnell and Ryan can't convince members to dramatically scale back the tax breaks scattered throughout the code.
In recent weeks, members of the Big Six have hinted that the Trump team acknowledges that a 15 percent rate might not be achievable.
But the 20 percent rate the Ryan has called for, or even a 25 percent rate, also would require winning over reluctant senators and representatives.
For instance, to get to 20 percent, Ryan proposed a border adjustment for corporate taxes. That would have raised about $1 trillion over 10 years, enough to account for most of the corporate rate reduction.
At this point, though, it appears the retail industry has successfully eroded support for border adjustment. Under border adjustment, export sales would be exempted from taxation, but companies would no longer be allowed to deduct the cost of imported goods from their taxable income. Fearing an import tax, retailers such as Arkansas-based Walmart and Georgia-based Home Depot launched a large-scale campaign to stop border adjustment.
With the four Republican senators from Georgia and Arkansas vocally opposed, including Perdue and Sen. Tom Cotton, R-Ark., the pressure is on Ryan to drop it.
While the controversy over border adjustment has overshadowed other tax news, the import tax is not the only tough sell that Ryan has put on the table. To get to the 20 percent corporate tax rate, Ryan also called for eliminating the ability of businesses to deduct interest expenses from their income.
Today, interest payments are treated as an ordinary business expense, like buying raw materials or paying workers. Ryan would change that so that companies could no longer deduct interest costs from their taxable income. Doing so would raise $1.2 trillion over 10 years, according to the Tax Foundation.
Any business that relies on debt is going to be an obstacle to those ambitions, however. That includes heavyweights such as private equity and utilities, but also smaller firms like farmers.
Accordingly, the break has some highly influential defenders, such as Iowa Sen. Chuck Grassley, a senior member and former chairman of the Senate Finance Committee. Hatch, too, has expressed skepticism about eliminating the break.
Opposition to eliminating interest deductibility was on full display during an April House Agriculture Committee meeting, at which several Republican members aired defenses of the current system. Rep. Steve King, an Iowa conservative, called it a "harebrained idea."
From the perspective of the Big Six, the task is to gauge how deep the opposition runs and whether it can be defused by the offer of the lower corporate rates, or whether they could dangle other enticements to worried lawmakers. They could, for instance, promise generous terms for a transition to the new regime, or commit to limiting, rather than outright disallowing, interest deductibility.
Rep. Mike Conaway, the Texan who is chairman of the agriculture panel, says skeptics shouldn't oppose tax reform until they are able to go through the final proposal with their accountants to see whether their bottom lines would be hurt.
"What I'm telling my constituents is to keep their powder dry," he said. "No one knows yet what the full impact of the overall tax reform package will be on their individual circumstances."
Short of legislative accomplishments so far, Republicans are hungry for a big achievement such as tax reform. Consequently, lawmakers are prepared to countenance changes they might balk at initially.
Sen. Pat Roberts, a Kansas Republican on the Finance Committee, previously expressed worries about eliminating interest deductibility. Asked last week about it, though, he passed on issuing a defense. "My main concern is — let's get something narrowed down so that it can pass."