Tax Overhaul Challenges Unified Republican Government

Contentious House provisions spark interest in bipartisan Senate plan

Speaker Paul D. Ryan and Senate Majority Leader Mitch McConnell had planned to pass a tax overhaul by August, a timeline that has slipped amid intraparty divisions. (Bill Clark/CQ Roll Call file photo)
Speaker Paul D. Ryan and Senate Majority Leader Mitch McConnell had planned to pass a tax overhaul by August, a timeline that has slipped amid intraparty divisions. (Bill Clark/CQ Roll Call file photo)
Posted May 23, 2017 at 5:03am

BY LINDSEY MCPHERSON AND JOE WILLIAMS

Republican leaders are applying a lesson learned from health care to the tax overhaul debate: build consensus before releasing a bill.

It’s no secret that the House, Senate and White House are not on the same page on a tax overhaul. But GOP leaders are now more openly acknowledging those divisions as they work toward a goal of a unified plan.

“There’s been a commitment that’s made to try and come up with one bill, which would be helpful,” said Illinois Rep. Peter Roskam, the chairman of the Ways and Means Tax Policy Subcommittee. He said the goal is for the House tax-writing panel to produce a bill the White House and Senate can both support: “That’s really what we’re driving towards.”

While Republicans have pushed for a repeal of the 2010 health care law for seven years, for many members, an overhaul of the tax code has been a dream for longer than that. But the major divisions between the two chambers and the White House could impede progress on President Donald Trump and Speaker Paul D. Ryan’s top domestic policy priority.

To that end, the timeline for a tax overhaul has already slipped from a goal of by August to the end of 2017. It is unlikely a tax package would be taken up until Congress resolves the effort to repeal and replace the health care law, a continuously moving target.

Lawmakers in both chambers have even cautioned that a tax overhaul could slip into 2018. Should that happen, the GOP faces the possibility of trying to push a major policy initiative in a critical election year.

BAT battle

One of the major roadblocks is the border adjustment tax, or BAT, a key component of the House plan. The BAT, which, as proposed, would impose a 20 percent tax on imports but exempt exports, is among the topics to be debated during the Ways and Means Committee’s tax hearing Tuesday on increasing U.S. competitiveness and preventing jobs from moving overseas.

Ryan and Ways and Means Chairman Kevin Brady have been pushing the BAT hard, but it’s gained far more opponents than proponents on the Hill. And in a surprise admission last week, Ryan acknowledged that Republicans are discussing alternatives to the BAT.

“You have to weigh alternatives off one another,” the speaker said, cautioning that those alternatives come with “upsides and downsides.”

On Monday evening, Brady met with Vice President Mike Pence on Capitol Hill, where the two discussed both health care and taxes. The Texas Republican described the meeting as “just good discussions about delivering on both this year.”

Brady confirmed that the border adjustment tax was part of the discussion but declined to provide specifics.

“I’m not going to give a readout about all the discussion but, yeah, just very positive about all these key issues,” he said. Roskam was also at the meeting. 

Ryan reiterated his belief that the BAT is “the smart way to go,” arguing that “it makes the tax code the most internationally competitive of any other version we are looking at.”

His comments came just days after Senate Majority Leader Mitch McConnell handicapped the House’s preference. In an interview with Bloomberg TV on May 16, the Kentucky Republican called the BAT “controversial” and said it “probably wouldn’t pass the Senate.”

“The way we are trying to go forward, the secretary of the Treasury, the speaker and myself, are trying to reach an agreement on a proposal that we can all agree to start with,” McConnell said. “We haven’t reached that agreement yet. But we will at some point.”

Other Senate GOP leaders expressed similar views about the BAT.

“I certainly have a lot of respect for what they are trying to do, I just don’t see it having a future here,” Senate Majority Whip John Cornyn of Texas said last week.

Brady suggested the Senate is behind the House in debating the alternatives and that when they catch up with the House, they will ultimately come around.

