House and Senate tax writers have taken their first big steps toward advancing a tax-overhaul bill, but tough challenges are already emerging.
The Big Six, a group of House, Senate, and administration officials, released their broad tax-overhaul framework Sept. 27. The plan would lower the corporate and individual rates and create a tax break for business expenses, and it proposes eliminating many popular deductions to pay for it all.
Overhauling the tax code only gets tougher from here as business and special interests, along with the parochial issues of individual lawmakers, come into conflict with the emerging details of the plan.
Over the past two weeks, some potential compromises have emerged, as tax writers hold listening sessions to air concerns from the broader Republican Party. But there are other hurdles that might be tougher to clear.
With just 52 Republicans in the Senate, leadership can’t lose many members if they want to advance a tax bill.
Those prospects got a bit harder over the weekend after President Trump engaged in a Twitter battle with Sen. Bob Corker. Trump said Corker decided not to run for reelection in 2018 only after Trump had refused to back his candidacy. Corker denied the claim and described the White House as an “adult day care.”
The breakdown between Trump and Corker, who had been rumored for a spot in the Trump administration at the beginning of the year, couldn’t come at a worse time for the GOP effort to advance a tax overhaul. Corker has been vocal about his opposition to any tax bill that increases the deficit.
Other GOP senators have shown hesitation toward the tax plan. Rand Paul sent out a tweet Oct. 2 indicating that he may oppose the measure. Analysts are also watching moderate Republicans such as Maine’s Susan Collins and Alaska’s Lisa Murkowski, who played a key role in sinking the effort to repeal the Affordable Care Act.
State and local solutions
One of the most popular tax breaks on the chopping block is the deduction for state and local taxes, used by more than 40 million taxpayers. Repealing it would raise more than $1 trillion for the GOP tax plan. Republican leaders say the tax break creates an unfair federal subsidy for residents of high-tax states.
Most of those states, such as New York, California, and New Jersey, trend Democratic, but residents from their Republican-held districts would feel the pinch as well, and their lawmakers are sounding the opposition to the proposal to nix the deduction.
“I’m very sensitive, obviously, coming from New York, and I’m really sensitive to those working families that are the heart of my district, guys from $50,000 to $300,000 [in annual income] for a family of four,” Rep. Tom Reed, a Ways and Means Committee Republican from New York, told reporters.
Ways and Means Chairman Kevin Brady met with GOP members from high-tax states Thursday and has opened the door to a compromise on the issue.
“At this point there’s been no change to the framework, the way it was laid out, but again we’re listening very carefully to ideas and how we can make sure and deliver tax relief for families,” Brady told reporters.
There are some potential solutions, lawmakers say. Reed has proposed converting some of the deduction into a tax credit.
“I think you are just going to see a continuation of conversations about moving to the credit side, maybe capping the deduction, maybe targeting the relief more for hardworking Americans,” Reed said. “At the end of the day, I think there’s a compromise to be made there.”
Senate Finance Committee Chairman Orrin Hatch has said he is open to preserving some of the deduction.
Since GOP officials released their tax framework in September, critics have been battering the plan over provisions they describe as giveaways to the wealthy, singling out the proposals to eliminate the estate tax and alternative minimum tax, and lowering the top tax rate.
Now, one GOP senator is opposing the plan to scrap the estate tax, a proposal that sits at the core of the Republican platform. Sen. Mike Rounds told Bloomberg that he opposes the plan to fully repeal the tax, though in 2015 he cosponsored a bill that would have eliminated it. Another GOP senator could oppose the provision as well. Collins voted against a repeal in a separate 2015 budget measure. GOP Sen. Jeff Flake has questioned whether ending the tax would actually have a stimulative effect on the economy.
Leadership can lose only two Republican senators and still pass a tax-overhaul bill.
The estate tax applies a maximum rate of 40 percent to inheritances that exceed $5.49 million for an individual. Repealing the tax could cost $269 billion over a decade, according to the Joint Committee on Taxation.
Lawmakers could still find a middle ground, such as lowering the threshold at which the tax applies or creating an exemption to the tax only for small businesses and agriculture.
Backtracking on the top rate
There has also been pushback on the proposal to lower the top tax rate from 39.6 percent to 35 percent, a move that critics of the framework have seized upon.
Some Republicans are willing to entertain raising the target top rate if it solves the optics problem associated with the current proposal. The framework’s language offers an option to create a fourth top tax rate above the 35 percent bracket, though it didn’t specify a rate.
“I think it’s something that we’re going to have to eventually consider, but I don’t think we are anywhere close to deciding that yet,” Rep. Kenny Marchant, a Ways and Means Republican, told reporters.
On the bright side for Republicans, the House passed its fiscal 2018 budget resolution last week and the Senate advanced its version out of committee. The budget will set the spending limit for any tax cuts and allow lawmakers to pass a tax bill with only a simple majority in the Senate.
The Senate Budget Committee approved its version along party lines, and the full House passed its version 219-206, with 18 Republicans voting against the measure.
Several Republicans who voted in opposition have districts in high-tax states such as New York and New Jersey, which would be hit hard by the tax plan’s proposal to repeal the state and local deduction.
House Freedom Caucus Chairman Mark Meadows told reporters after the vote that the margin illustrates the challenges ahead for a tax bill, but added that he thinks the GOP can sway some Democrats who voted against the budget to vote for a tax plan.
“So where it may not be prudent for them to vote for a GOP budget, they might be able to vote for a tax bill that is truly bipartisan,” Meadows said.