Congressional Republicans need to think again if they’re hoping tax reform will offer them an easy victory after their bungled Obamacare repeal effort.
Rewriting the tax code will be just as difficult as health care — maybe even more so. While every Republican loves a tax cut, the GOP is divided over how -— or even whether — to pay for them. The fault lines are as much about lawmakers’ parochial concerns as they are about party identity, further complicating the task of cobbling together a majority.
That’s not to mention the procedural hurdles that could stall the tax debate, or the crowded congressional calendar that could push reform to the back burner. And with the 2018 election season kicking off in just four months, time is not on the Republicans’ side.
Here are five reasons why tax reform could end up a bigger quagmire than Obamacare repeal:
The budget wars
Congressional rules require Republicans to pass a fiscal 2018 budget before tackling partisan tax reform.
But House Republicans have been trying — and failing — to pass a budget for about two months, as conservative- and centrist-Republican demands pull Speaker Paul Ryan (R-Wis.) and his team in opposite directions. Moderates have balked at House Budget Chairwoman Diane Black’s proposed $200 billion of cuts to welfare programs included in the budget. But conservatives say those cuts aren’t deep enough and have threatened to withhold their votes unless they get their way on key tax reform provisions.
Even if House leaders manage to muscle a budget through the House, the reality is that the Senate GOP’s fiscal blueprint will probably look nothing like the House version. So both sides will have to spend precious time resolving their differences in a conference committee — then pass a GOP budget agreement through both chambers again.
Should the debate drag through the fall, White House and senior Republicans plan to bring the hammer down hard by warning GOP factions: pass a budget or be blamed for blocking tax cuts.
Tax cuts vs. tax reform
While virtually all Republicans tout the need for a tax overhaul, there’s an ongoing war over whether to pursue true tax reform or just a tax cut.
The difference is huge — starting with the price tag. Congressional leaders like Ryan have consistently said they’d prefer tax reform, which traditionally neither adds nor subtracts revenue. That mean offsetting any tax cuts by getting rid of tax breaks.
But hard-line conservatives in Congress — and more than a few top Trump advisers in the White House — have questioned the need to fully pay for tax reform. They argue that the government should be bringing in less revenue, not the same amount, and that simply cutting taxes will do more to jolt the economy.
“You don’t have to be a genius to know that if it’s ‘revenue neutral’ they’re going to take it from this pocket and give it to this pocket,” Rep. Scott Perry (R-Pa.), a House Freedom Caucus member, said in July, pulling at his pant pockets for emphasis. “It’s the same pair of pants! That’s the problem.”
Because of strict Senate procedural rules, leaders are inclined to first try to pursue real tax reform. The Senate can only bypass the filibuster — and thus cut out Democratic input altogether — if any tax changes do not add to the deficit in the long term.
But Republicans could choose to pass tax cuts that come with an expiration date, as happened with the Bush tax cuts, or a mix of temporary and permanent provisions. That’s one of the advantages the GOP has in the tax debate: Unlike with health care, Republicans could claim victory with more modest tax cuts that fall short of full-scale reform.
“I think we’re highly motivated to get a result on taxes after health care,” said Sen. Roy Blunt (R-Mo.).
The ‘sacred cow’ problem
They’re called “sacred cows” for a reason. Overhauling the tax code requires getting rid of a wide range of tax breaks and incentives, almost all of which have entrenched interests fighting for them in Washington.
Take the so-called border adjustment, a central feature of the House GOP tax reform blueprint. Ryan and Ways and Means Chairman Kevin Brady (R-Texas) had to drop the proposal to tax imports but exempt exports after retailers complained it would cause prices to spike on consumer goods and cripple the middle class.
The border adjustment debate also illustrated that a lawmaker’s tax reform priorities can be influenced more by home-state priorities and industries than by ideology. Sen. Tom Cotton (R-Ark.), who has Walmart’s global headquarters in his state, was among the most strident Republican critics of the border adjustment.
Some Republicans are also pushing to allow businesses to immediately write off investments in equipment and other purchases. But that idea has also split conservatives, some of whom believe tax reform should focus more on lowering tax rates for companies, and the business community, some of which wants to keep a deduction for interest on business debt that would be eliminated to keep the plan’s cost down.
On the individual side, the largest tax breaks — like the deductions for home mortgage interest, charitable donations and state and local taxes — are broadly popular and survived previous prunings of the tax code.
“There’s so many more losers than in health reform,” said Marc Goldwein of the Committee for a Responsible Federal Budget, a group that advocates policies to reduce the federal debt. “Tax reform — if they do it right — it’s going to affect everyone.”
Repeal failure spillover
Top Republicans on the Hill have said they’re shifting their focus to taxes and away from health care. But some rank-and-file GOP lawmakers — and more importantly, President Donald Trump — don’t sound interested in totally giving up on repealing Obamacare before the 2018 elections.
“I just want him to get repeal and replace done,” Trump said Thursday of Senate Majority Leader Mitch McConnell (R-Ky.).
Returning to health care would take precious time away from tax reform efforts. But on the flip side, the GOP’s failure to enact a health care bill is complicating their tax reform efforts. Obamacare includes hundreds of billions of dollars in taxes, which the GOP spent months vowing to repeal.
Now, opponents of policies like the medical device tax will be seeking relief in tax reform. And because Republicans couldn’t roll back an Obamacare tax on higher earners’ investment income, they likely won’t be able to reduce capital gains rates as much as they would like.
Crammed congressional calendar
Even if health care is sidelined, tax reform will have competition this fall for Republicans’ attention.
The White House has said a tax package will get marked up in September, pass the House in October and clear the Senate by Thanksgiving. But most Hill GOP insiders know that’s unlikely — if not impossible — because of the busy fall schedule.
Upon returning from August recess, lawmakers will have to raise the debt ceiling and avert a government shutdown by the end of September. Both votes are tough and will require bipartisan negotiations, sucking up GOP leadership’s energy to the point that tax reform will have to take a backseat.
Hill insiders and the White House have also begun talks about a major bipartisan budget deal to raise strict spending caps on the Pentagon and domestic programs — yet another distraction from a tax bill. Both chambers will also need to pass a unified budget, a difficult feat given the divisions in the party.
Meanwhile, the clock is ticking on tax reform. GOP insiders say they have approximately four months to pass a bill before the 2018 election season kicks into high gear in January or February. Passage after that becomes even more precarious, as vulnerable Republicans turn skittish about taking tough votes.
“Time’s the most precious commodity they have,” said Liam Donovan, a former top aide at the National Republican Senatorial Committee who is now legislative director for Associated Builders and Contractors.