Republicans are likely to aim for a tax reform plan that is a mix of permanent and temporary provisions, due to the constraints of Senate procedure.
Treasury Secretary Steven Mnuchin said Friday that some provisions may be temporary, and that certain aspects of the plan must be permanent, especially features relating to the corporate tax code.
“There’s aspects of the package that absolutely have to be permanent,” Mnuchin said at a convention of international bankers in Washington. Those include, he said, the switch to no longer taxing multinationals on the earnings of their foreign subsidiaries.
“Parts will be permanent, and parts will be temporary,” he explained.
Previously, House Speaker Paul Ryan and other House Republicans had aimed to make the entire reform package a permanent change. But the party has struggled to unite around offsets to replace the revenues lost from rate cuts, likely placing the goal of permanence out of reach.
“Are going to be able to get to a completely permanent change? I don’t think so,” Peter Roskam, the chairman of the House Ways and Means tax subcommittee, said Wednesday at an event at the Newseum. “I think we’re going to fall short of that.”
“But is it an all-or-nothing proposition? No,” added Roskam, an advocate of permanent changes.
Republicans will be forced to choose between measures because of Senate procedure. They plan on advancing tax reform through the budget process known as reconciliation. Reconciliation requires that the tax legislation does not add to federal deficits in the years beyond the 10-year budget timeframe.
That means that any net tax cuts would have to sunset, as did the tax cuts passed by George W. Bush in 2001 and 2003.
As a result, Republicans will have to decide what is in and what is out. So far, the GOP has spelled out roughly $5.8 trillion in tax cuts, according to the Committee for a Responsible Federal Budget, versus only $3.6 trillion in offsets. That means they have to find $2.2 trillion of cuts to sunset. And if they can’t agree to raise revenues by eliminating certain tax breaks, such as the state and local tax deduction, they’ll have to sunset more.
For both policy and procedural reasons, Republicans are likely to try hardest to make the corporate tax provisions permanent, as Mnuchin suggested.
One reason is the perception that corporations plan major investments on very long timelines, requiring certainty about what the law will be.
Another is that the models used by Congress’ tax experts finds that even a very temporary tax rate cut, such as a three-year reduction in the rate, would run afoul of the Senate rules by adding to deficits past the 10-year budget window. That’s because corporate tax lawyers would find ways to move accounts around to shift taxable income up by years or even decades.
If Republicans fight hard for offsets to make the corporate changes permanent, though, they will have less scope to make the individual tax changes permanent.
One tax lobbyist suggested that the “corporate stuff is going to have to pay for itself” and that Republicans could “dial” all the individual provisions up or down in order to make the numbers work. The lobbyist suggested that all the tax cuts for families — the lower rates, the doubled standard deduction, the enlarged child tax credit — could be set with an expiration date, as was the case with the Bush tax cuts.
Doing so would be possible because the bill will be judged by the Senate Parliamentarian on a title-by-title basis. By separating parts meant to be permanent into titles that won’t add to the deficit in the long-run, Republicans could ensure that they remain in place while other titles phase out.
Such a maneuver would please some conservatives in Congress, who favor deficit-increasing tax cuts and would be willing to bet that any cuts passed now would likely be re-upped, at least in part, by future Congresses.
Phil Gramm, a former Texas Republican senator and economist who now runs an advisory firm for investors, said that “the last thing I would make permanent are the provisions that… Democrats will have a very difficult time overturning in the future.”
In particular, he suggested, Republicans shouldn’t prioritize making the doubled standard deduction a permanent feature. Future Democratic-run Congresses would not be likely to let that tax break for low-income families expire. Not making it permanent would buy Republicans a lot of space, too: The break would lose $1.1 trillion in the second decade, according to the Tax Policy Center.
Already, the administration and GOP leadership have made some of these decisions. In the framework unveiled in September, Republicans said they aimed to allow companies to write off all new investments in equipment, but only for five years. Already, some members are talking about how that provision could be made permanent.
In fact, one view is that measures that are enacted on a temporary basis — or left out of the bill altogether — would be candidates to move in tax legislation as soon as next year.
“Let’s try to make as much permanent as we possibly can, and recognize that we’re going to have to come back and do other things in the future,” said Roskam, explaining that there’s a “false impression that this is where tax reform starts and ends.”
In an early October Facebook interview with anti-tax activist Grover Norquist, Ryan raised the possibility of pursuing tax bills via reconciliation every year Republicans are in power.
“We intend to go after this each and every single year, because what we can’t can’t accomplish now we want to accomplish more and more and more…” Ryan said. “There’s no reason not to do this every year.”
