August 11, 2017

Let the Jockeying Begin on Tax Reform

 

Prior to departing for their summer breaks, House and Senate GOP leaders indicated that they plan to pivot from repealing and replacing Obamacare to making enactment of broad-based tax reform their number one priority.

Prior to departing for their summer breaks, House and Senate GOP leaders indicated that they plan to pivot from repealing and replacing Obamacare to making enactment of broad-based tax reform their number one priority.

What are the chances of that happening? Lawmakers face a number of hurdles and a busy legislative schedule when they return from their summer recess, which could complicate matters.

Statement of Principles

On July 27, the so-called “Big 6” — House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch (R-UT) and House Ways and Means Committee Chairman Kevin Brady (R-TX) — issued a joint statement affirming their commitment to tax reform.

“We are all united in the belief that the single most important action we can take to grow our economy and help the middle class get ahead is to fix our broken tax code for families, small business, and American job creators competing at home and around the globe,” the statement reads. “Our shared commitment to fixing America’s broken tax code represents a once-in-a-generation opportunity, and so for three months we have been meeting regularly to develop a shared template for tax reform.”

The leaders explain that the goal is to reduce tax rates as much as possible, allow “unprecedented” capital expensing, place a priority on permanence and encourage American companies to bring back jobs and profits from overseas.

The statement directs the two congressional tax-writing committees (House Ways & Means and Senate Finance) to draft comprehensive tax reform legislation with the expectation of moving the legislation through the committees this fall under “regular order” — that is, following the conventional congressional process of hearings and approval by the committees and subcommittees with appropriate jurisdiction — prior to debate and votes on the House and Senate floors. The statement also offers an olive branch to the Democrats with hope that they will participate in the effort.

The Challenges Ahead

Perhaps most significant in the statement is that the leaders have agreed to set aside a proposed border adjustability tax. Why is this significant? Because this was being targeted as one of the key revenue raisers – upwards of $1 trillion over 10 years — to finance tax reform on a revenue-neutral basis. Without this potential revenue, policymakers will be forced to look elsewhere for ways to “pay for” tax reform. This raises the possibility of policymakers looking to retirement-based tax incentives for revenue, even though some have previously said that such provisions are off limits.

Breaking the Olive Branch

In a letter to President Trump and the Senate Republican leadership, 45 of the Senate’s 48 Democrats offered to work together on tax reform, but only on condition that the bill be revenue neutral, not increase the tax burden on middle-income households, proceeds under regular order and not endanger entitlement programs like Social Security, Medicare and Medicaid.

Hemmed in by those conditions, Sen. McConnell immediately dismissed the Democrats’ demands. “We will need to use reconciliation1 because we have been informed by the majority of the Democrats in a letter I just received today that most of the principles that would get the country growing again they are not interested in addressing,” he stated. McConnell later added that he doesn’t “think this is going to be 1986 when you had a bipartisan effort to scrub the Code.”

More Hurdles

If these hurdles were not already enough to create havoc with the prospects for tax reform, consider that Congress has a hectic legislative schedule waiting once lawmakers return from their summer recess in September.

The House and Senate are scheduled to be out until September 5. The House currently has only 12 legislative days scheduled for the month of September and a total of 48 legislative days scheduled through the end of the year. The Senate calendar currently shows 21 legislative days scheduled for September and a total of 69 days through the end of the year. Of course these schedules are subject to change as circumstances warrant, but even still, the overall legislative calendar is quite full for the remainder of the year. Other legislative priorities include:

  • raising the debt limit (which Treasury Secretary Steve Mnuchin has said must be done by Sept. 29);

  • passing a fiscal year 2018 budget resolution (which would give Congress the ability to approve tax reform under a simple majority, as mentioned above);

  • passing the corresponding appropriations bills for fiscal year 2018 (which begins on Oct. 1); and

  • whether to seek legislative fixes to help prop up the ACA exchanges and whether to continue seeking a full or partial repeal of the legislation.

Many have speculated that tax reform legislation needs to be enacted before the end of the year because 2018 is an election year, which will make enactment of meaningful tax reform even more difficult given the current partisan differences between the two parties.

As we previously reported, last month the American Retirement Association sent a letter to Senate Finance Committee Chairman Orrin Hatch (R-UT) expressing its strong support for tax incentives to encourage retirement savings. The ARA contends that the current tax incentives work well to promote good savings behavior and argues, among other things, that any modifications to the current incentives should be evaluated based on whether or not the changes will encourage more businesses to sponsor retirement plans for their employees.

Footnote

1.Reconciliation is a process under the federal budget rules that allows Congress to pass spending and revenue legislation by a simple majority and not be subject to a filibuster in the Senate, as was the case with the Economic Growth Tax Relief and Recovery Act (EGTRRA) in 2001. The rules, however, provide strict guidelines on the legislation’s overall federal budgetary effects and what provisions can be included. In order to use the reconciliation process, both the House and Senate must pass what’s called a concurrent budget resolution, which they have not yet done this year.