Instead of Launching Tax Reform, Trump Could Ground It

By Ben White and Nancy Cook, Politico

26 April 17

 

The main problem, observers say, is that Republicans are caught between two irreconcilable models for enacting major tax changes.

resident Donald Trump on Wednesday will release a plan to radically overhaul the American tax code that many Republicans say is unrealistic and could end up hurting the chances of getting anything done on the issue, long one of the party’s top priorities.

Driven by a president eager to show momentum heading into the close of his first 100 days in office, the hastily written plan could wind up alienating critical Hill Republicans while offering little or nothing to entice Democrats. It could also be widely dismissed by outside observers as an over-hyped rehash of promises the president already made during the campaign.

“So far at least, the contours of this are starting to look a lot like what happened with Trump and Congress on health care,” said Lanhee Chen, a top adviser to Mitt Romney’s 2012 campaign and now a professor at Stanford. “On health care you had irreconcilable differences on the scope of government. And in the same way here, whether or not you pay for a tax cut is a fundamental difference Republicans have. And what we could see Wednesday is that there isn’t even as much middle ground on taxes as there was on health care.”

The main problem, political analysts and tax experts say, is that Republicans are caught between two irreconcilable models for enacting major tax changes.

The president is likely to release a plan that repeats his campaign call for slashing the top corporate rate from 35 percent to 15 percent and reducing and simplifying individual rates, while doing little or nothing to replace the trillions of dollars in lost revenue from such cuts beyond relying on rosy forecasts for faster growth.

The White House confirmed that the plan will include a boost in the standard deduction for individual taxpayers. The housing and charitable sectors fear that will hurt their bottom lines by making the mortgage interest and charitable deductions less attractive to taxpayers.

The non-partisan Tax Policy Center estimates that reducing the corporate tax rate to 15 percent would cost the federal government $215 billion in 2018 alone and become a more expensive proposition as each year passes, according to the center’s analysis of Trump’s campaign plan.

Many congressional Republicans, led by House Speaker Paul Ryan, prefer a radically different approach that would employ a new border tax to generate over $1 trillion in revenue over 10 years to pay for a cut in the top corporate rate to 20 percent from 35 percent. People close to Ryan are dismissive of Trump’s approach to unfunded tax cuts as a “magic unicorn” that will never clear the House.

By releasing his plan without the border tax, as widely expected, Trump will be setting himself up in direct opposition to Ryan, whose help the president will need to get any major tax bill passed.

“The fundamental disagreement here is basically over which kind of Reagan-style tax change that Trump is going to embrace,” said Jeffrey Birnbaum, a former journalist and author of a book on the epic 1986 tax reform fight. “Will it be 1986-style reform, which neither raised nor lowered the budget deficit or will it be 1981-style, which was just a reduction in rates and was eventually viewed by both Democrats and Republicans as too deep a cut. It’s clear Trump wants to echo Reagan but we don’t know which version of Reagan it will be.”

For the moment, Republicans on the Hill are trying to stress the areas where they agree with Trump, including a desire to lower and simplify both corporate and individual rates to spur what the party hopes will be much faster economic growth that creates millions of new jobs and lifts wages. But many are signaling that significant differences remain that could prove insurmountable.

“We all agree on the benefits of tax reform and the place we want to land, and the question is how you reach that place,” said AshLee Strong, a spokeswoman for Ryan. “We continue to have productive discussions with the administration about all ideas on the table.”

But Ryan’s office also cited guidance from the Joint Committee on Taxation on Tuesday suggesting it would be impossible to pass a big corporate rate cut through the reconciliation process — which would avoid a Democratic filibuster in the Senate — without paying for it.

The guidance held that even letting the cuts lapse after three years would still increase the deficit beyond ten years, which would violate the reconciliation process. “We project a nonnegligible revenue loss in the tax years immediately following the budget window,” the Joint Committee said.

Pointing to this report is House Republicans’ way of saying that Trump’s current approach to the tax issue simply won’t work.

