Five challenges for tax reform

Five challenges for tax reform
© Getty Images

Lawmakers and lobbyists believe that 2017 presents their best chance in years for comprehensive tax reform.

President-elect Donald TrumpDonald John TrumpIvanka Trump pens op-ed on kindergartners learning tech Bharara, Yates tamp down expectations Mueller will bring criminal charges Overnight Cybersecurity: Equifax security employee left after breach | Lawmakers float bill to reform warrantless surveillance | Intel leaders keeping collusion probe open MORE and Republican leaders in the House and Senate have all named tax reform as one of their top priorities.

But overhauling the tax code is notoriously difficult and moving legislation is no slam dunk.

ADVERTISEMENT

Tax-reform advocates say those hurdles can be overcome but acknowledged that lawmakers will have to make some big decisions.

“There’s good reason to be optimistic that tax reform can be done next year,” said Pete Sepp, president of the National Taxpayers Union, a group pushing for reforms. “That doesn’t mean we won’t have to put in the work.”

Here are five challenges that remain to passing tax-reform legislation in 2017:

 

Republicans only have a slim majority in the Senate:

Republicans will likely have 52 seats in the Senate next year, eight short of the 60 votes needed to overcome a filibuster. As a result, Republicans will either need to get a number of Senate Democrats to support a tax-reform bill, or pass reforms through a special process known as budget reconciliation.

Lawmakers have already talked about passing two budgets with reconciliation instructions in the coming months: One may include instructions for repealing ObamaCare, and the other may include instructions for tax reform.

But using reconciliation presents its own challenges. Reconciliation bills cannot increase the deficit outside of the 10-year budget window, and each piece of a bill passed under reconciliation has deal with spending or revenue. Also, almost every Senate Republican would need to vote for the bill.

Instead of trying to move a tax bill through the Senate through reconciliation, lawmakers could work to produce a bill that would have bipartisan support.

Dean Zerbe, national managing director at Alliantgroup and former senior counsel to Senate Finance Committee Republicans, said he thinks there will be a “strong effort to see if they could get the 60 votes they need” to avoid reconciliation.

Janice Mays, managing director of tax policy services at PricewaterhouseCoopers and a former top aide for House Ways and Means Committee Democrats, said she thinks Republicans may be able to find eight Senate Democrats who would support a bill, but it could take time.

 

House and Senate Republicans may have differences:

House Republicans released a tax-reform blueprint in June that is currently being turned into legislation.

While the blueprint is likely to be the starting point for a tax-reform bill in the lower chamber, it’s not clear that Senate Republicans would want to rubber-stamp the House bill.

Senators are “going to want some of their own priorities in there,” said Lisa Zarlenga, co-chairwoman of the tax group at Steptoe & Johnson.

Mays said that tax proposals released by senators in the past have differed from the House blueprint.

The Senate and the House “aren’t yet on the same page,” she said. But she added that common ground could be reached once House and Senate lawmakers start talking.

 

Lawmakers must decide on infrastructure spending:

Some have suggested that a tax bill could also include infrastructure spending to make the bill more attractive to Democrats.

One method would be to use revenue from the repatriation of U.S. companies' foreign earnings to pay for transportation projects.

Trump economic adviser Stephen Moore on Tuesday met with members of the House Republican whip team and floated the idea of including infrastructure spending in a tax-reform bill to make the measure more bipartisan.

But some would like to use the repatriation money to instead pay for lowering tax rates. House Republicans’ plan currently uses repatriation to lower rates.

“They’ve got to do one or the other,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center. He suggested that using the money for infrastructure could make tax reform more difficult because doing so would eliminate a revenue source.

House Ways and Means Committee Chairman Kevin BradyKevin Patrick BradyGOP eyes limits on investor tax break Overnight Finance: White House requests B for disaster relief | Ex-Equifax chief grilled over stock sales | House panel approves B for border wall | Tax plan puts swing-state Republicans in tough spot Swing-seat Republicans squirm over GOP tax plan MORE (R-Texas) said recently that there are a number of people who want to discuss linking tax reform and infrastructure and that a discussion on that topic will probably happen.

 

The cost of a tax-reform package:

Republican lawmakers and Trump have differed on the revenue effects of tax reform.

Lawmakers in both chambers of Congress have expressed an interest in producing a tax-reform bill that doesn’t add to the deficit.

Brady has said he is aiming for a tax-reform bill to be revenue neutral under “dynamic” scoring that takes into account macroeconomic effects. And Sen. John ThuneJohn Randolph ThuneGun proposal picks up GOP support Overnight Regulation: Senate panel approves driverless car bill | House bill to change joint-employer rule advances | Treasury to withdraw proposed estate tax rule | Feds delaying Obama methane leak rule Dems see Trump as potential ally on gun reform MORE (R-S.D.), the third-ranking Senate Republican, also told CNBC that “tax reform ought to be revenue-neutral, budget-neutral, deficit-neutral.”

But the tax plan Trump put forward in September has been estimated to cost trillions of dollars even after accounting for the economic growth it would produce. Moore said at an event hosted by Politico Wednesday that Trump wants to implement a tax cut and offset the effects on the deficit by cutting spending.

“This is clearly one of the tensions between where the incoming administration is at and where congressional Republicans are at,” said Scott Greenberg, an analyst at the Tax Foundation.

 

Pushback from lobbyists and trade groups:

Lawmakers talk about repealing tax breaks in order to pay for reducing rates. But there are supporters of those tax breaks and they are gearing up to fight back if those are threatened.

“This will definitely be a lobbying bonanza,” said Ron Bonjean, a GOP strategist and a partner at ROKK Solutions.

Already, groups have started to push back against ideas they don’t like. After the House GOP blueprint was released in June, banks and those in the bond community started “to get real fidgety” because the plan eliminated the deduction for businesses' net interest expenses, Greenberg said.

One way for lawmakers to deal with the pushback from lobbyists and trade associations is to cut lots of preferences at once and use the revenue from doing so to pay for a large rate cut, Greenberg said.

That could help stakeholders keep the size of their tax bill steady under a new code and undercut opposition.