Big Progress on Tax Reform, but Even Bigger Hurdles Ahead

Big Progress on Tax Reform, but Even Bigger Hurdles Ahead


Republicans cleared two big hurdles this week, with the House Ways and Means Committee passing an amended Tax Cuts and Jobs Act as the Senate unveiled its version of the legislation. “It’s been a week of remarkable progress,” said one GOP operative, as numerous conservative groups breathed a collective sigh relief that the tax bill was showing signs of momentum.

But some of the hurdles ahead will likely be more difficult to clear. Here are three major impediments Republicans face as they race to pass a tax bill before the end of the year:

1. Let’s make a deal – or lots of them: The House and Senate bills have a strong family resemblance, but there are many important and substantial differences between them that will have to be ironed out. Key issues include the timing of the corporate tax cut (the Senate wants to delay it until 2019), and possibly whether it expires after 10 years; the state and local tax deduction (the Senate bill eliminates it entirely); the estate tax (the House calls for its elimination); and the top individual tax rate (the Senate number is slightly lower than the House’s).

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Despite Republicans’ eagerness to pass a sweeping tax bill, there’s enormous potential for conflict on some of these details. To give just one example: Some lawmakers are talking about adding a repeal of the Obamacare individual insurance mandate to the tax bill, which would provide considerable revenue to pay for the cuts but in all likelihood kick off a new and possibly fatal political fight between conservatives and moderates.

Politico framed it this way: "Can Republicans somehow stitch these approaches together in a way that draws enough votes to clear both the House and Senate, where the GOP can lose only two votes? Maybe. But it's gonna be super hard."

2. Byrd-watching: For all their differences, the Senate and House bills share this important feature: Both violate the Senate’s Byrd Rule by causing debt to increase outside of the 10-year budget window. Sahil Kapur of Bloomberg predicted that the “Senate bill is headed for a Byrd Rule buzzsaw,” with some major changes likely necessary to erase the red ink projected after 2027. Given the size of the problem — the Joint Committee on Taxation analysis of the Senate bill shows $216.7 billion added to the deficit in 2027, with no indications that the negative trend would reverse itself in the following years — this may end up being the biggest challenge of all.

3. Debt concerns: Even if the tax writers can figure out a way to satisfy the Byrd Rule, with the expiration of some cuts in year 10 looking like a real possibility, there’s still the broader question of running up the debt to fund tax cuts that disproportionately benefit corporations and the wealthy. The Committee for a Responsible Budget published an analysis of the House and Senate tax bills Friday, finding that they reduce revenues by about $1.5 and $1.4 trillion respectively over 10 years. While this means that both likely fall within the budget limit for the tax bill, CRFB says the true costs will likely be higher, given interest on the added debt and the likelihood that some temporary cuts will become permanent. The debt could come back to haunt the GOP effort, particularly in the Senate. Last week, Sen. James Lankford warned that he wouldn’t support a bill that “balloons the debt,” while Sen. Jeff Flake said Thursday: “I remain concerned over how the current tax reform proposals will grow the already staggering national debt by opting for short-term fixes while ignoring long-term problems for taxpayers and the economy.”

4. Little time left in 2017, and narrow margins for error: Another potential problem area is the calendar, since Republicans have given themselves very little time to push a bill through. Chris Krueger of the Cowen Washington Research Group highlighted the tight schedule in a note to clients Friday morning: “The House is planning on passing their bill by next Friday (they then leave for Thanksgiving to return with the December 8 government shutdown fight to navigate — critical to have some tax momentum going into Thanksgiving). This is not a slam dunk … The House has very little margin for error in this vote.” The Senate will have even less room for defections.