Photographer: Andrew Harrer/Bloomberg

To reform or not reform the tax code

Bloomberg Government regularly publishes insights, opinions and best practices from our community of senior leaders and decision makers. This column is written by Prime Policy Group’s Keith Smith, Armstrong Robinson and Paul Weiss.

Tax Reform remains a major priority for Republicans in Congress and the President. But, it will be one of the most difficult things to achieve in Washington. We expect action on Tax Reform this year and into 2018.

Ways and Means Chairman Kevin Brady (R-TX) and Speaker Paul Ryan (R-WI) are working on the Blueprint, which is the most developed tax reform product under active consideration. President Trump released his one-page principles for reform on April 26, 2017. Senators continue to evaluate different proposals and Chairman Hatch maintains a public disposition for a bipartisan product from the Senate Finance Committee.

The Trump Administration is leading weekly meetings in an effort to bring the principal Republican negotiators in Congress into agreement about the goals and direction of tax reform. Fundamental questions like revenue neutrality are still under discussion. Those negotiations are still very high-level, and they have not gotten to the details yet. We understand that the House will not proceed to marking up its tax reform legislation until a consensus is produced between the House, Senate and White House on principles and major components.

Timing

There are two legislative hurdles for tax reform. First, healthcare reform, which relies on the FY2017 budget reconciliation vehicle, will soon be in the hands of the Senate. Their goal for action on their healthcare reform product is July 2017. Thus healthcare might not reach President Trump’s desk until July or September given the August recess.

Second, Republican leadership continues to believe that tax reform will have to move through budget reconciliation instructions that would need to be provided in the FY 2018 Congressional budget.

There is a lot of arcane procedure and some interpretation to come about the exact sequencing of the two budgets and respective reconciliation vehicles. Practically speaking, healthcare reform will have to be completed before tax reform can clear too many legislative milestones. Beyond procedure, the biggest reason to complete healthcare before tackling tax reform is its impact on the budget baseline.

Download Bloomberg Government’s latest white paper: 5 Questions (And Answers) About Tax Reform.

Reconciliation

Reconciliation bills are subject to the Byrd Rule which prohibits the bill from increasing the budget deficit outside the budget window.  In 2001 Congress passed a tax bill through reconciliation that was sunset towards the end of the budget window in order to comply with the Byrd Rule.  That policy option does not lend itself well to comprehensive tax reform therefore the tax reform bill will likely be revenue neutral . Lowering tax rates necessitates significant payfors. Speaker Ryan and Chairman Brady have made bold proposals on that front that highlight the difficulty of generational tax reform.

Budget Committee Chairman Diane Black (R-TN) is now looking at June for a House mark-up of the FY2018 Budget Resolution. It is worth keeping an eye on the conservatives in Congress, led in the House by Rep. Mark Walker (R-NC), who have repeatedly noted that the budget must achieve balance in ten years. Every year the growth of the mandatory spending side of the federal budget makes that more difficult, without factoring for tax reform.

Nothing is Free

Speaking of paying for tax reform, if the BAT does not survive in the final analysis then where does the money come from? While we expect that the BAT (border adjustable tax) will be a component of the House bill, it is hard to see at this point how the BAT makes into a final tax package. Here is a list for the top tax expenditures.

Interest groups have formed tax reform war rooms around each of these benefits. Should the House, Senate or the President offer these up as sacrifices for payfors, then the food fight will escalate on a new front.

While it may be that Republicans will use the reconciliation process to marshal tax reform through Congress, Chairman Hatch for one has stated several times that he wants the process in the Senate Finance Committee to be bipartisan. We hope so, because no Republican-only tax reform proposal has ever passed Congress. Also, bipartisan reform usually means lasting reform, without it, there is an increased risk that new political winds will produce another overhaul and our economy needs reform and then stability to grow the way we all want it to.

Scope

The chances that President Trump and Congress can deliver broad comprehensive tax reform in 2017 seem like the long pole in the tent at this time. In addition to the very difficult debate over rates and “sacred cows and sacrificial lambs” of tax policy, there is a very limited amount of time before the August recess and pressing deadlines concerning fiscal year (FY) 2018 funding for the government and the need to increase the debt ceiling in the fall.

If at the end of the year there is no real chance for major reform in the near term, then can there be a tax vehicle that does carry expired or expiring provisions?  Will the Administration and Congress agree that only a splashy rate reduction (or tax cut) with some infrastructure spending can provide the quickest economic growth recipe?

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