The Path to Tax Reform: Without a Blueprint, Where Are We Headed?
With Congress back in session following its August recess, one agenda item stands above the rest in terms of priority: tax reform.
After several failed attempts at repealing the Affordable Care Act earlier this year, and with few other major achievements nearly nine months into the 115th Congress, Republicans are in need of a win and hoping it might come in the form of reforming the nation’s tax laws. Still, there remain many obstacles that could derail their quest for tax reform.
How Did We Get Here?
As we discussed more than a year ago, the House Republican tax reform “blueprint” served mostly as a conversation starter about tax reform. However, since its release, many of the House Republicans’ proposals – the border adjustable tax (BAT), in particular – received pushback from a variety of industries and ultimately forced tax-writers to reassess their approach to tax reform.
Enter the “Big Six” (Speaker of the House, Paul Ryan (R-WI); House Ways and Means Committee Chairman, Kevin Brady (R-TX); Senate Majority Leader, Mitch McConnell (R-KY); Senate Finance Committee Chairman, Orrin Hatch (R-UT); Treasury Secretary, Steven Mnuchin; and National Economic Council Director, Gary Cohn). Having seen how a lack of consensus ultimately led to the GOP’s inability to repeal and replace the Affordable Care Act, the Big Six have spent the last several months meeting together in an effort to agree upon key tax reform principles to guide tax-writers’ efforts to enact tax reform legislation this year. After significant anticipation and speculation about this additional guidance, the Big Six, just prior to the August recess, released their joint statement on tax reform – a brief statement that addressed only a few of the high-level principles contained in the House GOP’s original blueprint.
The Big Six have spent the last month and a half continuing to seek agreement and hash out key policy details. Having reportedly made significant progress, they are expected soon – potentially as early as next week – to release a detailed framework for tax reform that is intended to serve as a passing of the baton to the tax-writing committees to complete the task of tax reform. While this framework is largely a product of the Big Six, there is an active effort underway to get feedback – and ultimately buy-in – from tax-writers, who want to ensure that they are playing an active role in shaping tax reform. That said, how much guidance it will provide remains uncertain, as Chairman Hatch recently stated that the Finance Committee with not merely “rubber stamp” any framework.
While we do not expect any additional hearings in the House, Members are continuing the work behind the scenes this month by holding “listening sessions” to discuss individual, business and international tax policy issues. Moreover, in advance of the release of the framework by the Big Six, House Ways and Means Committee Republicans are expected to meet on September 24-25 to discuss the framework so that committee members are comfortable with the product and feel they have appropriate input into the process. Once the framework is set, we anticipate the Ways and Means Committee will move forward shortly thereafter in marking-up their version of tax reform legislation – a process likely to play out over the course of several weeks during mid-to-late October.
As for the Senate, with two hearings on tax reform (individual and corporate) under their belt, the Senate Finance Committee is expected to hold its third and final hearing on tax reform this Congress (like in early October), where it will focus on international tax reform issues. Once finished with hearings, the Finance Committee is also expected to move forward with drafting and marking-up its version of tax reform legislation.
While the White House generally plans to allow tax-writers to take the lead going forward, President Trump will likely attempt to leverage the power of the bully pulpit to try and help get tax reform across the finish line. In fact, over the next two months, the President plans to travel to more than a dozen states – many states where he won the Election and there is a Democratic Senator up for reelection – to make the sales pitch for tax reform and put pressure on potentially vulnerable Democrats to earnestly engage in the process. Though the President will clearly face an uphill battle in negotiating with Democrats, it appears that he is attempting to avoid a repeat of healthcare reform by building a buffer so as to be able to lose a few Republicans and still have sufficient votes to enact tax reform.
Can We Actually Get to Tax Reform?
It is clear that there is a palpable desire – indeed, a political imperative – for enacting tax reform in 2017. However, despite the groundwork that has been laid through hearings, legislative proposals, etc., there are nevertheless certain realties that will challenge even the most valiant efforts to overhaul the nation’s Tax Code.
First and foremost is the need for a budget. While there continue to be calls for bipartisan tax reform on both sides, it is presently unlikely given the current politics in Washington DC. As such, the Senate will almost certainly need to use the budget reconciliation process to pass its tax bill with a simple majority. To do that, however, Congress must first pass a FY 2018 budget with reconciliation instructions for tax reform. While that may sound simple, both Chambers have thus far found the process to be challenging. In the Senate, though nothing has been finalized, it is rumored that Senators Bob Corker (R-TN) and Pat Toomey (R-PA) – both of whom sit on the Senate Budget Committee – have reached agreement on the size and scope of tax reform that they think will garner enough support to pass out of committee and to the Senate floor before month’s end. In the House, the Freedom Caucus has thus far been hesitant to support any budget proposal without knowing more details about tax reform. Though many are confident that the House will ultimately get sufficient buy-in to pass a budget, the House budget will then need to be reconciled with the budget the Senate passes – which may add further difficulties to the mix and continue to slow the process.
From a sheer logistical perspective, the long-list of legislative items that Congress needs to address before year’s end (i.e., funding the government and reauthorizing the Federal Aviation Administration, the National Flood Insurance Program and the Children’s Health Insurance Program) is also problematic, as lawmakers will have limited time to consider comprehensive tax reform. Moreover, the recent deal to fund the government and extend certain programs through December 8 means that Congress will likely be forced to turn their attention to these matters during a period where tax reform should, in theory, be front and center in Washington DC.
Finally, the inter- and intra-party politics also have the potential to play a key role in determining the success of tax reform efforts. Though Democrats writ large have little incentive to work with Republicans under the auspices of tax reform via reconciliation, certain Democratic lawmakers who might feel vulnerable heading into the 2018 Election and are up for reelection will have to make their own determination on how to participate in the tax reform debate. On the other side of the coin, some Republicans are growing concerned about the President’s recent deals with Democrats and may be more willing to work with other Republicans that may share a different viewpoint (e.g., revenue neutral tax reform) on certain tax policies for the sake of getting a deal done without looking to Democrats for votes. Still, some Republican constituencies (i.e., the Freedom Caucus) may well be unmoved in their positions despite the threat of President Trump’s willingness to negotiate across the aisle, potentially setting up an interesting fight within the Republican Party.
With the potential for the most significant reforms to the US Tax Code in 30 years on the horizon, congressional leadership and the Administration can be expected to pull out all the stops this year to ensure that tax reform is successful. Nevertheless, there remain serious doubts about the feasibility of enacting comprehensive tax reform, with some suggesting that the ultimate outcome could essentially be another round of Bush-era tax cuts. As the debate continues, now is a critical time for all those with an interest in tax reform to be actively engaged with tax-writers.
Note: Next week, following the release of the tax reform framework, our team will provide a thorough analysis of the tax policies it contains and the implications for businesses – both in the US and abroad.