John McCain’s unexpected retreat to Arizona for eye surgery and the defections of Mike Lee and Jerry Moran have added yet another delay to the Senate’s health-care reform slog. But even as the most recent Senate health-care bill dies, Republicans are charging ahead to lay plans for their next congressional brawl: tax reform.
Simplifying and slimming the federal tax code was a major campaign promise for Donald Trump, who made regulatory reform and “massive” middle-class tax cuts the first legislative priority on his post-election 100-day plan. We’re closer to day 200 of the Trump presidency now, but a tax reform timeline is starting to take shape.
Representatives from the Senate, House, and Trump administration have been meeting behind closed doors to develop a plan that can fulfill Trump’s campaign promises while still passing muster in both houses.
The group, which some aides call “The Big Six,” consists of House speaker Paul Ryan, Ways and Means chairman Kevin Brady, Senate majority leader Mitch McConnell, Senate Finance chairman Orrin Hatch, Treasury secretary Steven Mnuchin, and National Economic Council director Gary Cohn. They’re expected to begin pitching their plan by mid-August, and hope to have the bill finalized for mark-ups after Labor Day.
The emerging plan will strongly resemble the outline the Trump administration released in April: slashing corporate tax rates to encourage growth, while lowering and simplifying individual rates to reduce the squeeze on consumers.
But passing tax reform is unlikely to be much easier than passing health-care legislation. In the Senate, Republicans will likely be working with the same narrow margins that have bedeviled them in health care, as no Democrats are expected to support the legislation. And the failure of health-care itself is a problem. Asked how the death of the health-care repeal will impact the timeline for tax reform, Sen. Hatch replied, “It makes it more difficult, let’s put it that way.”
So, as always, the question becomes: how do you deliver on promised tax cuts without either expanding the deficit or cutting politically popular programs?
Ryan and Brady have indicated that they want their plan to be revenue-neutral, but the administration’s April outline was anything but. That plan would have reduced the corporate tax rate from 35 percent to 15 percent (among other reductions), counting on a bump in economic growth to make up for lost revenue.
“This will pay for itself with growth, with reduction of different deductions and with closing loopholes,” Treasury secretary Steve Mnuchin insisted in April. “The economic plan under Trump will grow the economy and create massive amounts of revenues—trillions of dollars in additional revenues.”
Republicans also hope to make up some of the difference with cuts to mandatory discretionary spending. The 2018 House budget plan released on Tuesday would save $203 billion over the next decade, although passing it will be its own battle.
But even if that budget survives intact, $203 billion barely scratches the surface of the ballooning deficits which would result from a plan following the April outline. Last week, a paper from the nonpartisan Tax Policy Center used that outline to model a full tax plan. They found that such a plan would result in up to $7.5 trillion in lost federal revenue over the next decade.
White House officials have challenged this finding, arguing that it ignores the economic growth which will make the tax cuts effectively self-funding.
But economists do not agree that that tax cuts alone will be able to provide the kind of growth Mnuchin promises. In fact, the Tax Policy Center’s Roberton Williams argued that a plan that allowed deficits to skyrocket would hurt growth in the long run.
“Our dynamic models suggest that things would be a little bit better for a while—the economy would grow a little faster in the short run,” Williams told THE WEEKLY STANDARD. “But because the plan would likely run substantial deficits, at least in the short run, that additional debt would slow economic growth in the longer run. While you might grow a little faster in the first decade, by the second decade the economy would grow more slowly. The situation would actually be worse off under a dynamic estimate than they would under a static estimate.”
A White House spokesperson declined to comment on whether the final plan would be revenue-neutral, saying that “we are working together with the House and Senate on the final answer to those questions.”
In response to a question about the Tax Policy Center paper, the spokesperson added: “We are not going to comment from the White House on every report put out by independent organizations on our policies, but I would point you to the many other analyses, such as this one from Heritage, that conclude that the president’s plan will help spur economic growth, create jobs, and keep more money in Americans’ pockets.”
It seems likely that the final plan will cut some middle path between the big promises of the April proposal and the inclusion of additional funding mechanisms. Instead of a 15 percent corporate tax rate, for instance, Ways and Means chairman Kevin Brady has indicated that the group will aim for 20 percent. And House leadership has also pushed for several large new taxes to offset costs, including a border-adjustment tax, which would require U.S. companies producing goods overseas to pay taxes on the value of their imports, and a provision eliminating personal deductions for state and local taxes paid. The Tax Foundation has estimated that these taxes would net the federal government $1.1 trillion and $1.8 trillion, respectively, over the next 10 years.
