Even as congressional Republicans commended the Trump administration’s release of guidelines for comprehensive tax reform April 26, House and Senate taxwriters raised questions about funding the dramatic tax rate reductions.
Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn outlined the administration’s priorities for comprehensive tax reform, including a 15 percent tax rate for both corporate and passthrough business income, shifting to a territorial system of international taxation, and repealing the 3.8 percent net investment income tax imposed under the Affordable Care Act.
The proposal also calls for a one-time tax on repatriated offshore corporate funds; doubling the standard deduction while eliminating itemized deductions such as that for state and local tax; and reducing the current seven individual tax brackets to three with rates of 10 percent, 25 percent, and 35 percent. Released as a one-page fact sheet, the proposal lacked specific details on whether and how those changes would be offset. Mnuchin predicted economic growth from the plan would pay for the cuts, a notion that was met with skepticism from budget-minded groups.
Mnuchin also said congressional Republicans were in 100 percent agreement with President Trump’s plan; however, House Speaker Paul D. Ryan, R-Wis., offered a different ratio. “We all agree on 80 percent of these things, and so it’s that final 20 percent that we’re going to have a good conversation together about how do we close those gaps and make sure that we can get a bill that everyone is excited about supporting,” Ryan said at a BakerHostetler event before the plan's announcement.
The Trump outline does not include the controversial border adjustment proposal contained in the House GOP’s “A Better Way” tax reform blueprint, nor does it include the blueprint's plan to offer full business expensing or eliminate the deductibility of net interest expenses.
“If the silence of the new Trump plan means that he is not supporting [border-adjustable taxes], then this is an important difference,” said Saba Ashraf, a tax attorney with Ballard Spahr. She indicated that removing the proposal would prevent the GOP plan from achieving revenue neutrality.
Other differences between the House lawmakers’ and Trump’s proposal include changing the rates for the three individual brackets from the blueprint’s 12 percent, 25 percent, and 33 percent rates, Ashraf noted. The administration also included doubling the standard deduction, which for joint filers in 2017 would be $25,400, a reduction from the Trump campaign proposal of $30,000.
House Ways and Means Committee member Carlos Curbelo, R-Fla., highlighted the consensus already shared between the tax panel and administration, telling reporters that like other presidents, Trump is leaving concerns over revenue neutrality to Congress.
“Are there some differences? Sure, but there is also a lot we share in common, and more broadly, I think the goal is very similar: to deliver lower tax rates and a simpler system that will lead to growth," Curbelo said.
Committee colleague Tom Reed, R-N.Y., said the president’s plan may differ slightly from the blueprint, but that the White House and House Republicans ultimately want the same thing. “We are all working towards the same goal: get the rates as low as possible, and if we can thread that needle and get to 15 [percent], I’ll be a voice to try to get there.” He noted that the House GOP plan proposes reducing the corporate tax rate to 20 percent.
Reed also said he is “very sensitive to the deficit” and that “making sure that the growth that’s going to come from this, that that’s real, that we’re going to see that dynamic effect on the score in regards to the deficit.” Reed added, “Hopefully we will get those types of numbers and the deficit won’t balloon as a result of this.” Reed was unable to quickly name a dynamically scored tax incentive passed by Congress that was later offset by economic growth, saying only that his constituents had relayed anecdotal evidence that provisions in the 2015 tax extenders law were helpful.
If the controversial border-adjustable tax provision in the House Republican tax reform blueprint is scrapped, Curbelo said, there are other options to help pay for the policy change.
“There are many different ways to achieving the goal. Obviously there will have to be some compromise or the rate reductions won’t be as ambitious, and then there are other ways to raise revenue. I’m pretty sure that when we huddle over the weekend and Monday that will be a big part of the discussion,” Curbelo said.
Not There Yet
Ways and Means Committee member Kenny Marchant, R-Texas, said that it would not be possible to reduce the corporate tax rate to 15 percent within the confines of the House Republican blueprint. But Ways and Means member George Holding, R-N.C., considered the 15 percent rate “not a non-starter.”
“In a tax reform package, there are a lot of moving parts. The rates are kind of like dials. It depends on how all the moving parts come together for how you dial the rates up or down,” Holding said.
Ways and Means Tax Policy Subcommittee Chair Peter J. Roskam, R-Ill., said during the BakerHostetler event that the broad tax reform debate is about whether to implement permanent reforms or temporary tax cuts, adding that it would be an “underperformance” if Congress were not to work on a permanent tax reform package.
But Mnuchin indicated the administration was prepared to settle for temporary cuts that fit within the reconciliation process, saying that while a permanent cut would be preferable, the administration would work for one covering 10 years if necessary. Deficit-minded groups like the Committee for a Responsible Federal Budget are skeptical such a plan's price tag would qualify under reconciliation.
Weighing in on the timing issue, Marchant said, “I think we’re looking for permanence. [That] would be our number one goal." Highlighting the Bush administration tax cuts in the early 2000s that sunset in 2013, he said, “I can’t imagine that [we] would want to go through that again.”
Appearing on MSNBC April 26, Ways and Means Chair Kevin Brady, R-Texas, agreed a tax reform effort should strive for permanence.
But Ryan said at the BakerHostetler event that he feels “very good” about where House Republicans and the White House stand in terms of their respective agendas, despite potential differences there and on policy issues. Echoing April 25 comments from Brady, he said the border-adjustable tax provision needs to be altered to address concerns before being included in any legislation. “We all agree that in its present form it needs to be modified. That’s why we’ve been getting all of this kind of feedback from you,” Ryan told conference attendees, adding that Republicans want to avoid severe disruptions.
