US: From Here to Tax Reform

Published on May 5, 2017

The House Republican success in passing the amended American Health Care Act yesterday should give a nod of encouragement to the still badly divided GOP to move on to the even bigger prize of tax reform. Indeed, Ways and Means Committee Chairman Kevin Brady was quick to proclaim yesterday’s 217-213 vote on H.R. 1628 “a giant step towards delivering bold tax reform.”

Well maybe.

*** We still believe tax reform legislation will pass this year, though that is unlikely before the final months of this year, and it is highly likely to be more moderate in the size of its tax cuts and more limited in the scope of its reforms to the corporate tax code. But we expect it will be permanent rather than temporary. ***

In the meantime, there will be plenty of news articles and television commentary in the coming days and weeks about the healthcare vote and what it may or may not mean for tax reform. But for now, we would offer these few points to keep in mind and to frame expectations:

** After all the weeks of sturm und drang in the House, Senate Majority Leader Mitch McConnell already confirmed the Senate will not be voting on the House-passed bill at all, and will instead be writing its own health care legislation. That means healthcare is going to be tying up Capitol Hill for at least several more months.

** That will further delay, but it will not derail, the tax legislation. The House healthcare battle was always going to be asymmetrical in its impact on tax reform: an outright failure could have been devastating, but a House-passed healthcare bill doomed from the start in the Senate does little to boost tax reform political momentum.

** In terms of its time line, the earliest a tax bill is likely to see its initial mark-up in Ways and Means is the end of May but probably sometime in June with a summer House floor vote. But any House-passed tax bill is unlikely to get to the Senate before the August recess if not much later; September is going to be consumed with battles to pass a FY2018 budget and address the debt ceiling.

** The House GOP leadership confirmed the tax legislation will be permanent and revenue neutral. Consequently, now that the Border Adjustment Tax is all but dead, a scramble is underway to find revenue payfors to offset the cost of the tax cuts. Our strong sense is that the tax cuts will be scaled back, with a headline corporate tax rate somewhere between 23% to 32%, rather than the 15% the White House has proposed.

** One word of caution, however, in that the House Republican leadership now writing the first draft on tax reform has only one success to date under its belt, yesterday’s squeaker win. But H.R. 1628 began as a healthcare bill drafted hurriedly and in secret, despite seven years of promises, and was fumbled on its first attempt to pass and nearly collapsed again.

** Along the way, Speaker Ryan lost the helm to self-appointed negotiators drawn from House Republican moderates (the Tuesday Group) and especially their colleagues on the far-right edge (the Freedom Caucus), resulting in a barely passed House healthcare bill that has no chance of being picked up by Republicans in the Senate.

** But on the bright side, like the healthcare bill barely passed in the House yesterday, we think the Senate, not the House, will be the key to whether the tax bill becomes law, with its fate in the hands of Majority Leader McConnell, not Speaker Ryan or President Trump.

** Indeed, what McConnell, a master of Senate procedure and traditions, does with the House healthcare bill may be the single best foreshadowing of tax reform’s prospects. On that theme: McConnell is not referring the House bill to the three Senate committees with jurisdiction, but rather to a hand-picked 12-person working group.

** That neutralizes some of the Democrats’ ability to influence the Senate healthcare bill by avoiding regular order, which means no hearings, extensive debates or negotiations. McConnell understands that whoever controls the legislative process on a tough-to-pass bill usually ends up with the best odds for a legislative victory, in this case getting to at least 50 votes.

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