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Trump Win Opens GOP Path for Tax Reform, ACA Repeal

Posted on November 10, 2016 by Moroses, Dylan F.Cooper, Stephen K.Curry, Jonathan

Comprehensive tax reform, Obamacare repeal, and rebuilding the nation's infrastructure will get the most attention from President-elect Donald Trump and the Republican-controlled Congress, according to lawmakers, tax staffers, and lobbyists, who suggested the GOP could use budget reconciliation to clear a path over Democratic objections in the Senate.

Speaking on CNBC on November 9, House Ways and Means Committee Chair Kevin Brady, R-Texas, called the tax code "broken" and said tax legislation would come in the first 100 days of Trump's presidency. He said the important thing to address during Trump's presidency is redesigning the way the United States taxes companies so they can be competitive anywhere. He said tax incentives for companies to move jobs or headquarters overseas need to be eliminated and that the Affordable Care Act needs to be replaced.

Repealing the ACA is a pretty high item on the Senate GOP's agenda, Senate Majority Leader Mitch McConnell, R-Ky., told reporters November 9. He also noted his plan to discuss revenue-neutral, comprehensive tax reform with Trump. Rather than follow President Obama's proposal to spend revenue generated from tax reform, McConnell said he wants to reach an agreement with the new Trump administration and congressional Democrats to use that revenue to lower tax rates for corporations as well as S corporations and limited liability companies.

"If we want to make America truly competitive, the goal ought to be, when revenue is produced by the elimination of preferences, use that to buy down the rates," he said. "We have a particularly acute problem with the corporate tax rate, as everyone admits, thereby creating the opportunity for inversions and the like."

McConnell's efforts seem to be in line with those of House Republican leaders like Brady and House Speaker Paul D. Ryan, R-Wis., authors of the GOP's six-part "A Better Way" plan that includes a tax reform blueprint. What's unclear at this point, tax observers say, is whether tax reform would be tied to infrastructure spending, whether it or ACA repeal would be the priority, and whether the fast-track budget reconciliation procedure would be used to secure passage of those items to the White House.

During his campaign and acceptance speech, Trump voiced support for spending billions of dollars to rebuild the nation's crumbling infrastructure -- a proposal that congressional taxwriters as recently as last year paired with a revenue-raising deemed repatriation plan that would tax corporate earnings at a lower rate. House Minority Leader Nancy Pelosi, D-Calif., also noted Trump's support for investing in infrastructure, saying in a statement, "We can work together to quickly pass a robust infrastructure jobs bill."

Speaking to reporters, Ryan declined to explain how he would use the budget reconciliation process, deflecting questions on tax reform or repeal of the ACA. He said he planned to discuss with Trump and his team what could be taken up in the lame-duck session of Congress. "It is very exciting to be going into a lame duck where we have a Republican president following right after it," he said.

Start Your Engines

With several commitments already made by House Republicans to address comprehensive tax reform in 2017, many stakeholders believe the election results pave a way to passing some substantial policy reforms in the new Congress and presidency.

Bill Signer of Carmen Group Inc. told Tax Analysts he expects some type of tax reform to be a major effort next year in Congress, in a session where Republicans "probably have the votes to do it."

Jon Traub of Deloitte Tax LLP said there still could be "political hurdles that tax reform presents," but that "the odds of action on tax reform just went up dramatically."

Traub and Signer suggested that Republicans will use the reconciliation process to get a comprehensive tax reform proposal through the Senate with a simple majority vote rather than the 60-vote threshold normally required.

Under reconciliation, only 51 votes -- the number of Republicans who will be in the Senate in the 115th Congress -- are required, noted Mary Burke Baker of K&L Gates LLP. "Trump winning the presidency greatly increases the chances that we are going to be seeing tax reform fairly soon in the next administration," she said. Upon release of Trump's budget in late winter and congressional agreement on a budget resolution, legislators could start working on tax reform and putting parts of it into the reconciliation bill shortly after convening the new Congress, she said.

Baker said that although Trump's tax policies were not outlined in detail during the campaign, there are commonalities between his general plans and the House Republicans' blueprint.

She noted that although the reconciliation process could be used to advance some aspects of tax reform, not every measure could be passed in that manner because of rules that provisions enacted through reconciliation both have a budgetary impact and do not increase the deficit outside the 10-year window.

The reconciliation process has been openly discussed as the most likely path to a Republican tax reform bill. Ryan said as much during a press conference in late September, when he said he would use the reconciliation process to repeal Obamacare and push the House GOP tax plan through Congress if Trump was elected president.

Gordon Gray of the American Action Forum told Tax Analysts that the question is not if Republicans use the reconciliation process, but what they choose to use it for. Reconciliation rules impose limits on how much the proposals can affect revenues, deficits, and spending, so trying to push through repeal of the ACA at the same time as a major tax code overhaul could run into those limits.

"You only get a few bites of the apple in any given year with reconciliation," Gray said. "I think there's a temptation to view reconciliation as a magic wand -- it's not." If Republicans had to choose between repealing the ACA and passing tax reform, he predicted ACA repeal would take priority.

Several tax observers in Washington think tanks also saw a strong push for tax reform on the horizon.

