With Republicans teeing up a budget resolution calling for a $1.5 trillion tax cut, panelists at an October 4 forum in Washington voiced concerns that tax reform was headed in a direction that doesn’t take base-broadening seriously.
The move toward a $1.5 trillion tax cut rather than revenue-neutral tax reform was a critical shift in the direction of the tax plan, and one that actually makes tax reform harder, rather than easier, according to Marc Goldwein of the Committee for a Responsible Federal Budget, which hosted the event.
Base-broadening is the most unpopular part of tax reform, Goldwein said. After making promises that the latest effort would constitute the biggest tax cut since the Reagan administration, to now say that that not everyone would get a tax cut, is politically challenging in a way that being upfront from the beginning — that there would be winners and losers in tax reform — wouldn’t have been, he said.
He explained that budgetary constraints like requiring tax reform to be revenue neutral would have provided one of the few sources of pressure to pay for rates and force lawmakers to make hard decisions. “Starting with the idea that everyone’s going to be a winner makes creating losers really hard,” Goldwein added.
Discussion about who might lose under tax reform is something that’s been largely missing thus far, but it’s a crucial part of the process, according to Mac Campbell of the Lincoln Policy Group. “There needs to be an honest discussion of winners and losers,” said Campbell, a former aide to former Senate Finance Committee Chair Max Baucus.
Campbell contrasted his own experience in helping to draw up tax reform legislation with the current effort. “We were talking to constituent groups, businesses, as many people as we could . . . providing them detailed plans and asking them to explain to us how it would impact their businesses,” he said. “There’s not been as much of that in this time-constrained process.”
Reports that Republicans may not be fully unified around repealing the state and local tax deduction raised concerns among several panelists that the biggest pay-for on the individual side is at risk of being watered down.
Without eliminating the state and local tax deduction, “there really is no space for rate reduction on the individual side,” Goldwein said.
Kyle Pomerleau of the Tax Foundation agreed that not repealing the deduction would make distributionally neutral tax reform more challenging and undermine efforts to make the individual tax code simpler. He explained that the main theoretical question behind whether the deduction should be repealed is whether the provision of state and local services should be treated as consumption or payment transfers.
Noting that tax reformers have reportedly contemplated partially limiting the deduction, Pomerleau said that property taxes, for example, go toward funding services that have a more direct benefit to the taxpayer, while state income taxes could arguably be seen as going more toward welfare transfers or education for other individuals. Still, Pomerleau said he would recommend eliminating the deduction “across the board.”
Goldwein said eliminating the state and local tax deduction in service of lower individual tax rates would have “big side benefits,” including reducing marginal effective rates and reducing the value of other “distortive tax expenditures” like itemized deductions.
Even if lawmakers are diligent in broadening the base, however, there’s “not a lot of low-hanging fruit,” Eric Toder of the Urban-Brookings Tax Policy Center said. He cited a recent Tax Policy Center report, which found that even if virtually every corporate tax expenditure were repealed, that would provide lawmakers with only enough offsets to reduce the corporate tax rate to 26 percent.
“There are a lot of nasty things we can get rid of, but from a budgetary perspective, they’re not all that big,” Toder said. Instead, lawmakers really ought to be looking at new sources of revenue — a VAT, a carbon tax, or higher rates on capital gains and dividends — that could be substituted for a lower corporate rate, he suggested.
Toder also worried that there is a disconnect between Republicans’ tax cutting wish list and the math needed to make those cuts happen. Judging from the recent tax reform framework, there’s been “a lot of overselling of what they can do,” he said.
Like Toder, Gordon Gray of the American Action Forum said that the framework features “an awful lot of ice cream in there, not a lot of veggies.” He also said that recent statements by administration officials like Treasury Secretary Steven Mnuchin that the tax plan would pay for itself “ill serves the debate.”
“How do you dynamically score, I guess, nine pages?” Gray wondered. However, he also said that critics of the plan who say it would hurt middle-income taxpayers are employing assumptions of their own. As people from either side of the debate make claims about what the plan will do, Gray said he would “urge a little bit of humility and a little bit of caution.”
John O’Neill, a former tax and budget aide to Senate Finance Committee ranking minority member Ron Wyden, D-Ore., also voiced concerns about the framework’s promises.
“My first response [to the framework] was that they’re offering the moon and you don’t have to pay for it,” O’Neill said.
“I hope they do serious tax reform, but to go from what they put out to getting a bill is . . . a Herculean task, and it takes time,” O’Neill said. And time, he said, is not on Republicans’ side. “In Wyden’s office, we had a rule of thumb: that you had a year after an election to get tax reform done. If you made it into [the] second month of the next year, it’s not going to get done because there’s a subsequent election,” he said.
Even after Republicans draft tax reform legislation, it’s going to be “enormously difficult to sell to members,” O’Neill said, because members are “risk-averse,” and anything that is “large and that only has a narrow chance of success is right away a disincentive to get on board.”
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