But these additional taxes also have their detractors. The border-adjustment tax is opposed by the Trump administration and is unpopular in the Senate, where only a handful of defections could kill the plan. The deductions elimination seems more likely to survive, but a handful of New York House Republicans, among others in high-tax blue states, oppose it.
“The SALT deduction affects filers’ taxable income, so its elimination would push some people into higher marginal tax brackets and would thus reduce incentives to work and invest,” Dan Donovan, the Republican representative of New York’s 11th district, wrote in an open letter to Mnuchin on June 27. “The deduction for state and local taxes matters for all Americans, but it affects New York disproportionately.”
Meanwhile, some House conservatives are deeply skeptical of the whole idea of revenue neutrality.
“Revenue neutral is a fancy way of saying the tax burden stays the same, we just shift around who pays what,” Ohio Congressman Jim Jordan, a member of the House Freedom Caucus, told reporters last Wednesday. “In that scenario, what always happens in this town is the connected class gets a good deal, the middle class gets the bad deal. I’ve never, and I don’t think our party has ever subscribed to the idea that letting people keep more of their money somehow costs the government.”
Jordan and other Freedom Caucus members instead stressed a policy of deficit neutrality: reducing the revenue the federal government brings in through taxes, but reducing federal spending by a corresponding amount.
“We should be talking more about deficit neutrality; that’s the bigger picture,” Paul Gosar of Arizona told TWS. “I’m not here for a new tax. You either believe in free-market principles or you don’t. There’s no hedging one way or the other. And from that standpoint, when you start looking at corporate tax, that’s a pass-through tax to every Tom, Dick, and Harry, every consumer that’s buying. So from that standpoint I’d love to see it be zero.”
Deficit-neutral plans that cut both taxing and spending are popular among conservative policy groups. Adam Michel, a tax policy expert at the Heritage Foundation, argues that such a plan wouldn’t actually require an absolute reduction in federal spending, just a reduction in the government’s future rate of growth.
“When we talk about the budget picture, taxation is only half of it. What’s important is what we spend the money on,” Michel told TWS. “You can balance the budget in 10 years, provide a $3 trillion tax cut, and still keep the same size of government we have today, and all that requires is reducing the growth rate of government going into the future. The current spending baseline assumes over a 5 percent year-over-year growth rate in spending, so just by bringing that down to about a 2 percent growth rate you can meet the balanced-budget consideration. . . . And you’re not shrinking the government; you’re just keeping up with inflation, essentially.”
But even relatively modest future reductions in the growth of entitlement spending could have political consequences for Republicans who support the tax reform package. After all, they’ve already tried a similar plan this year: the Senate health-care bill was powered by the same sort of future rate-increase reductions. Democrats have clubbed Republicans over these cuts, declaring that the GOP bill is nothing but a massive tax cut for the rich financed by the poor.
“If you want to have big tax cuts and you want the budget changes to be deficit neutral, you have to go after not just the non-defense discretionary but also go after these entitlements,” the Tax Policy Center’s Roberton Williams told TWS. “We’ve seen what happens there. Look what happened to the health bill, where the big fight now is over what to do about Medicaid. Congress is trying to cut back on the entitlement side, and they’re having trouble getting that through because they can’t get their own members to go along with taking benefits away from people in need.”
Further complicating matters is the view that spending reductions to programs such as Medicare and Social Security would disproportionately affect Trump’s own base.
“So the issue there is what do you go after?” Williams says. “Do you go after the two thirds of the spending that’s for entitlements? And the president’s promised not to do that. You could not be generous to the military the way he’s promised, but that doesn’t seem to be something that’s on the table at this point. It’s really hard to go after that non-defense discretionary spending, because there’s not a lot of it; it’s about a sixth of the federal budget, and some of that stuff you just can’t cut.”
Despite these challenges, the White House remains confident that tax reform will result in a political and policy victory, leading to economic growth and, ultimately, a balanced budget.
“They keep saying they can do it,” Williams says. “We haven’t seen this happen before, and the kind of things they’re talking about doing haven’t worked in the past. That doesn’t mean they couldn’t work going forward.”
