Four Hurdles That Could Block Republicans’ Tax-Cut Ambitions

  • Ryan has said he wants tax overhaul completed before August
  • Obstacles include controversial border tax and deductions

Trump's Policy Timeline: Tax Reform and Bank Regulation

If House Speaker Paul Ryan wants to achieve his goal of passing massive tax cuts for individuals and businesses before August, he’ll have to navigate around obstacles posed by his own party, members of Congress say.

Early hurdles include distractions posed by President Donald Trump as well as opposition to a key part of the plan among such conservative stalwarts as Charles and David Koch, the billionaire industrialists.

While campaigning, Trump promised sweeping tax cuts -- including middle-class tax relief -- that analysts said would add trillions of dollars to the national debt. But he gradually moved more in line with the less costly House GOP tax blueprint that was released in June, embracing shallower rate cuts for individuals and businesses.

Since his surprise victory, the president and Republican leaders in both chambers have described a tax overhaul as a top priority -- a once-in-a-generation opportunity for meaningful change. Here’s a closer look at four of the hurdles they’ll have to overcome.

1. Trump’s Controversies

Some GOP lawmakers worry that Trump’s actions in the first two weeks of his administration -- including his allegations of voter fraud, his comments about the size of his inauguration crowd and his executive order imposing immigration restrictions -- have “distracted” Congress from taxes and other issues, said Representative Charlie Dent, a Pennsylvania Republican.

“A lot of us want to work with this administration on important issues like tax reform, health care, infrastructure,” Dent said. “But it doesn’t help when we get distracted by crowd size, recounts, and now this poorly thought-out and developed executive order on immigration.”

Trump has to avoid squandering political capital, Dent said. “There are limits as to what can be accomplished and we have to set priorities and be much more focused than has been the case up to this point,” he said.

Another Republican, Representative Adam Kinzinger of Illinois, had said last week at the GOP policy retreat in Philadelphia that he was concerned that voter-fraud claims "derail the message" that the party wants to put forward.

House Ways and Means Chairman Kevin Brady, the Texas Republican who’s leading the House’s tax-overhaul effort, dismissed concerns about presidential distractions. Replacing Obamacare and enacting broad changes to the tax code remain “at the top of the priorities” for the Trump administration and congressional Republicans, Brady told reporters this week.

2. Border Tax

A centerpiece of the House GOP tax plan is a controversial change that would tax businesses’ domestic income and their imports and exempt their exports -- a feature known as “border adjustment.” The tax would be assessed at a 20 percent rate and would replace the current 35 percent corporate income tax.

Making the tax border-adjusted -- that is, applying it to imports and not exports -- is estimated to generate about $1.1 trillion in federal revenue over a decade, according to an independent estimate by the conservative-leaning Tax Foundation, a Washington policy group. That revenue contribution could make it crucial to keeping any tax legislation deficit-neutral, a prerequisite for passing a tax bill through the Senate without Democratic votes.

The procedure, known as reconciliation, is reserved for budgetary changes and can bypass the 60-vote threshold in the Senate.

The border-adjusted tax plan picked up considerable steam last week, after Trump was said to be warming to the idea. But the proposal, which would raise costs for businesses that depend on imported materials, faces pushback from retailers and oil refiners, as well as from conservative groups. Koch Industries Inc., the private firm headed by the Koch brothers, has railed against it. And the biggest of the grassroots groups backed by the Koch brothers -- Americans for Prosperity -- said it’s fighting hard against the measure.

There’s internal GOP resistance too. Senator David Perdue of Georgia said he disagrees with the border-adjusted tax plan. Senator Pat Roberts of Kansas said he has concerns with it, and Representative Raul Labrador of Idaho said he’s leaning against it.

Senator Orrin Hatch, chairman of the tax-writing Finance Committee, said at the U.S. Chamber of Commerce Wednesday that “at least a handful” of senators have serious reservations about the border tax and a Senate tax bill will likely look different from what passes in the House. Hatch said he doesn’t yet have a definite view on the plan because he still wants answers to who will ultimately bear the tax and if it conforms to international trade obligations.

But it’s clear that the House’s tax plan needs the revenue boost that a border-adjusted tax would provide. The “blueprint” that Ryan and Brady released last summer calls for individual income-tax cuts that would take the top marginal rate down to 33 percent from 39.6 percent. That change alone would cost the government $2 trillion over a decade, according to the Tax Foundation’s analysis. And cutting the corporate tax rate to 20 percent would cost an additional $1.8 trillion, the group found.

Despite the opposition, Ryan’s office said in an e-mailed statement to reporters there was “momentum” for a tax overhaul, citing endorsements by the center-right group American Action Forum’s Douglas Holtz-Eakin and Alan Cole, an economist at the Tax Foundation.

3. Deductions and Disputes

While Trump and Ryan broadly agree on sharply cutting individual income and corporate taxes, there are areas of disagreement between the two that have to be ironed out.

Trump has called for a corporate tax rate of 15 percent; Ryan wants 20 percent, and he has warned that cutting it an additional 5 percentage points could prevent the ultimate tax plan from being revenue neutral.

Trump has called for ending the carried-interest tax break, which allows fund managers to pay the capital-gains tax rate on much of their income -- giving them a lower tax rate than average workers. Brady said Republicans are undecided on carried interest, and examining it “very thoughtfully, very carefully.”

Meanwhile, Steven Mnuchin, whom Trump has picked to serve as Treasury Secretary, has said rewriting the tax code will offer “no absolute tax cut” for the upper class -- even though tax experts note that the president’s plan -- like the House Republicans’ -- would give the wealthy a major tax break.

Senator Ron Wyden, an Oregon Democrat, has sought to call Mnuchin’s statement ruling out a tax advantage for the wealthy “the Mnuchin rule.” While it’s not clear that the nickname will catch on, this much is clear: Brady, the House’s chief tax writer, says he doesn’t intend to follow that rule.

“I’m not comfortable with any American continuing to pay the high Obama taxes,” Brady said in an interview. “It certainly has not been good for our economy. It certainly hasn’t been good for wage growth.”

Regardless, any attempt to offset tax cuts will depend on eliminating other tax breaks, Mnuchin has said. Likewise, the House’s plan calls for abolishing “carve-outs and loopholes” in the tax code. Determining which ones get the axe may only spur more disagreements.

“I’m not going to discuss that here,” Hatch said Monday in response to questions about tax breaks. “We’re going to have to work through all that stuff.”

4. Democratic Opposition

Even though they’re in the minority in Congress, Democrats have the means to shape the debate. They control 48 Senate seats, which may give them enough leverage to require that any tax legislation remain revenue neutral under Senate rules. That, in turn, may put some of the most generous tax cuts in jeopardy.

“It’s clearly a giveaway to big-money special interests and the very wealthy, at the expense of everybody else,” Senator Chris Van Hollen, a Maryland Democrat, said of Republicans’ plans. “If this is another trickle-down tax package where the theory is that tax cuts for millionaires and billionaires are going to lift everybody up, that’s going to be a nonstarter.”

Representative Richard Neal of Massachusetts, the top Democrat on the Ways and Means Committee, has said he and others will zero in on upper-income tax breaks pitched by Trump and House leaders in an attempt to make it politically difficult for Republicans to support large parts of the emerging plans. Democrats plan to use Trump’s populist rhetoric about taking on special interests and helping ordinary Americans to attack any tax plan that includes benefits for the wealthiest.

“I’m not sure they’re going to have such an easy time on taxes at the end of the day,” said Van Hollen, “because the Republican-Ryan plan is totally inconsistent with the things that Trump said on the campaign trail.”

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