Dueling tax plans struggle to pass a key red ink test
Republican tax writers in the House and Senate scoured the U.S. tax code Thursday and shook the couch cushions for loose change, as one member put it, in an all-day struggle to find ways to pay for the deep tax cuts their leaders and President Donald Trump have promised.
By day’s end, the House Ways and Means Committee had hammered together a bill and sent it toward the House floor for a vote promised next week, while the Senate Finance Committee revealed a proposal it intends to mark up on Monday.
But there’s an elephant in the room. Both plans contain nearly $1.5 trillion in red ink in the first 10 years. Unless they eliminate the red ink beyond that — a tall order that would require major changes — the legislation will be subject to a 60-vote threshold under Senate rules, which could doom it to failure. An alternative is to sunset some of the provisions after a decade, but congressional leaders don’t want that.
“One of the challenges we have is there’s a limit to how much revenue we can forgo in the budget window, so it’s a matter of putting these pieces together,” Senator Pat Toomey, a Pennsylvania Republican, said in a Bloomberg TV interview on Friday.
As written, the Senate proposal “blows a massive hole in the debt,” said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, in a Twitter message Thursday night.
A GOP aide to the Finance panel said everything in the proposal that Senate Finance Chairman Orrin Hatch released Thursday is designed to be permanent — and that any issues related to deficit effects will be fixed. The aide didn’t specify how. The committee is scheduled to begin marking up the bill on Monday, Hatch said.
Hatch’s plan seeks to shore up revenue by departing from the House bill in a number of ways — including its proposal to fully repeal state and local tax deductions that benefit individuals in high-tax states. That measure will alienate GOP House members in New York, New Jersey and California.
It would lower the price tag by about $100 billion with a one-year delay on the corporate tax cut that Trump has sold as a key to faster economic growth. White House Budget Director Mick Mulvaney downplayed the harm of a delay Thursday. But a day earlier, Treasury Secretary Steven Mnuchin said, “The longer we wait, the worse it is for the economy and making companies competitive.”
The Senate plan preserves the estate tax — though limiting it to fewer multimillion-dollar estates. The House bill would eliminate that levy in time.
Still, Hatch’s plan would give corporations a bigger break on taxes associated with trillions of dollars in earnings that they hold offshore than the House bill would. And it would set a lower top individual tax rate than the House envisions — 38.5 percent for million-dollar earners as opposed to 39.6 percent.
In at least one case Thursday, the Senate plan seized on a provision that the House dropped on the same day. Hatch proposed accelerating the taxation of salary and other awards put into “non-qualified deferred compensation plans,” which function as super-sized 401(k) plans for high-earning workers.
The provision, which would also change how stock options and similar securities are taxed, would probably lead to hundreds of companies eliminating such plans, experts say. In the Senate plan, the measure is credited with producing $13.4 billion over 10 years, according to Congress’s Joint Committee on Taxation.
If those differences sound difficult, just wait. Jonathan Traub, who oversees tax policy for Deloitte Tax LLP, said the biggest sticking points will emerge as the Senate Finance panel begins rehabbing its bill to comply with Senate rules.
“That’s a hole that Hatch and the other Senate Republicans are going to have to fill,” Traub said. “And how they fill it may not be very attractive to House Republicans. It’s an unenviable challenge they face.”
On the House side, last-minute changes to the bill before it cleared the Ways and Means Committee on Thursday pulled its price tag under the $1.5 trillion allowed in the first decade under the budget resolution.
“Today, the first and oldest Committee in Congress passed transformational tax reform legislation that charts a new course for the country,” Ways and Means Chairman Kevin Brady said after his panel approved his tax bill.
To get there, the panel appears to have employed a touch of fiscal finesse: The single biggest source of new revenue in Brady’s changes stems from a revision that wouldn’t take effect until 2023 — raising questions about whether Republicans in Congress would ever really let it happen.
The measure would require companies to write off their spending on research and experimentation over five years. Currently, they can deduct such spending immediately. That change raises a nice bit of revenue: $108.6 billion from 2023 through 2027, according to a JCT estimate.
Three senators have already raised concerns about tax cuts that increase the deficit, including Senator Bob Corker of Tennessee, Senator James Lankford of Oklahoma and Senator Jeff Flake of Arizona. “I remain concerned over how the current tax reform proposals will grow the already staggering national debt,” Flake said Thursday, calling for a “fiscally responsible” bill.
A wildcard in the debate is the Obamacare individual mandate, which many Republicans in both chambers are pushing to repeal as part of a tax bill. Doing so would save $338 billion in government subsidies over a decade to help offset the tax cuts. But it’s a political hand-grenade that party leaders worry could cost them crucial votes and potentially sink the tax effort, as it’s also estimated to lead to 13 million people losing their insurance coverage in 2027.
Senate Majority Whip John Cornyn said Thursday that GOP leaders are “taking a hard look at” adding repeal of the mandate to the tax bill. Senator Jerry Moran of Kansas suggested that repealing of the mandate could help initiate a corporate tax cut immediately.
“Those two things are connected,” he said.
Going forward,the next few weeks will determine whether the tax overhaul succeeds. The House is on track now to hold a vote before Thanksgiving, and the Senate perhaps soon after.
But it’s far from clear either measure can pass in the opposing chamber, let alone be combined into one bill that can clear both and land on Trump’s desk.