If any one goal exists that could motivate fractious Republican lawmakers to come together, it should be cutting taxes.
“It’s probably the one unifying issue all Republicans have,” said Bruce Bartlett, an economic adviser to President Ronald Reagan and a Treasury Department official under George H.W. Bush.
But as Republicans turn their attentions from their failed health care overhaul to rewriting the tax code, the road ahead is anything but smooth. Even with control of both chambers of Congress and the White House, many political and fiscal obstacles could derail efforts to slash tax rates for the wealthy and corporations.
With deadlines looming for Congress to avert a government shutdown and raise the debt ceiling, Washington’s insiders are airing doubts that Republicans can accomplish tax reform by their originally stated August deadline, if at all.
There is a reason, experts warn, that no comprehensive, permanent reform of the tax code has passed since 1986.
“It’s even more complicated than health care, and you have a lot more special interests who are going to be tugging at people’s strings to make they aren’t impacted negatively or that they benefit,” said Dan Scandling, who worked as a senior staffer for Republican lawmakers for nearly 25 years. “It’s going to be a slog.”
While the widespread conservative veneration of tax cuts and Republicans’ unified control of Washington should make the challenge simpler, a number of major hurdles stand in the way.
Bruised by health care
Republicans had originally planned to tackle the thorny issue of tax reform bolstered by achieving the repeal of the Affordable Care Act.
“Success breeds success,” Rep. Tom Cole (R-OK) told TPM leading up to the health care bill’s failure, which he warned would make tax reform “infinitely more difficult.”
Lawmakers, former staffers, and economists agree that the challenge now is much greater both fiscally and politically. Republicans continue to point fingers and snipe at one another over the health care bill’s demise, Trump has publicly attacked and threatened to primary the very lawmakers whose support he would need to pass a tax bill, and Republicans are getting slammed by their constituents and deep-pocketed conservative groups over their failure to pass a bill.
“They touched the stove with health care and boy, did they get burned badly,” Scandling said. “How much of an appetite do they have now to work on something like this?”
Scandling, now a consultant for the group APCO Worldwide, said the health care debacle could also embolden Republicans to continue defying the president’s wishes in the coming tax reform battle.
“Now people have seen how easy it is for a certain group of people—the Freedom Caucus or Tuesday Group or Republican Study Committee or some new group in the House—they only need a small number of votes to hold everybody else hostage,” he explained.
Aside from the political bruising, Republicans will also enter the tax reform fight with far less federal money to work with, having failed to pass a health care bill that would have reduced the deficit by hundreds of billions of dollars—mainly through slashing Medicaid spending.
A question mark over the executive branch
By all accounts, President Trump is very much invested in the topic of tax reform and eager to impose his own vision on the process.
“Unlike with health reform, he has his own ideas, and he won’t be content to just rubber stamp what comes out of Congress,” noted Scandling.
But what exactly those ideas are remains a mystery. The Associated Press reported this week that Trump is scrapping the tax plan he campaigned on in favor of going back to the drawing board. Treasury Secretary Steve Mnuchin, meanwhile, has revealed little about his own vision, other than cutting individual and corporate tax breaks, and has no previous government experience to fall back on.
“We haven’t the faintest idea what the hell [Mnuchin] thinks about anything,” Bartlett told TPM. “And he hasn’t hired senior staff for critical positions.”
On that latter point, Bartlett warned it will be near-impossible to prepare a tax reform bill in an understaffed Treasury Department in an administration gripped by paranoia about sabotage by “deep state” bureaucrats.
“Most of the number-crunchers at Treasury are career staff. And a lot of Republicans believe, rightly or wrongly, that a lot of career staff are liberal Democrats who are out to torpedo everything they do,” he said. “That’s not my experience. I think those people are very professional. They do whatever they’re told to do, but you have to tell them what to do.”
Without a team of experienced government economists, says Bartlett, the effort could soon fall apart.
“Unless you’re an expert on taxation, it’s easy to make simple mistakes,” he said. “You need to work through the consequences of each policy to understand the implications for different industries and businesses. If you don’t, those people are going to come back and lobby the hell against you. You have to know where the land mines are.”
The land mines
Larry Kudlow, who served as Trump’s top economic adviser during the 2016 campaign, argued recently that Republicans should prioritize cutting corporate tax rates above all else. But other economists and experts warn doing so would be political suicide.
“Reducing the corporate tax doesn’t help the average person. It only helps the affluent,” said Scandling. “If it turns out the tax cuts are only for the wealthy, and the average American doesn’t benefit from it, those Trump voters, those Freedom Caucus voters are going to go, ‘Whoa, what’s going on, here? That’s not the kind of tax reform I was talking about.’”
Chuck Marr, who served on the National Economic Council under President Bill Clinton, also predicted a backlash. “With health care, Republicans betrayed their campaign narrative of improving the lives of working class people,” he said. “They wanted to take away health insurance from the poor and give a massive tax cut to high-income people. That’s their pattern, and the tax bill will be pretty much the same thing.”
Meanwhile, cutting income tax rates, several lawmakers and experts noted, would disproportionately help those at the top.
