“Hybrid” Tax Plan Gains Steam

A bill combining permanent and temporary rate cuts with some minor revisions to the tax code is looking more likely.

Treasury Secretary Steven Mnuchin speaks at a news conference in Las Vegas on Aug. 28.
AP Photo/John Locher
Casey Wooten
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Casey Wooten
Sept. 4, 2017, 8 p.m.

Lawmakers are returning to Washington facing a September calendar stocked with critical, contentious policy items. In the background, however, tax writers continue searching for a way to advance Congress’s best chance to pass meaningful legislation this year

Capitol Hill staffers and administration officials have been meeting through August to build on a brief statement of tax-reform principles released in late July. In the statement, GOP officials agreed on a broad outline to lower corporate and individual tax rates, simplify the code, and broaden the tax base, but so far they haven’t formed a consensus on the details and methods of financing their aims.

Negotiators say they hope to have a tax-reform bill done by the end of the year, but to make that deadline, they’ll likely need to work out the scope of any tax plan soon. The GOP proposal for a broad, permanent rewrite of the tax code is ambitious and politically difficult. Lowering the corporate rate from 35 percent to the low 20s and compressing individual tax brackets into three would require lawmakers to eliminate popular tax breaks, such as the federal deduction for state and local taxes, while also finding new revenue raisers, such as a proposed tax on interest expense on loan payments.

That’s left some analysts wondering if the White House and Congress will scale back their ambitions and present a hybrid tax bill, one that makes minor changes to the code meant to broaden the tax base, combined with a mixture of temporary and permanent tax cuts. Some cuts would expire at the end of the 10-year budget window, letting the GOP use reconciliation to pass a tax bill and avoid a Democratic filibuster in the Senate. If lawmakers want to advance a tax bill using budget reconciliation—which requires only 51 votes in the Senate to pass—the measure must not add to the deficit after a decade.

“My strong instinct is that the bill—if you write it in a long-term, revenue-neutral way—it’s not going to be sufficient for their needs in terms of how much they are cutting rates, how much they can do on the business and individual side,” said Rohit Kumar, a principal at PricewaterhouseCoopers and a former aide to Senate Majority Leader Mitch McConnell.

Exactly which provisions could be permanent and which temporary are still unclear.

“The question is what goes into which bucket,” said Ray Beeman, a tax expert at Ernst & Young and former House Ways and Means Committee staff member.

But analysts can make some basic projections. Structural reforms proposed by the GOP such as moving to a territorial tax system—which taxes only income earned inside the U.S.—would likely need to be permanent, as it would cause too much financial disruption to let them expire.

Tax rates, however, are more flexible.

Lawmakers could pass a bill that meets their target tax rates initially but inches up those rates after a decade to return to revenue neutrality. And it’s also a safe bet that Congress wouldn’t ultimately let the rates increase. Tax cuts can be politically difficult to let expire, and Congress would likely face pressure to renew or make permanent the provisions when the 10-year window lapses.

In 2012, when the expiration date neared for tax cuts that had been passed using reconciliation in the George W. Bush administration, Congress passed a bill that made permanent more than 80 percent of the provisions, including cuts to income, capital gains, and dividend income taxes, as well as changes to the estate tax and the alternative minimum tax, at a cost of nearly $3 trillion.

The permanency of other provisions, like a $2.2 trillion proposal to let companies immediately deduct the full cost of some capital investments, would also be on the table. So is the revenue-raising provision that would eliminate the deduction for interest payments on loans.

“There are so many ways that you could fit this together,” said Lisa Zarlenga, partner at Steptoe & Johnson and a former Treasury Department counsel.

Pitfalls to this policy option remain, however. Beeman warns against making revenue offsets permanent while using them to pay for tax cuts that could disappear after a decade. That could draw pushback from both business groups and individuals.

Lawmakers are likely to hold a few tax-reform hearings in September, but a markup is unlikely, Beeman said. Congress has two major hurdles first: raising the debt ceiling and passing a measure to fund the government.

Congress must pass a funding bill by the end of the month to avoid a shutdown, and the federal government is likely to hit its debt ceiling around then as well. Lawmakers could attach a debt-ceiling provision to an aid package for victims of Hurricane Harvey to ease its passage. Rep. Mark Meadows, chairman of the conservative House Freedom Caucus, warned leadership against that plan in an interview with The Washington Post last week, but if Democrats voted for the package, leadership wouldn’t need the 30-plus votes in the Freedom Caucus.

Lawmakers must also pass a budget, which is key to tax reform as it will provide instructions for reconciliation and serve as a yardstick for the size of any proposed tax-cut plan.

Treasury Secretary Steven Mnuchin told CNBC and The Wall Street Journal in interviews last week that the tax-writing principals have a detailed plan, but he didn’t disclose details. Mnuchin, White House economic policy chief Gary Cohn, and congressional leaders released a wafer-thin framework in July, but Mnuchin said a more detailed plan is set for release soon that should serve as an outline for committee staff to craft legislation in the coming weeks. That outline could answer lingering questions about target tax rates and revenue neutrality, and could signal whether the White House and lawmakers are moving ahead with a hybrid plan.

The tax-writing committees can do only so much preparatory work until congressional leaders and the White House hammer out those key issues. Then, staffers can begin to apply them to the detailed policy work that has been going on behind closed doors.

“There are a lot of provisions that are on the shelf—legislation drafted that they can pull from and start working,” Zarlenga said.

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