GOP Dives Into Tax Reform With Key Questions Unresolved

Having spent years setting the stage for an ambitious bill, Republican tax writers are finally ready to go public with a plan—even as they face a minefield of competing interest groups and unresolved differences within their own party.

Key Republicans on and off the Hill still differ over how low rates should go, which deductions and breaks should be preserved, and how much of a tax-cut package should be offset to keep the deficit from ballooning. But they all agree that the issue’s time has arrived.

“We plan to move forward on our next priority, which is reforming the American tax code significantly for the first time in 30 years,” Senate Majority Leader Mitch McConnell told reporters Tuesday, after announcing he wouldn’t hold a vote on the latest Obamacare-repeal effort.

The Big Six, the group of House, Senate, and administration officials negotiating a tax overhaul, are set to kick off that revamped effort Wednesday when they release another broad framework for their plan, one that will likely offer more clarity on corporate and individual tax rates but won’t provide great detail on thorny problems like which popular tax breaks to eliminate.

President Trump is set to deliver a tax speech in Indiana late Wednesday in which he will sell the new tax framework to the public. The event follows a series of tax-reform speeches by Trump in states with vulnerable Democratic senators who may be swayed to vote for the plan. Indiana is home to Democratic Sen. Joe Donnelly, who is up for reelection in 2018.

It’s make-or-break time for GOP tax writers, who have been working on the current tax plan for at least two years, but their success is far from certain. Aside from broad goals such as lowering tax rates, expanding the base, and making the U.S. more competitive internationally, broad disagreements remain between political and business interests on the structure of a tax bill and how to pay for it. Wednesday’s document is unlikely to resolve those divides. Moreover, the head of a key House caucus has put down a red line on tax rates that further narrows the path tax writers must walk to make their numbers work.

Details of the plan began to emerge over the weekend. The framework will likely collapse the current seven tax brackets into three, at rates of 12 percent, 25 percent, and at least a 35 percent top rate. It will also likely propose lowering the corporate rate to 20 percent and lowering the rate for companies who pass their profits on to the owners to 25 percent.

The GOP may have a heavy lift with the public on the corporate rate. An ABC News/Washington Post poll found that 65 percent of Americans believe large companies pay too little in taxes, while only 11 percent say they pay too much.

Republicans are banking that the cuts will be paid for in part from economic gains stimulated by the plan, expecting as much as 3.5 percent annual gross domestic product growth, according to one GOP lobbyist. When Trump met with a bipartisan group of Ways and Means Committee members, he told the group that the upcoming plan would nearly double the standard deduction and increase the child tax credit as well.

Those figures are an opening bid in what will likely be a months-long search for coalition and compromise on Capitol Hill, and some rank-and-file members are staking out their positions already. House Freedom Caucus Chairman Mark Meadows told reporters that he wouldn’t vote for a tax bill if it had a corporate tax rate higher than 20 percent and a pass-through rate higher than 25 percent, leaving little room for tax writers who may need to increase rates to preserve politically popular tax breaks.

“I’ve not heard a compelling reason to suggest that we ought to have a higher corporate rate than 20 percent,” Meadows told reporters.

House members are set to hold a half-day retreat Wednesday for tax writers to brief them on the overhaul plan. Meadows said his Freedom Caucus will also hold its own tax-and-budget meeting later that day to form an official position on both issues. The 30-plus-member caucus may be instrumental in passing a tax bill in the House if Democrats vote in a bloc against the measure.

To help pay for the tax bill, Senate Budget Committee members Bob Corker and Pat Toomey have worked out a deal that would allow for as much as $1.5 trillion in revenue cuts over a decade. McConnell told reporters that the Budget Committee would begin marking up the measure next week. The budget resolution is key because it will also unlock reconciliation for the tax bill, allowing the GOP to avoid a Democratic filibuster in the Senate and pass the measure with a simple majority.

But the GOP proposals so far add up to much more than $1.5 trillion. The Committee for a Responsible Federal Budget estimated that Trump’s tax proposals released in April could cost about $5.5 trillion. That means that tax writers will need to search for pay-fors within popular tax breaks such as the deduction for state and local taxes or the deduction for interest paid on business loans.

That could pit groups such as the National Governors Association, which backs the state-and-local deduction, and the real estate lobby, which benefits from the interest deduction, against some conservative organizations that want to cut many tax breaks to further lower rates.

“Go big with the cuts as long as you do clear out a lot of these deductions and carve-outs,” Tim Phillips, president of Americans for Prosperity, told reporters at a tax event. “I know that you are going to have a lot of special-interest groups getting upset there, but tax reform that’s genuinely the kind of tax reform that’s transformative has to take on how this economy is rigged.”