Four big things that could stand in the way of tax reform
Posted August 8
There's a long list of reasons why Republicans' plan to overhaul the nation's tax system is going to be complicated this fall.
Actually, tax reform is always complicated. The last time it was signed into law was in 1986.
Fast-forward 31 years, and the conditions for smooth sailing on this issue haven't gotten any easier. In fact, there's a hashtag used by tax policy wonks, #TRIH, an acronym for "Tax reform is hard."
So far there is no bill with specifics on how exactly the White House and Republicans intend to accomplish tax reform. The White House released a one-page blueprint earlier this year, and it teamed up late last month with congressional leaders to release a broad set of principles.
The White House says it will be working behind the scenes during the August recess to get the House and Senate on the same page before a bill goes for a committee mark-up in September, with the ultimate goal to send a bill to the President's desk by mid-November.
And Senate Majority Leader Mitch McConnell said last week the goal was to finish tax reform "sometime this year."
That's an extremely fast timeline considering how complicated tax reform is and how partisan gridlock has already resulted in multiple stalemates this year, from nominations to health care.
Not to mention, there's a host of other issues and deadlines that Congress will face this fall that have the potential to derail or at least delay tax reform.
Here's a look at just a few.
McConnell said last week that he plans to use reconciliation to pass tax reform, a method that would allow the Republicans, who hold a 52-48 majority, to advance the bill with 51 votes only, rather than the usual 60.
This strategy allows Republicans to pass a bill without any help from Democrats.
But to use reconciliation, Congress would first have to pass a budget for 2018. The Senate can use reconciliation only once per fiscal year, and Republicans already used it the 2017 fiscal year trying to pass health care.
The House has been busy debating a budget, but its Republican majority is seeing ideological splits between conservatives and moderates. While the House budget committee approved a budget last month, it didn't go to the floor before lawmakers left for the August recess.
So the issue is awaiting continued debate when they return in September, but it's unclear when exactly the House will pass the budget (though it faces a deadline of September 30, when the current fiscal year ends).
And even after that, it still has to pass the Senate. Intra-party divides exist there, too.
Another urgent matter for Congress when it returns will be a deadline at the end of the month to raise the debt ceiling to avoid default. That issue will undoubtedly take up time from key players in the tax reform debate -- like Treasury Secretary Steven Mnuchin and congressional leaders heavily involved in fiscal matters.
(That deadline, however, is just Mnuchin's best estimate as to when Treasury will face a cash crunch, meaning it won't have enough cash and revenue on hand to pay all the country's bills in full and on time. The actual date could turn out to be somewhat earlier or later, since revenue inflows and outflows aren't entirely predictable.)
A week before recess, Mnuchin was on Capitol Hill to work with Senate leaders toward an agreement, but nothing was announced before lawmakers left town.
Debt ceiling showdowns in the past have evolved into bitter fights over spending. Mnuchin is currently pushing for a "clean" debt ceiling hike -- meaning an agreement to raise the debt limit without any extra conditions attached.
But Republicans, especially fiscal conservatives, want to see spending cuts to go along with any debt increase. Getting enough Democrats on board for that could prove tricky, since those spending cuts are often proposed for massive programs like Medicaid and Medicare, which have large and vocal activist groups that mobilize to fight such fights -- as they did in the health care debate.
While the House passed a health care bill earlier this year, the overall failure by Congress to send a bill to the President's desk doesn't bode well for another major legislative task like tax reform. It showed that even though Republicans are in power and share common goals, they don't always agree on the fine print.
The President has made public comments that he still wants Congress to focus on repealing and replacing the Affordable Care Act -- former President Barack Obama's signature domestic legislation also known as Obamacare -- to uphold a major campaign promise that Trump and other Republicans made for years.
A few senators closely linked to health care have had recent one-on-one meetings with the President, but Republicans didn't come close to reaching a consensus on their next health care step before they left for the August recess last week.
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The Senate health committee is scheduled to hold hearings when it returns in September on stabilizing the markets and enforcing current provisions in Obamacare. Depending on how much oxygen that takes up and how involved the President gets in pushing for another push on repeal-and-replace, tax reform could struggle to break through.
But Republicans were also hoping for a health care win in part to help make the transition to tax reform a bit smoother. By repealing Obamacare, they would have nixed some or all of the taxes on the wealthy that were being used to pay for it -- worth about $800 billion.
Now there's some pressure on Republicans to use tax reform to rid of those same taxes. But that looks highly unlikely. For one, even if they eliminated the taxes, Republicans would have a gaping hole in revenue to continue funding Obamacare.
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That challenge would be in addition to the pending battle to offset the list of tax cuts that the White House and congressional Republicans are hoping to make in tax reform.
How to pay for it?
On top of timeline issues are debates over how to pay for any potential package. Democrats and some Republicans have insisted that the bill must not add to the deficit, meaning any tax cuts must be paid for.
To make a bill "revenue neutral," which means tax cuts would be offset through other methods involving the tax code, like closing up loopholes and deductions, for example.
To make it "deficit neutral," that would entail raising the money through spending cuts in other parts of government, which can be a large ambition to take on, especially after passing a budget where cuts were also likely made.
Earlier this year, McConnell said tax reform would have to be revenue neutral, but it's unclear what path Republicans will take on this since the White House hasn't laid out how they plan to offset the loss of revenue from tax cuts.
If they choose not to lay out ways to make up the revenue, then that could spark pushback not only from Democrats, but also from conservative Republicans and deficit hawks.
Interestingly, though, some fiscal conservatives in the House showed openness to tax cuts without offsets, arguing that the cuts are needed for economic growth.
If the White House and Republican leadership go with the revenue neutral path, as McConnell suggested, then they'll start looking at potential deductions to get rid of. That path in itself is a potential landmine field, given the wide array of deductions and the various special interest groups and lobbyists who will be fighting to keep them in place.
CNN Money has already taken a look at potential items that could end up on the kill-list, like deductions for state and local income taxes, medical expenses, and charitable giving (though the White House stated earlier this year that it wants to protect this last one).