"Tax reform is gonna happen," William G. Gale of the Urban-Brookings Tax Policy Center said. While Trump has broken with mainstream Republican policies on several issues, including trade, tax reform unites all segments of the GOP, he said. Republicans "got their ducks in a row; I expect that they'll move early and fast. . . . Tax reform is high on their agenda."

Scott Greenberg of the Tax Foundation said he thought the election results indicate "significant momentum for a major tax reform bill coming out of Congress and signed by the White House."

Which Plan?

While the House Republican tax blueprint and Trump's tax proposals have some similarities, Signer said he thinks the president-elect will let Congress take care of most of the legislative details.

"Mr. Trump will bring people into his administration without very much government experience, which will allow him to set general parameters and directions, but leave much of the details up to Congress to decide," Signer said.

Trump himself has indicated he would be willing to defer to taxwriters in Congress on the particulars of tax reform legislation. "We will work with House Republicans on this [tax reform] plan," he said during an August 8 speech at the Detroit Economic Club, adding that his plan would use the same tax brackets they proposed.

The tax reform blueprint, which Brady said will be released in legislative form sometime "early in 2017," is likely to be the basis for any tax reform effort, lobbyists said.

Trump's campaign advisers have also indicated an openness to letting Congress handle tax policy details. When it was revealed that some low- and middle-income taxpayers, particularly single parents, could face a tax increase under Trump's tax plan, senior economic adviser Wilbur Ross dismissed those concerns, saying that when it came to drafting actual legislation, Congress would ensure that didn't happen.

Signer suggested that there are several areas where bipartisan tax reforms could be included in an overall comprehensive package, most notably including expansions of the earned income and child tax credits. "Trump wants something for people who were left out or left behind in the economy, so family tax relief will have to be a part of the package, because to cut tax rates, they need to address the middle-class families still struggling to make ends meet," Signer said.

Harry Stein of the Center for American Progress worried that Republican efforts at tax reform would ignore tax proposals with bipartisan backing, such as expansions to the EITC and the child tax credit. "This was not an election about tax cuts. This is not an election about supply-side economics. It's hard to imagine a less appropriate way to respond to the populist anger in this election than to give huge tax cuts to the economic elites," he said.

Stein added that he thought the sudden drop in the stock market late November 8 in response to Trump's victory "is a pretty good referendum that slashing taxes on rich people isn't going to release an economic boom."

Lame Duck

Results of the election have also changed the landscape for the lame-duck Congress, leading to less reason for Republicans to make deals, including tax legislation, according to several lobbyists. Traub suggested that "we shouldn't anticipate much on the tax front."

Signer said any opportunity to pass legislation during the lame-duck session this year became "a larger challenge" after Trump's upset victory. "Where there was an inclination to do tax extenders before the election because tax reform hadn't been enacted in 2016, leaving the business community uncertain, it remains to be seen what will happen now" with tax reform's prospects increasing for next year, Signer said.

Senate Finance Committee Chair Orrin G. Hatch, R-Utah, and committee staff have been developing a corporate integration proposal that would essentially eliminate the corporate tax rate and equalize the treatment of debt and equity. Some stakeholders suggested that the proposal could be released during the lame-duck session.

"We might see a draft on corporate integration this year, but it probably won't represent the center of gravity in the tax reform debate going forward," Traub said.

While Hatch has repeatedly told reporters the legislation is being held up by scoring troubles at the Joint Committee on Taxation, one lobbyist told Tax Analysts the plan could be completed and Hatch may be waiting for the right time to release it. Another suggested the JCT troubles are real and may prevent the proposal from ever being publicly unveiled.

Possible Obstacles

There could be some sticking points in the tax proposals between the Trump-led White House and House Republicans. Greenberg said that the White House could assert its position on issues that featured prominently during Trump's campaign, like international competitiveness, or on issues that affect Trump directly, like interest deductibility.

"A central, structural component of the Better Way blueprint is getting rid of the deductibility of interest paid and lowering taxes on interest receipts, but we've seen little to no indication that the folks in Trump's tax circle are interested in such a policy, and in fact Trump himself probably relied heavily on interest deductibility as an investor in real estate," Greenberg said.

Still, he said, there's a lot they agree on. "They both want a significantly lower tax rate, an end to federal estate and gift taxes, lower top individual tax rate, and -- for better or worse -- more generous treatment of passthrough income," Greenberg said. "There are significant shared priorities, but the devil is always in the details."

However, Gale was confident that differences between Trump's tax proposals and those of taxwriters in Congress would be smoothed over. He speculated that they might find a compromise on interest deductibility, such as the one proposed by the Trump campaign, which would allow taxpayers to either deduct interest or claim full expensing, but not both.

The fact that the Trump tax plan itself went through several major revisions during the campaign was interpreted by Gale to mean that "by and large, they aren't wedded to particular details of tax reform."

Asha Glover and Marie Sapirie contributed to this story.

Follow Dylan F. Moroses (@DMoroses3244), Stephen K. Cooper (@ScoopOnTaxes), and Jonathan Curry (jtcurry005) on Twitter for real-time updates.