Tax Reform, Facing Numerous Challenges, Could End Up Meaning Only Marginal Cuts

Looming fights over the budget and debt ceiling threaten the GOP's dream of a major tax-system revamp.

WASHINGTON ― Republican congressional leaders say that reforming the tax code will be an easier lift than their thwarted bid to repeal the Affordable Care Act. But eight months into Donald Trump’s presidency, lawmakers remain at odds over what new tax rates should look like, how they’ll pay for cuts, or whether they even should make up the lost revenue.

With most of Trump’s legislative agenda in limbo, broad consensus exists within the GOP to do something on taxes once Congress returns from recess in September. The key question is how big to go ― whether to push for a major, permanent overhaul of the tax code, which is politically harder to do, or live with a temporary, marginal tax cut that Trump can chalk up as a victory.

Few specifics about the effort have been released so far, but Republicans are already facing an uphill battle.

Trump has proposed slashing the tax rate for all businesses to 15 percent from the current 35 percent. House Republicans, meanwhile, have previously talked about a plan that would reduce the corporate tax rate to 20 percent. (Most companies, meanwhile, pay an effective tax rate much lower than 35 percent.)

There is even less agreement about altering the taxation of small businesses, deductions for corporate interest expenses and the state and local tax deduction. Eliminating such deductions would bring in more revenue to offset the cost of rate cuts, but doing so is considered politically sensitive because they are utilized by millions of Americans.

House Speaker Paul Ryan (R-Wis.) ― who, unlike the president, has been traveling the country this week to drum up support for tax reform ― said Thursday some deductions would indeed have to go. He was careful, however, not to say which ones.

“We recognize, acknowledge and believe you need to maintain the mortgage interest deduction,” he said in an interview on CNBC. “Whether it can be improved and how it works, that’s a discussion we’ll have on an ongoing basis.”

Ryan has said he wants to double the standard deduction that most households use to reduce their taxable income, but he hasn’t said whether reforms would take away personal exemptions that particularly benefit families with children. Even with a bigger standard deduction, taking personal exemptions away could result in a tax hike on middle-class households.

Politico reported earlier this week that options under discussion include a cap on the mortgage interest deduction for homeowners. Negotiators are also reportedly weighing eliminating people’s ability to deduct state and local taxes, which would disproportionately affect liberal-leaning states, as well as “eliminating businesses’ ability to deduct interest, while also phasing in so-called full expensing for small businesses that allows them to immediately deduct investments like new equipment or facilities.”

Groups affected by such proposals ― like the National Association of Realtors, which opposes any reductions to the mortgage interest deduction ― can be expected to lobby hard against such changes.

White House Press Secretary Sarah Huckabee Sanders did not offer any details about a tax reform plan in a press briefing on Thursday, but she told reporters to expect movement in “very short order,” possibly even next week.

Aside from policy, Republicans face several procedural hurdles on tax reform. In order to pass a bill under so-called reconciliation ― rules that would allow Republicans to approve the legislation with a simple majority in the Senate ― the tax cuts must not add to the deficit 10 years after they’re passed. While GOP leaders are optimistic they can craft such a bill, there are already some members, like Rep. Peter King (R-N.Y.), who say that goal is unrealistic.

Moreover, Republicans haven’t even agreed to a budget resolution yet that would make possible the process of reconciliation. Conservatives and moderates in the House are still at odds over the level of cuts to mandatory spending programs in the next fiscal year. The influential House Freedom Caucus, comprised of some of the chamber’s most conservative members, wants the tax reform bill to include deep cuts to corporate taxes before they commit to support any budget resolution.

Looming large over everything, as usual, is Trump himself. The president earlier this week threatened shutting down the government if Congress did not approve funding in the 2018 budget for construction of a massive wall on the southern U.S. border, which he initially said Mexico would pay for.

A costly government shutdown fight with Democrats, who oppose building the wall, could delay progress on tax reform. Indeed, such a scenario is looking more likely. Alternatively, if Trump loses the border fight, it could put added pressure on Republican lawmakers to do tax reform as a means of appeasing him.

A prolonged debate over how to raise the debt ceiling, which Trump on Thursday called “a mess,” could also push back the calendar for tax reform.

“At the end of the day, if we see anything, I think it’ll look more like a tax cut than tax reform,” said Jared Bernstein, who served as economic policy advisor to former Vice President Joe Biden. “In fact, in the plans [Republicans] have released thus far, it looks like same old trickle-down snake oil that they’ve always tried to sell.”

“That said,” he continued, “there’s been some talk of closing wasteful loopholes, and I’ve actually been pleasantly surprised by some of the things on that list.”

He added: “Whether they’ll stick, that is the question.”