Capitol Hill: Tax Reform’s Uncertain Start

Published on March 27, 2017

In the wake of Friday’s disastrous collapse of the American Health Care Act, the White House and the badly bruised House Republican leadership did their best to quickly switch the subject to tax reform, as we thought they might (SGH 3/23/17, “Capitol Hill: A Shift to Tax Reform”).

Treasury Secretary Steven Mnuchin even asserted tax reform would be “easier” than the bungled efforts to repeal Obamacare.  But we seriously doubt that.

*** Not only will tax reform be immensely difficult — as it always is — it was made even more difficult by the loss of nearly $1 trillion in revenue offsets that were critical tax components of H.R. 1628. And although the headlines may note that the House Ways and Means Committee is scheduled to discuss tax reform tomorrow, we doubt Committee Chairman Kevin Brady will be able to move on a tax reform bill before May. ***

*** Most of April — which includes a full two week Easter recess  — will instead be taken up with Senate confirmation of Supreme Court nominee Neil Gorsuch and with what will be an eventual extension of the FY 2017 Continuing Resolution, which expires on April 28. We expect the CR won’t include the threatened Planned Parenthood defunding, but nor will it include an increase in the debt ceiling, which will instead be punted nearer its “drop dead” date in the fall. ***

*** We do still think some form of tax reform will pass this year, but we likewise still don’t expect it before September if not later (SGH 2/17/17, “US: BAT’s Legislative Track”). We also think to pass, its ambitions will be considerably moderated, with BAT partially or fully dropped, its time frame shortened to under the ten year baseline, and the corporate tax cut is likely to be scaled back to nearer 28% than the proposed 20%, and in the end, it may not be budget neutral. ***

Confusing White House Tax Signals

To no small extent, tax reform looks to be in even more disarray than the failed healthcare repeal efforts.

There has been no indication yet from Ways and Means Chairman Kevin Brady when he will be moving forward with the tax reform legislation, but we doubt it will be any time before May. He is also still talking up the controversial border adjustment tax, even though it has limited chances to pass in the House and none in the Senate.

But our sense is that he is only keeping it on the table for something to trade down the road or, more likely, because he is still scrambling to find an alternative to it. He may not only lose most if not all the estimated $1.2 trillion in revenue offsets the BAT was supposed to provide, but he made need to make up for another near $1 trillion in offsets lost when the ACHA bill was withdrawn.

That is the additional shortfall that would need to be plugged if the GOP still wants to include a repeal of the 3.8% investment income tax. The logic had been that since the the 3.8% investment income tax was imposed by the ACA to help fund its costs, it could be repealed under the ACHA. It was originally going to be repealed in the health care act that has since derailed.

So the GOP will now have to battle the bad optics of so much of those intended tax cuts primarily benefiting the wealthy, something Secretary Mnuchin specifically promised the tax reforms would not do.

But above all, the House Republican leadership is still looking to get the White House fully on board from the beginning of this legislative process to avoid the tactical mis-steps of the doomed H.R. 1628.

Indeed, our sense is that both Chairman Brady and House Speaker Paul Ryan will be highly reluctant to move forward with tax legislation until there is far better coordination with the White House and, more specifically, clearer signals on what President Trump wants in the bill.

The White House said earlier today that it is “driving the train” on tax reform, but so far, it is our understanding Brady is hearing three different mixed if not confused signals from the White House and Treasury on what exactly they want in the tax reform bill.

The Hill Republican leadership, in other words,  is still unsure on whether National Economic Council Chairman Gary Cohn, Special Policy Advisor Steven Bannon, or Treasury Secretary Mnuchin is the “go to” point person on the tax legislation.

And before Ways & Means can mark up the tax legislation, four important but undecided factors need to be resolved between the White House and the Republican House leadership: the border tax adjustability (BAT); the duration of the bill; whether it is budget neutral or not; and the new tax rates. It will probably take most of the weeks available in April to iron out the decision on these four fronts, with leaks and trial balloons along the way.

We would then expect a mark-up finally being unveiled by Ways and Means Committee Chairman Brady, perhaps in very late April but probably early May.

CR Extension in April

In the meantime, the higher priority on the Hill is the vote to extend the FY2017 CR, which expires on April 28. It would be a politically devastating testimony to the accusation the GOP is unable to govern if there is another government shutdown, and so we strongly doubt Speaker Ryan and Senate Majority Leader Mitch McConnell will let it come to that.

We believe the CR will be passed and that there will be no government shutdown. But it could take up most of the scant two weeks left in April once the long Easter recess is taken into account, and it could be only partially extended to the September 30 end of the fiscal year as a result of compromises on two different issues.

The first is that some in the House GOP are also threatening to attach a ban on federal funding to Planned Parenthood, which would guarantee no Democratic votes, and perhaps some GOP no votes in the Senate.

But on that front, we understand the Republican leadership will seek to defuse the Planned Parenthood issue by keeping it out of the CR, promising instead to direct the full or partial defunding of Planned Parenthood be taken up through administrative means by Health and Human Services Secretary Tom Price.

The second, and more important, is the increase in the debt ceiling that had been expected to be included in the CR. We now think it unlikely the CR will include the debt ceiling increase, and instead as a path of least political resistance, to punt the debt ceiling increase closer to its true “drop dead” date in the fall, when the default imperative will make its passage more politically acceptable to GOP hardliners.

And as if that wasn’t enough, the Defense Appropriators want a supplemental appropriation to replenish war materiel lost in various battlefield engagements over the past half-decade.

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