“Everyone ought to look at the alternatives,” the Texas Republican said. “We certainly did in proposing this provision. And hands down the best way to level the playing field for American workers and products and stop American jobs from going overseas and reversing them and bringing those jobs back is a smart, well transitioned border adjustment tax.”

Deficit debate

The border adjustment proposal is estimated to raise roughly $1 trillion, and thus is a significant offset for the GOP’s ambitious tax rate cuts. But along with raising red flags about the BAT, McConnell has also reinforced his position that the overhaul should not add to the federal deficit.

“It will have to be revenue-neutral. We have a $21 trillion debt,” the majority leader said in the Bloomberg TV interview.

McConnell’s view runs counter to recent comments made by Trump, who expressed openness to a tax rewrite that resulted in a short-term increase in the deficit.

“It is OK, because it won’t increase for long,” he said in an interview with The Economist.

Trump was not clear about how long an overhaul could lose revenue before it turned into a growth generator. But GOP leaders have been clear the legislation needs to be revenue-neutral to adhere to Senate budget reconciliation rules and still be counted as permanent tax law, versus temporary tax cuts.

“Those aren’t mutually exclusive,” Brady said of Trump’s comments and his panel’s position. “Tax reform that’s permanent can be bold and can lose some revenues in those early years and recoup them through economic growth in that same 10-year period, as well as that second 10-year period, both of which allow us to make tax reform permanent. So I don’t know that we’re necessarily far apart on that.”

No artificial deadline

Although some of these topline issues have yet to be settled, Republicans do have some time to figure it out. Since the plan is to use the fiscal 2018 budget reconciliation process to advance a tax code rewrite, there is no pressure on Republicans to release a bill before both chambers pass and reconcile their budget resolutions with reconciliation instructions for the tax overhaul. That is not expected to occur until late June at the earliest.

Republicans have shied from imposing a self-imposed deadline for completing the tax bill, like they did initially with their health care overhaul. They are also aiming to have a more deliberate process for debate, with the Ways and Means Committee holding hearings on aspects of the plan the GOP laid out in its “A Better Way” campaign blueprint.

The committee has turned many Better Way ideas into legislative text but does not have a complete draft bill, Brady said. The panel has refined the blueprint and will continue to do so, “especially in discussions with the White House, the Senate and stakeholders,” he said.

The Ways and Means Committee does not have a timeline for completing hearings and releasing a bill, Brady and other panel members said.

That’s actually by design, according to Roskam. He cited two primary lessons learned from the health care debate: “First is don’t chase a false deadline. Second is driving toward consensus at the front end.”

“Think of it more in terms fruit ripening,” the Illinois Republican added. “When it’s ripe, it’s ripe. And until it’s ripe, it’s not ready. I do think. though, that 2017 is the year for tax reform, and if it doesn’t happen in 2017, I think it becomes really elusive.”

Pressure on the Senate  

While the House formulates its plan, there is a growing realization among Senate aides that the chamber may have to carry the initiative given the opposition to several key areas of the House proposal.

Treasury Secretary Steven Mnuchin, for example, met last week with the Senate Finance Committee and said the White House would not push for the BAT, according to an aide with knowledge of the discussion.

Members said after the meeting that Mnuchin expressed hope that Republicans and Democrats could find middle ground.

“One of my most important takeaways was their interest in doing bipartisan tax reform,” Cornyn said. “So far, the Democrats have basically resisted anything and everything.”

At the meeting, Senate Finance Democrats raised concerns to Mnuchin about proposals included in a one-page document released last month by the White House that they believe would predominantly benefit wealthier Americans, according to one aide. 

That underscores a major barrier to bipartisan agreement. Republicans will likely seek to lower taxes for high-income earners as part of an across-the-board tax cut; Democrats are expected to push back against any plan that benefits the wealthy.

Trump’s budget being released Tuesday is expected to include more details of his tax plan. Mnuchin will testify this week before both the Ways and Means and Senate Finance committees on the budget, hearings that will provide an early public look into how divided Republicans and Democrats are on taxes.