Victory lap.

Photographer: Ty Wright/Getty Images

Republicans Prepare Extravaganza of Tax and Spending Cuts

Albert R. Hunt is a Bloomberg View columnist. He was the executive editor of Bloomberg News, before which he was a reporter, bureau chief and executive Washington editor at the Wall Street Journal.
Read More.
a | A

Immediately after Inauguration Day, Republicans are planning to use their dominance in Washington to enact the most radical overhaul of spending and taxes in a half-century.

Soon after the new Congress convenes next month, they plan to repeal some of Obamacare, delighting the right-wing base. The critical element, replacement, would come later. In the more than six and a half years since the Affordable Care Act became law, Republicans have yet to find a consensus on replacement.

QuickTake Obamacare

If they get a partial repeal, congressional Republicans might try to cobble together a replacement by the spring. This would be part of a huge bill that might include a big tax cut and major cuts in domestic spending programs, including turning the most important low-income assistance initiatives into block grants to the states, with eventual cutbacks. Look for a lot of fiscal gimmicks and sleight of hand.

House Speaker Paul Ryan and many conservative Republicans also would like to partially privatize Medicare, which could result in major budget savings down the road. The best bet now is that Trump, who vowed during the campaign that there would be no cutbacks to Medicare, will balk and the Republicans will blink.

Overall, says Robert Greenstein, president of the liberal Center on Budget and Policy Priorities research group, these plans "pose the greatest threat to the social safety net since it was created."

The initial repeal will go through a special budget process called reconciliation, which would eliminate the Obamacare mandates and retain, for a while, the more popular provisions. If it follows earlier Republican measures, it would repeal the small Obamacare tax hikes on upper incomes, while cutting provider reimbursements for hospitals. The promise would be to do replacement later.

Expect Democrats to soon voice the mantra: No Repeal without Replace. It may bring political pressure on the Republican plans, as the uncertainty caused by promises that re vague and very difficult to achieve could wreak havoc.

If the plan is successful, things will get interesting. Republicans envision a second reconciliation, under the same rules.

They would try to craft an Affordable Care Act replacement that wouldn't throw millions off the insured rolls and would postpone the effective dates. It took four years to ramp up Obamacare, and these critics haven't done the groundwork, much less worked out critical policy specifics. And some of the replacement would have to be done in regular order, requiring Democratic votes.

But, as currently envisioned, that's only part of Reconciliation 2: It might include huge tax and spending cuts. A key challenge is that under this parliamentary process, the measure can add to the deficit in the first decade, but not the decade after that.

A $3 trillion to $4 trillion tax cut would do that. (Conservative sources dismiss the assertion this week by Trump's designated Treasury secretary that the rich won't get a net tax cut; they would get a big one.) One option for Republicans is to enact the tax cut as a regular piece of legislation by offering at least eight Democrats a piece of the action if they go along. The bill would turn into a special interest bonanza; the K Street lobbying crowd is salivating.

If this doesn't work, another option is to offset the subsequent budget shortfall with spending cuts of major entitlements: turning Medicaid, food stamps and supplemental security assistance into block grants to the states, with about the same funding initially but subsequent reductions of more than $1 trillion.

This would be accompanied by humongous cutbacks in discretionary domestic programs. Trump has championed a "penny" plan, under which he'd cut only 1 percent of each dollar of domestic spending. It sounds modest; it's not. It would take domestic spending to 2 percent of gross domestic product, compared with 3.3 percent under President Ronald Reagan.

Moreover, Trump has pledged to increase funding for items such as the Border Patrol and veterans, which would require even more draconian cutbacks elsewhere.

If the political optics -- tax cuts disproportionately favoring the wealthy funded by spending cutbacks for the poor -- are bad, which Trump often senses, Republicans have another option to make these tax cuts permanent. It's called dynamic scoring: assume these tax cuts will produce such a surge of economic activity they will pay for themselves. That hasn't been past experience -- the George W. Bush tax cuts had to be modified after 10 years because of the revenue drain -- but the Republicans have the votes.

This is hardly the populist agenda enunciated by candidate Trump -- don't touch Medicare, focus on helping struggling workers, drain the special interest swamp.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Albert R. Hunt at ahunt1@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net