On the Senate side, Finance Committee Chairman Orrin Hatch (R-Utah), who has been dismissive of the 15 percent target as unattainable, also tried to sound positive on Tuesday.

“Every administration has had its own ideas, I’ve never seen one that hasn’t,” Hatch said. “They’re working with us and we’re interested in whatever they come up with. Even if it’s really expensive, I’m going to be interested in whatever they come up with. That doesn’t mean I’m necessarily going to follow it, but I want to support the administration if I can.”

Democrats, meanwhile, stand ready to savage the plan as a giveaway to big corporations that would balloon the deficit. “I'm very skeptical. I've seen no plan in the past that could get to that [15 percent] level without adding to the deficit,” said Sen. Debbie Stabenow (D-Mich.), a member of the Finance Committee.

Democrats are likely to also blast the proposal if, as expected, Trump repeats his campaign pledge to extend the 15 percent rate to so-called “pass-through” companies, which are often owner-operated businesses, like Trump’s own real-estate and branding empire. The argument Democrats will make is that if the proposal became law, it would give the president himself a giant tax cut.

“In trying to slash taxes for 'pass-through' business entities, Trump is seeking to dramatically reduce his own tax bill,” said Frank Clemente, executive director of Americans for Tax Fairness.

The 15 percent tax on pass-through income would also be far lower than the 25 percent top rate proposed by Ryan and House Ways and Means Chairman Kevin Brady (R-Texas).

Privately, Democrats say they relish the thought of Republicans battling each other on how to rewrite the tax code. One Democratic aide predicted “a lot of Republican-on-Republican violence this week.”

Others say it appears that Trump is simply pushing for a giant tax cut under the guise of more politically palatable “tax reform.”

“Is it just tax cuts, or truly tax reform? I think the administration sometimes has confused the issue by calling everything tax reform when it is not,” said Mark Mazur, the former assistant secretary for tax policy at the Treasury Department under the Obama administration and now director of the non-partisan Urban-Brookings Tax Policy Center. “If you’re going to do tax reform, you need to be thinking about making the system simpler and more efficient.”

Trump himself is personally invested in an overhaul of the tax code, far more than he was in any machinations of the health care legislation, according to one source familiar with the White House’s internal tax deliberations. The lone tax policy staffer on the National Economic Council, former Hill staffer Shahira Knight, has personally briefed the president on tax questions, say two sources.

The president has a much stronger attachment and understanding of the tax code than, say, health insurance because the real estate industry relies so heavily on tax breaks such as the mortgage interest deduction for homeowners or the interest deduction for businesses. In this area, Trump's proposal to increase the standard deduction could actually harm his beloved real estate industry by making the mortgage deduction less attractive for tax filers.

Inside the administration, Trump’s pledge to produce a new tax reform document this week took officials by surprise. And not all were thrilled to have to produce something this early in the process with major policy decisions still up in the air and meetings with congressional leadership still in their early phases.

“This was all about doing something in the first 100 days and really it’s doing the process backwards,” one senior White House official said this week. “I’m not sure how helpful it is.”

The rushed nature of the effort was reflected in conflicting statements from administration officials about what the package to be released Wednesday would include. Initially, several administration officials said it would probably include some kind of infrastructure investment to appeal to Democrats. Several Democrats support the idea of using some funds generated by the taxation of repatriated foreign earnings to pay for infrastructure projects such as rebuilding decaying roads and bridges.

But as of late Tuesday afternoon, officials said the plan to be released Wednesday would probably not include infrastructure spending but instead just focus on individual and corporate rates.

“The reason your head is spinning on this is that the plan isn’t even written yet,” one White House official said ahead of a planned meeting Tuesday evening between the administration and top Capitol Hill leaders.

That meeting, which lasted about 45 minutes, appeared to be perfunctory.

“This is just a preliminary meeting," Hatch said afterward. "They went into some suggestions that were mere suggestions and we’ll go from there."