“When almost 50 percent of Americans don’t pay any federal income tax, any federal tax cut you make is of course going to the wealthy,” Rep. Chris Collins (R-NY) told TPM last week. “You can’t cut below zero.”
Bartlett added that a rate reduction, while doing nothing for the millions of people who pay no income tax, would be a boon for “the Donald Trumps of the world.”
Marr noted, however, that lawmakers in both parties have in the past supported cutting the taxes of the country’s top earners. “It’s like everybody represents the Hamptons,” he said.
One proposal the administration is reportedly mulling to offer a break to working class Americans is the elimination of the payroll tax, which they estimate would save someone earning $60,000 a year an additional $3,720.
But Bill Hoagland, who worked for decades for the Senate Budget Committee, calls the idea “a real loser,” noting that the payroll tax is the primary dedicated source of funding for Social Security.
“Anything they do there that would bring forth the Social Security trust fund default quicker would not sell,” he said.
Advocacy groups, including the AARP, the Strengthen Social Security Coalition, and the Alliance for Retired Americans are already campaigning against the idea.
“It’s ludicrous,” Richard Fiesta, the executive director of the three-million member Alliance for Retired Americans, told TPM. “The genius of Social Security is its dedicated funding source, which is protected from the ups and down of the economy. We will mobilize in full force if this thing ever escapes the draft status.”
A reconciliation reckoning
Assuming the Trump administration can prepare a tax plan and send it over to Congress, more hurdles await.
To avoid the possibility of a Democratic filibuster, GOP lawmakers need to pass a tax reform bill through a process known as reconciliation, but to do so they need to craft it in a way that does not increase the deficit over time. This means they can’t permanently cut taxes without raising revenue through other means, but the two main ideas on the table to raise revenue are both politically fraught.
House Speaker Paul Ryan’s tax plan includes a border adjustment tax (BAT), which could raise more than a trillion dollars over a decade by taxing imports more than U.S.-produced goods.
“I support it completely,” Collins said. “It’s everything the president promised in terms of supporting America. By putting a 20 percent surcharge, tariff, tax—call it what you will—that does incentivize made in America. And it’s a real push to incentivize exports.”
But even boosters of the plan like Collins admit it’s controversial—staunchly opposed by many businesses that manufacture products outside the U.S. and by lawmakers fearful of constituent complaints of costlier basic necessities.
“The potential losers are the retailers, the energy sector, and agriculture,” explained Marr. “People could see higher prices on food, gas, clothes, and more.”
“It will not fly in the Senate, period,” Hoagland told TPM. “For the average senator, they will look at the cost of things at places like Walmart and Target, where prices could go up real fast. Big businesses can’t renegotiate contracts that quickly in order to adjust, and their voters will be pretty upset. I think it’s a no-winner, particularly in an election year.”
The other revenue generator being floated around is a one-time tax repatriation aimed at convincing corporations who have massive amounts of money stashed in tax shelters overseas to bring the money home in exchange for a large tax break.
This was last done in 2004, passed with Democratic and Republican support. It was sold at the time as an incentive for companies to create jobs, invest in research and development in the U.S., and stop offshoring their profits in the future. It failed on all three fronts. According to a report produced by the Treasury Department in 2011, the companies that benefited most from the tax holiday cut tens of thousands of jobs, decreased the growth of their research spending and put more of their money in overseas accounts out of the reach of the IRS.
With that legacy, Hoagland warned that lawmakers may be wary of backing the same policy again. “Knowing that the companies used the repatriation for mergers, buyouts, and buying up their own stock options, there could be a lot of leakage [of support] this time around,” he said. “Maybe Congress could put restrictions on how those companies could use their tax breaks.”
If neither of these ideas can generate sufficient support, Republicans could also get around the reconciliation rules by making the tax cut temporary—as George W. Bush did—giving a future president the unpleasant task of choosing between extending the cut or overseeing a massive take hike when it expires.
If Republicans can’t put together a tax reform plan that reduces the deficit over time, they may need to depend on securing enough support from Senate Democrats to get the bill to the president’s desk.
Even in the current hyper-polarized environment, Republicans have made some overtures to their colleagues across the aisle. Rep. Kevin Brady (R-TX) told TPM last week that he is inviting the Democrats on the Ways and Means Committee he chairs to “bring their ideas to the table.”
“I’d love to have them engaged, because their communities are suffering like ours,” he said. “They’re watching the same business leave the country. So we ought to have an open discussion about this. Every chance we can make this bipartisan, let’s explore it.”
The Trump administration has also suggested pairing an infrastructure package with tax reform in order to court Democratic support.
But the ship of bipartisanship may have sailed. Completely excluded from the negotiations over the Obamacare repeal bill and pushed by a fired-up progressive base, Democrats will likely be in no mood for cooperation with Republicans and President Trump.
“Why would the Democrats even want to play?” Scandling asked. “The Republican House is on fire and they’re not going to come put it out. They’d love to see it burn to the ground.”
Bartlett agreed, adding that Democrats could base their future re-election campaigns on opposition to the GOP’s budget and tax proposals.
“Given that Trump has proposed these huge budget cuts to programs that help the poor, and now is going out there and saying they’re going to cut taxes for big corporations and the rich, I think Democrats will be salivating at the opportunity to play those sound clips,” he said.