Some Republican intra-party issues are already emerging on tax reform
The current code reflects decades of lobbying from industry and advocacy groups
Key issues: The deficit, the corporate tax rate and what deductions are scrapped
Fresh off a blistering loss over health care, many lawmakers are cautiously optimistic their party can be more successful in overhauling the US tax code, a system they say is seriously lacking in popularity and in dire need of change.
Fewer than 24 hours after Republicans were forced to pull the plug on their second effort to repeal and replace Obamacare, the party released a framework, held a bicameral news conference and discussed details about how they plan to revamp the tax code.
“Have you seen what we’re doing? There wasn’t even a bathroom break between health care and taxes,” said Alaska Republican Sen. Lisa Murkowski. “We are just moving straight on through.”
But some intra-party disagreements are already emerging, and all eyes are watching to see if any disputes evolve into enormous obstacles that prevent tax reform from moving forward.
The constituencies for each individual tax break underscore the complication for the Republican Party. The code is a reflection of decades’ worth of lobbying efforts from industry and advocacy groups to secure tax breaks for themselves.
“If you guys think health care was hard, every industry has some issue that is important to them,” said Sen. Bob Corker, a Republican from Tennessee.
And that’s why tax reform is hard. After all, the last time Washington had success in comprehensive reform was 1986.
State and location deductions
One of the major sticking points is the GOP’s plan to do away with the state and local deduction, a tax write-off that allows individuals to deduct many of their local and state taxes on federal returns.
The deduction benefits individuals who live in high-tax areas, including many in the Northeast corridor. It’s also the case that many Republicans from the Northeast happen to be some of the GOP’s most vulnerable going into next year’s mid-term elections.
Rep. Tom MacArthur, a moderate Republican from New Jersey, said that losing that state and local deduction would be a major blow for his constituents back home.
“New Jersey is dead last,” he said. “We get the least amount of return for the taxes we pay to the federal government, and so to lose deductibility of state and local taxes is unfair, and I’m going to continue to fight it. I don’t think it’s the right answer.”
But Republicans in favor of eliminating the deduction argue that it’s a must in order to pay for rate cuts. The move will also simplify the tax code and make it easy enough to file on a postcard. And the administration is perpetually arguing that repealing it shows they’re not giving an advantage to the rich, because they benefit disproportionately from the deductions.
Rep. Jim Renacci, a Republican from Ohio, which has a state income tax, argued that doubling the standard deduction – as proposed in the plan – will help offset the pain felt for those who would lose the state and local deduction.
“We got to be able to put as much on one page as possible,” Renacci said. “To do that, you’re going to have to eliminate a lot of the deductions.”
The state and local deduction is only one of dozens that could become a point of contention in upcoming weeks. The GOP’s tax framework, after all, was broad and many of the deductions that will be eliminated have yet to be announced.
Should there be sharp resistance by Republicans who live in states that benefit from the deduction, there’s always the possibility that the final bill will simply cap the amount those taxpayers could deduct instead of completely eliminating the deduction.
“You can see where that would be very much part of the discussion,” said Rep. Peter Roskam of Illinois, a Republican on the Ways and Means Committee. “You can see where there would be some element of compromise there.”
Adding to the deficit
One of the biggest debates on tax reform is the concept of revenue neutrality. Republican leaders are open to the idea of not immediately paying for the tax cuts but instead relying on economic growth, arguing that tax cuts will essentially pay for themselves over time (though many economists say there’s no evidence that tax cuts pay for themselves).
Two Republican members on the Senate budget committee — Sen. Pat Toomey of Pennsylvania and Sen. Bob Corker of Tennessee – reached an agreement earlier this month that will essentially give the tax-writing committees the green light to write a tax cut that would include $1.5 trillion of tax reductions over 10 years as part of the overall reform effort.
Why 10 years? Under budget reconciliation – the rule that allows Senate Republicans to pass tax reform with only 51 votes – Republicans have to ensure their bill won’t add to the deficit after the 10-year window.
With so many doubts that economic growth can create enough money to pay for the tax cuts within a decade, senators like Texas Republican Ted Cruz and Toomey have called to expand that 10-year window to 20 or 30 years, giving the economy more time to grow and make up for the trillions in tax cuts. There is no evidence that leadership is keen on that idea.
Some fear that making the bill revenue neutral means changing the tax code so that some pay less while others pay may more.
“We don’t necessarily want to function in this revenue-neutral world, where the tax burden stays the same, you just change who pays what,” said Rep. Jim Jordan, a member of the House Freedom Caucus.
Rep. Dave Brat of Virginia, another member of the House Freedom Caucus, acknowledged Thursday on MSNBC that “in the short run there will be some deficit pain for sure” but argued “we should be okay” by the end of 10 years because of economic growth.
The question is whether all Republicans will sign onto that argument. They’re all in on wanting to reform the tax code, but some are hesitant about doing anything that risks raising the deficit long-term, including Corker, who has repeatedly said he’ll refuse to support anything that increases the deficit beyond the 10-year window.
“I hope there will be others joining me,” Corker said.
Is the corporate rate of 20% set in stone?
Given that the plan released this week was only a “framework,” many assume that some details could change as the tax-writing committees start hashing out the fine print and as lobbyists and special interests keep weighing in.
The framework unveiled a 20% corporate rate, down from 35%.
But President Donald Trump has long said he wanted a 15% corporate rate. He said Wednesday that 20% was “the perfect number,” arguing that he was only saying 15% as a negotiating tactic so that he could eventually get to 20%.
Some conservatives, however, believe the corporate rate is still subject to more negotiations, especially now that the plan is public. House Republicans like Rep. Andy Biggs of Arizona wanted to start the rate in the teens, then negotiate from there.
“Those of us who’d like to see a mid-teens corporate tax rate, we’re going to see something in the upper teens or low 20s (in the framework), and that’s probably where people like me would end up after negotiations,” Biggs told reporters Tuesday.
But instead, he lamented, “we’re going to start there” with the 20% rate, implying it could go up from there after what he called a “deluge” of special interests weigh in who feel that the 20% figure is too low and too costly.
Rep. Mark Meadows, who chairs the House Freedom Caucus, said he wants his group “to be aggressive” and start the framework with a lower rate like 15%, because if the rate ends up changing and goes above 20%, he said that would be a “red line” for him to vote against the whole bill.
As the debate goes deeper on tax reform, many additional “red lines” are sure to become more defined for lawmakers in the coming months. Resolving those disagreements will fall on the hands of leadership, who’ve just gone through battle on the health care repeal effort that ultimately went nowhere.
But Republicans like to argue their main advantage in this legislative task is the fact that there’s universal agreement the tax code needs to change.
“Nobody is defending status quo,” Roskam said. “Let’s take advantage of that.”