“If you’re an importer or a retailer heavily dependent on importers, we don’t want to shock the system so much that it puts them at a huge disruptive disadvantage. So we think that there are things we need to do to revise these proposals to make sure that we get there,” Ryan said.
Marchant added that modifications to the border-adjustable tax are still being explored, though he did offer a few examples of ideas under consideration, including a reduction in the provisions’ tax rate and a lengthy transition period.
“We’ve always planned for a very generous transition period. So I don’t know whether it makes it more generous, or there’s a huge transition period and/or a lower rate, or reciprocation. There’s all kinds of ideas bouncing around there,” Marchant said.
When asked how Republicans plan to make permanent tax reform legislation through the budget reconciliation process, which requires legislation be drafted so that budgetary effects don't fall outside a 10-year window, Marchant said, “I haven’t seen the way to do that.” He added that any permanent legislation would require 60 votes in the Senate, but that “there’s been no indication” of bipartisan support for the ideas proposed in the blueprint. Republicans hold 52 seats in the Senate.
Rave Republican Reviews
In a joint statement with House and Senate leadership, the top congressional taxwriters said the tax reform outline details “critical guideposts for Congress and the Administration.”
“With an eye toward fairness and simplicity, we’re confident we can rebuild our tax code in a way that will grow our economy, better promote savings and investment, provide our job creators with a competitive advantage, and bring prosperity to all Americans,” Ryan, Brady, Senate Majority Leader Mitch McConnell, R-Ky., and Senate Finance Committee Chair Orrin G. Hatch, R-Utah, said in a statement.
The plan also pleased Finance Committee member Chuck Grassley, R-Iowa, who suggested that tax reform should “help put U.S. job creators at the front of the pack” and considered the administration’s outline a jump start to the debate.
“A major undertaking like tax reform takes the bully pulpit of the presidency to start a debate with Congress and the American people. President Trump deserves credit for putting out an outline to get the conversation started. He’s correct to make promoting economic growth and job creation the top priority of tax reform,” Grassley said in a statement.
Democrats Not on Board
However, several Democratic taxwriters were much less impressed. Finance Committee ranking minority member Ron Wyden, D-Ore., said the administration’s tax plan amounts to “offering cakes to the fortunate few.”
“And while the President, multinational corporations and wealthy shareholders enjoy a big tax cut, trillions of dollars will be added to America’s crippling debt,” Wyden said in a statement. “This kind of irresponsibility is light on details for people who work for a living and is based off of a failed trickle down economic theory and one that could deplete Medicare and Social Security as we know it.”
Ways and Means ranking minority member Richard E. Neal, D-Mass., warned the administration against repeating history, saying in a statement, “This broad outline — which lacks any kind of real detail — is a rerun of the same failed tax policy that led to the Bush tax cuts in 2001 and 2003, which cost us trillions of dollars, did nothing to help working families, and, in part, contributed to the Great Recession.”
Speaking to reporters following the plan's announcement, Neal said it highlights Republican hypocrisy on the federal budget deficit. “It allows them to once again say that the budget should only be balanced when there’s a Democratic president,” he said.
Other Ways and Means Democrats issued statements lambasting the administration’s tax reform outline. Health Subcommittee ranking minority member Sander M. Levin of Michigan called the plan “déjà voodoo economics — cutting taxes mostly for the very wealthy and large corporations with a blind and disproven faith that those tax cuts will pay for themselves.”
Rep. Bill Pascrell Jr. of New Jersey took issue with the proposed elimination of the state and local tax deduction, saying, “This plan amounts to a massive corporate tax cut at the expense of working Americans by eliminating deductions New Jerseyans rely on like the state and local tax deduction. I am for reducing corporate taxes, but not on the backs of the middle class.” Rep. Leonard Lance, R-N.J., also expressed opposition to that one provision of the tax reform plan, saying in a statement that he would "be a leading voice in negotiations for maintaining that deduction."
Pascrell, a leading Democratic voice in the effort to force disclosure of Trump's tax returns, said, “It’s unacceptable that the president has not shown us his tax returns — so there is no way to know how this proposal would personally benefit himself or his businesses.”
Mnunchin told reporters that Trump would not release his tax returns.
Tax Policy Subcommittee ranking minority member Lloyd Doggett, D-Texas, interpreted the administration’s tax reform outline as another move promoting Trump's interests. “Trump talks like a populist but governs like a plutocrat. Like the near trillion-dollar tax cut in the failed health care bill that he endorsed, Trump’s tax plan fills the coffers of giant corporations and lines the pockets of the superrich,” Doggett said in a statement.
The outline does not contain pay-fors for infrastructure, despite some speculation that those provisions might be included to attract Democratic support. Rep. John K. Delaney, D-Md., said he was disappointed in their exclusion. “That’s basically signaling that they don’t want to do infrastructure,” he said. “Because if you don’t do infrastructure as part of tax reform, I don’t see how you find revenues" to pay for it.
However, Ryan said that an infrastructure bill may be able to pair with other legislation separate from comprehensive tax reform, providing for a better opportunity to pass the House and Senate with bipartisan support.
Asha Glover and David van den Berg contributed to this article.
Follow Dylan F. Moroses (@DMoroses3244) and Stephen K. Cooper (@ScoopOnTaxes) on Twitter for real-time updates.
Clarification, April 27, 2017: Figures for the standard deduction have been updated, and the year listed, for 2017.