The Hurdles Facing Tax Reform
Remember how we said that Congress needed to get moving on comprehensive tax reform if there was any realistic chance for passage this year? And remember we said that there were a lot of distractions? Boy, we didn’t know the half of it!
No sooner did Congress and the White House strike a deal on the debt ceiling and a stopgap spending measure and begin to pivot toward tax reform, the Washington rumor mill began to buzz about potential criminal indictments coming out of Special Prosecutor Robert Mueller’s investigation on possible Russian interference in the 2016 elections.
And just as Congress finally agreed to a budget resolution that could pave the way for tax reform that would only need 51 votes in the Senate and House Ways and Means Committee Chairman Kevin Brady (R-TX 8) announced that he would finally release his draft tax-reform legislation on Nov. 1, the wheels began to come off on multiple fronts.
First, former Trump campaign manager Paul Manafort and an associate were charged with tax fraud and money laundering stemming from their work on behalf of Ukrainian interests with ties to Russian President Vladimir Putin, and a low-level Trump campaign volunteer revealed that he had pled guilty to lying to the FBI regarding his alleged contacts with Russian interests purporting to have damaging information about Hillary Clinton. Admittedly, this doesn’t directly affect the work of Congress, but politically it takes up a lot of bandwidth at exactly the wrong time.
Second, as word began to leak out about some of the ideas being considered by Brady as part of his draft tax legislation, the inevitable pushing and shoving began. Lawmakers from high-tax states feared that Brady would propose to eliminate the deduction for state and local taxes. Homebuilders and realtors expressed concern about the possibility of losing the deduction for mortgage interest. Small-business owners grew troubled about the possibility that “pass-through” income might not get the same treatment as income earned by corporations. And so on.
With a slim margin in the House and a razor-thin edge in the Senate, Republican leadership can ill afford to alienate rank and file members if they have any hope of passing comprehensive tax reform. So, Brady and his staff were forced to delay the release of the draft legislation for at least 24 hours to try to work through some of the issues that members are concerned about. As of this writing (5 p.m. on Nov. 1) there has been no indication whether the draft will be released tomorrow or not.
Here are some of the key hurdles facing Brady and Republican leadership:
- President Trump and most Republican leaders want the corporate rate to go to 20% (from the current 35%). The problem is that’s expensive, so they have been considering possibly phasing in the reduction over a period of years. That creates two problems: one, it reduces the amount of economic growth that can be anticipated from the rate cut; and two, if the phase-in goes past the budget window, the legislation would need 60 votes in the Senate.
- Members want to give “pass-through” entities some relief by reducing the tax rate on business income, but they don’t want wealthy lawyers and consultants to pay less than they would normally pay as individuals. The trouble is that nobody has figured out how to build “guard rails” that would accomplish that goal. Early indications are that the approach being considered might be “complicated.”
- Eliminating the deduction for state and local taxes, combined with an increased personal exemption, is seen as a way to give a tax break to lower- and middle-class taxpayers, but it would also benefit lower-tax states more than higher-tax states. As it happens, higher-tax states (think New York, New Jersey and California) also have bigger Congressional delegations, so there are more votes at stake.
We expect this process to gain and lose momentum a number of times in the next 60 days, including one or more “near-death” experiences, and the odds are no better than 50-50 that real comprehensive tax reform will make it through Congress. But no matter what twists and turns lay ahead, the Forging Industry Association will continue to make the case for comprehensive tax reform that lowers rates, broadens the tax base and treats all manufacturing alike to the greatest extent possible.