This week, Republicans in Congress are planning to take an important step toward tax reform — a plan that already looks like it will be a bonanza for the wealthy.
While unified in their goal to cut taxes, Republicans are locked in a struggle of how deeply to cut rates — and whether to offset those cuts elsewhere. So far, GOP leaders have proposed a thin tax reform blueprint that aims to lower corporate and individual tax rates.
“I don’t know every single person’s little, small problem or issue,” House Speaker Paul Ryan said on CBS’s Face the Nation. “So yes, people are going to get tax cuts. How big are those tax cuts? That depends on the individual.”
But before Republicans can get into many of those specifics, they first have to pass a 2018 budget with “reconciliation instructions” for tax reform, which will allow the GOP to pass their tax bill with only a simple majority, instead of the Senate’s typical 60-vote threshold. The House is voting on its budget this week, while the Senate, which just released its budget proposal last Friday, plans to mark up its proposal in committee this week and put it to a floor vote by next week. Their proposals are really different from each other.
Leadership has signaled they want to get the reconciliation instructions out of the way quickly, and with all the key Republicans sending approving signals of the early framework, the vote in the House should go smoothly. Then the two chambers have to reach some kind of compromise.
Reading the tea leaves of how that reconciliation bill comes together gives us an idea of what’s to come — how much they intend to cut and where. Once Republicans get the reconciliation bill out of the way, they will have a green light to move forward and tackle what will undoubtedly be an even bigger challenge for their party: how to implement tax cuts without blowing up the deficit.
The Senate’s budget would allow for a massive tax cut — the House’s doesn’t
After repeatedly failing to repeal Obamacare for now, Republicans are adamant about getting tax reform done before the new year.
The Senate’s plan imposes a somewhat arbitrary November 13 deadline. The House has an even earlier and more unattainable late October deadline for tax reform. There’s still a lot of work to be done.
But depending on how strictly or loosely “budget reconciliation” instructions are written, it can dictate what a tax reform package looks like. In budget reconciliation, each committee is instructed on how much savings it must produce in order to pass a “reconciliation bill.”
Right now the Senate leaves room to increase the deficit by $1.5 trillion over the next 10 years — signaling what will likely be substantial tax cuts to come. But already one senator, Bob Corker of Tennessee, has said any tax plan that increases the deficit would lose his vote.
The House, which released a budget earlier this summer that looked wildly different from the Senate’s, does not allow for any increases to the deficit, making massive cuts more difficult. Until last week, the House budget was stalled by the conservative faction of the party, which expressed concerns that the tax cut would not be deep enough. For now, their concerns have been assuaged by GOP leadership, which recently released framework showing deep cuts to corporate tax rates and what was billed as a “simplification” of the seven tax brackets to three. Clearly, there will have to be some negotiating between the two chambers of Congress before Republicans can get to writing their overhaul of the American tax code.
Under reconciliation, committees can only make cuts from mandatory spending — which most notably covers programs like Medicare, Medicaid, and welfare programs such as cash assistance and food stamps. But there are some limitations: Trump has repeatedly promised Medicare wouldn’t be touched under his presidency, and per reconciliation rules, Social Security funding cannot be cut.
If these reconciliation instructions are written strictly in the budget resolution, the level of required mandatory cuts could influence how Republicans can approach tax reform — specifically how they pay for their tax cuts.
The Senate wrote the budget as loosely as it could. The reconciliation instructions only mandated cuts for one committee: $1 billion from the Senate’s Natural Resources Committee. It’s rumored this will likely come from a bill to allow drilling in the Arctic National Wildlife Refuge. But instead of focusing on mandatory savings cuts to reduce the deficit, it allows for a $1.5 trillion increase to the deficit over the next 10 years. In other words, it gives Republicans the freedom to make deep tax cuts without having to pay for them.
The House, however, took a different route, writing their budget reconciliation instructions very tightly, making a deep tax cut more difficult without offsets. It would require any tax reform package to decrease the deficit and forces all 11 committees to make a total of $203 billion in cuts, likely impacting everything from Medicaid to food stamps.
House conservatives, many of whom have long been deficit hawks, seem willing to accept the much higher deficit increase — but would like to see some compromise on the mandatory spending for programs like Medicaid, food stamps, and temporary financial assistance for the very poor.
“It would be disingenuous to suggest that $200 billion worth of mandatory spending cuts would make it in the Senate budget. So it’ll have to be worked out in conference, and compromises will have to be made,” Rep. Mark Meadows (R-NC), the chair of the conservative House Freedom Caucus, told the Hill.
How do you solve a problem like cutting taxes without blowing up the deficit?
In any scenario, Republicans are relying on projections of increased economic growth from tax cuts to offset the revenue losses from tax cuts. But under most projections, growth alone won’t be enough to offset the full losses from the deepest cuts Republicans originally discussed, including a drop in the corporate rate from 35 percent to 20 percent.
Senate leadership, House Speaker Paul Ryan, and the tax-focused Ways and Means Committee Chair Rep. Kevin Brady (R-TX) are adamant about executing a revenue-neutral tax plan — and one that is permanent. But that means the deficit might become a big problem for Republicans.
Under Senate rules, a reconciliation bill cannot increase the deficit outside the 10-year window or the policy will have to sunset. In other words, massive tax cuts without any offsets, like those implemented under George W. Bush’s administration, would have to be temporary.
The most conservative faction of the Republican Party says there is no need for revenue neutrality with tax reform, projecting that deep cuts to corporate tax rates would lead to more than 3 percent economic growth. The Congressional Budget Office, however, has estimated an average growth rate of 1.9 percent over 10 years. But it’s unlikely Republicans will be able to convince members to vote for tax reform that has the possibility of blowing out the deficit — let alone the Senate parliamentarian, who ensures bills are compliant with budgetary rules.
One of the Freedom Caucus’s proposed alternatives was to make up the difference with deep cuts to welfare programs. Meadows said his caucus has identified upward of $500 billion in cuts to mandatory spending programs, from Medicaid to food stamps. But Meadows himself has admitted that their proposal is unrealistic — and won’t come close to making up the difference in revenues anyway.