Mitch McConnellMitch McConnellGOP senators introducing ObamaCare replacement Monday Senators introduce dueling miners bills Dems demand second hearing for Trump's Education nominee MORE is discretely laying the groundwork for the fall’s budget negotiations, which promise to be a major headache for the Senate majority leader.
The Kentucky Republican has three priorities for the year-end talks that will dominate Congress starting next month.
He wants to keep the government open, avoid a federal default and avoid alienating his conservative base, which wants big concessions connected to legislation funding the government and raising the debt ceiling.
Government funding expires on Sept. 30, and the debt ceiling needs to be raised by year’s end, according to the administration.
Any year-end deal that busts the budget cap set in 2011 for non-defense spending, which McConnell regularly touts as a significant GOP achievement, will anger conservatives.
An agreement to boost spending and pay for it with a tax increase would infuriate the party’s base even more.
McConnell wants to avoid both these scenarios, according to sources familiar with his thinking.
The problem for him is a non-defense spending increase offset by tax increases and other revenue-raising provisions is exactly what Democrats are demanding.
Democrats, led by New York Sen. Charles Schumer, the Senate Democratic leader-in-waiting, want to lasso tax reform into the year-end talks to pay for a six-year highway bill. That would free up $47 billion in offsets McConnell negotiated with liberal Sen. Barbara Boxer (Calif.) to pay for the first thee years of the Senate-passed highway bill.
A senior Democratic aide says using those offsets to get rid of the budget caps set in 2011 is “a potential side effect” of using overseas corporate tax reform instead to pay for the highway bill.
Moving to a territorial tax system and forcing companies to repatriate profits stashed overseas could generate a windfall of revenue that could pay for the highway bill and reduce corporate tax rates, Democrats argue.
They hope it may even generate enough funding to provide more than one year of relief from sequestration — the automatic cuts Congress enacted three years ago.
President Obama’s proposal requiring companies to repatriate overseas earnings at a 14-percent tax rate would generate an estimated $238 billion in revenue — more than enough to cover the $90 billion shortfall left by the gas tax for a six-year highway bill.
“The highway bill and getting rid of the sequester will be combined, because we’re going to get only one bite at the apple with revenue,” said a Democratic senator on the Finance Committee.
McConnell’s top priority is to keep tax talks out of the spending and highway negotiations that Schumer and the Democrats want to pack into one big ball. That way the two discussions can’t bleed into each other, with a tax hike that will be used to pay for more spending as the likely result.
“Two separate issues,” McConnell said at a Thursday press conference, trying to put a kibosh on Schumer’s efforts. “There’s been a lot of focus on going to a territorial system. I might well be enthusiastic about that, but I view it as a totally separate track unrelated to the highway issue.”
McConnell wants the highway bill to move on a separate track and go through a conference negotiation with a companion House bill.
Democrats believe they have more leverage if it gets lumped into the year-end budget summit.
“From Schumer’s perspective, as long as there’s enough chaos and bedlam and more pieces are on the table, Democrats have more leverage,” said a Senate Republican aide.
Democrats believe that with a government shutdown looming, Republicans will feel pressure to strike a deal on spending and the highway bill to preserve the image they have constructed this year as being a party that knows how to govern. They think Republicans will go along with a plan to pay for it with tax reform, because it can be spun as something that reduces overseas rates.
But Grover Norquist, president of Americans for Tax Reform and guardian of the Taxpayer Protection Pledge, says requiring companies to repatriate foreign profits — instead of giving them the option of doing so voluntarily — counts as a tax hike.
McConnell does not think there’s enough money from overseas corporate tax reform to pay for both a reduction in rates and a highway bill. He suspects Schumer and House Ways and Means Committee Chairman Paul Ryan (R-Wis.), who is exploring options with Treasury Secretary Jack Lew, will be tempted to double count the proceeds.
Also, he’s not enthusiastic about tax reform that helps multi-national corporations but leaves out small businesses that file as individual taxpayers. He would prefer to use the windfall from repatriation to lower their rates, too.
Once McConnell establishes tax reform and the highway bill on separate tracks, the government funding challenge becomes more manageable. It would deprive Democrats of the highway bill’s offsets and corporate tax reform as options to pay for busting the budget cap for a non-defense spending increase.
That strategy would leave entitlement reform as the most viable way to pay for increasing the budget caps for defense and non-defense discretionary spending. Earlier this year, Congress used one such reform — means-testing premiums for wealthier beneficiaries — for the permanent “doc fix,” which eliminated scheduled cuts in doctors’ Medicare payments.
If Democrats refuse to offset discretionary spending increases with mandatory spending cuts, then a continuing resolution that locks in current funding levels for another year is a likely outcome.
President Obama and Senate Democrats have promised to oppose any spending bills that increase defense but not non-defense spending levels.
The majority of the Senate GOP conference opposes raising both accounts if it means adding to the deficit.
Publically, McConnell won’t say what demands he’ll insist on at the negotiating table. But he won’t take the talks to the brink to increase his leverage, knowing that tactic has backfired on Republicans before.
“I can’t tell you what will finally end up in or out of any government funding resolution. I can tell you without fear of contradiction there will be no government shutdown,” he said Thursday.
That leaves raising the debt limit as the last obstacle to finishing the year without a catastrophe.
Democrats will insist on a clean debt-limit increase, and McConnell will likely eventually agree to it, knowing they have the upper hand.
But he hopes to be able to claim that Congress kept the government open and avoided a default without busting the budget caps or raising taxes, which are the two things that would have given Democrats a win and caused a war in his own party.