Why Tax Cuts Will Only Get Harder From Here

  • Unity on first step likely to dissipate as tax details emerge
  • Measures don’t ward off risk of December government shutdown

BlackRock's Fink Says Trump's Tax Plan Must Be Amended

House and Senate Republicans took their first concrete steps Thursday toward enacting a major U.S. tax cut by advancing budget resolutions for fiscal 2018 -- and it only gets harder from here.

"It’s uphill, there’s no doubt about that," Senator Orrin Hatch of Utah, chairman of the tax-writing Finance Committee, told reporters Wednesday about the road forward.

Republicans are arguing over the size of proposed tax cuts, whether those cuts should add to the federal deficit, and which tax breaks to eliminate -- in particular the deduction for state and local taxes. Lawmakers say there will be more fights ahead on other tax breaks for individuals and businesses as the GOP tries to reach its longtime tax-cut goals.

"I think every one of these is going to be hard," said Senator John Thune of South Dakota, a member of Republican leadership and the Finance Committee.

Republicans are eager to enact a budget -- normally an optional exercise -- because it will include language allowing them to ram through a separate GOP-only tax bill without Democratic votes in the Senate. The House adopted its budget resolution Thursday on a 219-206 mostly party-line vote. The Senate Budget Committee voted 12-11 for its version later in the day. A full Senate vote is planned in two weeks, and Republicans hope to produce a joint budget later this month. 

President Donald Trump praised the House plan in a statement that said it "drives economic growth and job creation" and lays the groundwork to "fix our rigged and burdensome tax code."

Second-ranking House Democrat Steny Hoyer of Maryland, in a statement Wednesday, called the House resolution "merely a vehicle for achieving partisan tax reform" and added: "Their plan is to push through tax changes that massively increase deficits."

Fighting within the GOP has dogged the budget effort. The House budget measure was stalled for months over conservatives’ demands for deeper spending cuts and bigger tax cuts. While the budget would fast-track $200 billion in cuts to entitlement programs such as Medicare and Medicaid, conservatives had sought $400 billion.

Corporate Tax Cut

The conservative House Freedom Caucus agreed to allow a vote only after the White House and GOP leaders revealed tax plan details last week, including a proposed corporate tax-rate cut to 20 percent from 35 percent.

In the Senate Budget Committee, a dispute over whether the tax cuts should add to the deficit or be financed elsewhere in the budget was postponed by Senators Pat Toomey of Pennsylvania and Bob Corker of Tennessee until a final tax bill is released. The committee’s budget would allow $1.5 trillion in tax cuts, though Corker says he won’t back tax cuts that add to the deficit once economic growth is factored in.

Republicans skirmished this week over whether to eliminate the state and local tax deduction -- which would amount to a trillion-dollar tax increase mostly affecting blue states including New York, California and Massachusetts. The extra money is meant to offset lower individual rates and a higher standard deduction, but Republican House members from high-tax states are seeking to lessen the tax increase on their constituents.

“It’s ironclad that you will not see a full repeal," said Republican Representative Chris Collins of New York. "There will be an accommodation.”

Deficit hawks are pushing back, including Corker.

Corker ‘Disheartened’

"I’m disheartened right now,” Corker said of the effort to keep the state and local tax deduction. “All I see is a bunch of sugar being thrown on the table, but no one wants to eat even one leaf of spinach yet.”

The conservative group Heritage Action’s chief executive officer, Michael Needham, said in a statement, “It did not take long for Washington’s swamp creatures to begin picking apart Republicans’ sweeping tax reform proposal.”

House Ways and Means Chairman Kevin Brady of Texas said this week that he was “listening very carefully to lawmakers, especially from high-tax states.” Possible compromises would limit the deduction for top earners or allow people to claim either the mortgage-interest deduction or the state and local tax deduction.

Because the state and local tax deduction "is more than a trillion dollars and of its value as an offset, it is important to our overall effort, but there are lots of them. None of this is easy," Thune said.

Members of the Republican Study Committee of House conservatives raised a potential further complication Tuesday by calling for more generous tax cuts -- possibly cuts in capital gains and dividend taxes and expanding businesses’ ability to fully expense investments.

‘Reasonable’ Economic Growth

To advance the Senate budget, Corker agreed last month to allow language permitting a $1.5 trillion tax cut over 10 years when analyzed without economic growth effects.

Corker said at Wednesday’s Budget Committee meeting that in the future tax-cut bill he won’t support reductions that add to the deficit after accounting for "reasonable" economic growth. He also said he’ll insist on a permanent tax bill. "We don’t want a 10-year tax policy," he said.

"Let’s let the debate unfold," said Corker, who announced Sept. 26 that he won’t seek re-election next year. "I care deeply about deficits in this country. That is going to be one of the major thresholds from which I judge anything."

The House budget resolution calls for tax code changes that don’t add to the national debt. Given that the process is being driven by Senate rules to avoid a Democratic filibuster, a final joint House-Senate budget later this month is likely to adopt the Senate revenue-losing approach.

Thune said the official Joint Committee on Taxation analysis of a tax plan’s economic effects will be used for the purposes of satisfying Senate rules, but there will be "a lot of different numbers used" to understand the impact of the legislation.

"There’ll be plenty of scoring to use, to look at — models to help decide what we think is going to happen," Thune said. 

Spending Bill

Even before getting to a tax bill, Congress must resolve budget conflicts over spending caps. An agreement will be needed for Congress to pass a spending bill and avoid a federal government shutdown after Dec. 8.

The House budget would allow $73 billion more in regular defense spending and $10 billion more in war funding than the Senate plan. The House would cut non-defense agencies by $5 billion, while the Senate budget wouldn’t make cuts. Once Republicans work out those differences, they then must negotiate with Democrats to avoid a shutdown because Democrats have the ability to block spending bills.

Senate Democrats want a $54 billion increase in non-defense programs. Any spending cap deal with Democrats will also have to deal with Trump’s demand for $1.6 billion in spending on a southern border wall.

— With assistance by Sahil Kapur, Steven T. Dennis, and John Fitzpatrick

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