Five questions for Trump’s tax reform

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President-elect Donald Trump and congressional Republicans next year hope to undertake the first overhaul of the tax code in more than 30 years.

Trump and his economic team have discussed lowering tax rates while ending tax breaks that have cut IRS bills for the wealthy. 

The broad outlines of the tax plan sound similar to the effort by President Ronald Reagan that culminated in the 1986 tax reform bill. 

Getting it done this time, however, will be a tall order, even with Republicans holding both chambers of Congress and the White House. 

Here are five questions for Trump’s tax reform push. 

Will reconciliation be used?

Lawmakers must decide whether to use a special process known as budget reconciliation to initiate tax reform.  

{mosads}Using budget reconciliation would make it easier to pass tax reform, as it would prevent Democrats in the Senate from filibustering a bill.

Yet it would also cause some complications.

Reconciliation bills have to adhere to a number of special rules. They cannot increase the deficit outside of the 10-year budget window, and every provision in them has to have an effect on the budget.

Also, a tax reform bill passed with bipartisan support could have more longevity. If the bill passes over the objections of Democrats, it may be more likely to be dismantled if Democrats win back the majority. 

Both House Speaker Paul Ryan (R-Wis.) and Senate Majority Leader Mitch McConnell (R-Ky.) have suggested that Congress would use reconciliation, or at the least would pass a budget with reconciliation instructions for tax reform so that using that process is an option.

What will be the corporate tax rate?

Trump’s tax plan would lower the tax rate on corporations to 15 percent. 

It would also allow small businesses to use that rate if they “retain the profits within the business.” 

House Republicans, in contrast, would lower the corporate tax rate to 20 percent and the top rate for pass-through businesses to 25 percent.

The problem with cutting the rate to 15 percent is that it could add more to the budget deficit. 

Republicans are interested in getting the tax rates for businesses as low as possible. But Trump’s proposed rate would lose more revenue, so the House Republicans’ rates could be easier to adopt.

Budget reconciliation would also be a problem here. 

In an interview on Fox News, Ryan said he would love to get the corporate rate down to 15 percent, but that might not be possible if tax reform has to be revenue neutral so that it can be passed through budget reconciliation.

“We’re going to work on this bill and try and get it as best as we can so that it stays deficit-neutral so that they cannot filibuster it,” Ryan said.

Trump has already revised his tax plan so that it more closely resembles the tax-reform blueprint put forth by House Republicans as part of Ryan’s “Better Way” agenda.

“We’ve had great discussions with the Trump transition team, going forward and reaching common ground on a lot of areas,” House Ways and Means Committee Chairman Kevin Brady (R-Texas) said in a recent C-SPAN interview.

Brady said lawmakers are weighing the tradeoffs needed to lower rates as part of the tax reform efforts.

“I have no doubt, at the end of the day, we are going to have the lowest business rates in modern history,” he said.  

What will be the Senate bill?

The House is ahead of the Senate when it comes to tax reform. 

Members of Brady’s committee were meeting after Congress adjourned, and the House hopes to have legislation early next year.

Senate Finance Committee Chairman Orrin Hatch (R-Utah), in contrast, spent much of 2016 working on a narrower tax proposal known as “corporate integration,” which was focused on eliminating double taxation of corporate earnings.

In a speech earlier this month on the Senate floor, Hatch acknowledged that the dynamics of the tax reform discussion have changed since the election and have shifted toward comprehensive reform, though he expressed continued interest in his proposal. 

Even apart from Hatch, it’s not clear that GOP senators will just want to go along with a House plan.

Sen. Pat Roberts (R-Kan.), a member of the Senate Finance Committee, has suggested it might be better for Congress to do a bill that’s narrower than comprehensive tax reform. 

And Sen. Rand Paul (R-Ky.) said in an op-ed for Breitbart that tax reform should not be revenue-neutral and everyone should get a tax cut. That contrasts with the House GOP plan, which is being designed to be revenue neutral after accounting for economic growth.

“Let’s follow the lead of Presidents Reagan and Bush and help President Trump begin his administration with tax cuts for everyone, and less money in Washington,” Paul said.

Will the bill tax imports?

One of the most controversial provisions in the House GOP plan would place a new tax on imports while exempting from the corporate tax any products produced for export.

Many analysts have estimated that the provision would raise revenue and essentially pay for other tax cuts.

Retailers and other businesses, however, are fighting back against the proposal, arguing it will just raise prices on consumers. 

Brady has been a staunch defender of what is known as the border adjustment proposal and has said it removes incentives for companies to move jobs to other countries. 

This would seem to be in line with Trump’s campaign arguments, and Reince Priebus, Trump’s pick for White House chief of staff, has also expressed support for the concept.

“This is a key part of our built-for-growth tax code. It’s going to stay,” Brady said. He added that the committee wants to “listen to and find solutions with those who rely a lot on imported goods coming into America.”

What tax breaks will disappear?

The biggest fight over tax reform may be over individual tax breaks that could be scaled back or eliminated entirely.

Doing so is a necessity if rates are to be lowered without raising the deficit, but the fight was the most complex part of the 1986 battle. 

Just about every tax break in the code has a powerful interest behind it that does not want it to be changed.

The House GOP tax blueprint mentions a few tax breaks it would keep, such as the deductions for mortgage interest and charitable contributions, and a few breaks it would specifically eliminate, such as the deduction for businesses’ net interest expenses. It does not explicitly discuss how many existing tax preferences would fare. 

Trump’s latest plan discusses eliminating “most corporate tax expenditures except for the research and development credit” and capping itemized deductions at $100,000 for single people and $200,000 for married couples.

Trump’s choice for Treasury secretary, Steve Mnuchin, told CNBC last month that the mortgage-interest deduction would be capped. But Priebus said more recently that limiting the deduction was not a “done deal.” 

Tags Donald Trump Kevin Brady Mitch McConnell Orrin Hatch Pat Roberts Paul Ryan Rand Paul taxes
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