As Senate and House Republicans try to agree on a framework for tax reform, the Trump administration is making the entire process harder, not easier, for everyone involved. It is changing huge, structural parts of the plan on a whim — and sending conflicting signals on critical budget issues.
The result is a muddied path forward for what is arguably the administration’s top domestic policy priority. It is not, by any historical standard, how a successful reform effort works.
“It’s a total mess right now,” says Greg Valliere, a political strategist at Horizon Investments.
For investors — and the public — to have faith in the prospects for tax reform, Valliere says, Congress and the White House need to be forging agreements on the fundamental pieces for reform. That’s not happening yet.
Administration officials and congressional leaders show no signs of consensus on key elements of a tax bill. On some areas, such as whether the bill should simply pay for itself with economic growth, or actually raise additional revenue beyond that, administration officials appear to disagree with one another.
Trump was roundly mocked this week when he tweeted that the reform effort is “ahead of schedule.” Still, it’s nowhere near derailed. Republicans still have time to build their framework and push ahead with the bill. Here’s what they need to get on track.
1) Decide if tax cuts are permanent or not
This seems like a simple-enough choice, but it’s hardly resolved.
Trump and congressional Republicans need to decide if their cuts in tax rates will be permanent and if the plan will not add to the federal deficit beyond 10 years, after accounting for faster projected growth from the cuts. That’s the requisite formula to pass a permanent tax overhaul through the budget reconciliation process, which allows them to get a bill through the Senate with a simple majority (and without Democratic votes).
The other option would be to cut taxes temporarily, with lower tax rates that would then expire — or “sunset” — after a period of time.
Trump and House Republicans seem to agree that cuts should be permanent. But others in the party are looking for creative ways to make “temporary” tax cuts last longer, but still work under the Senate’s reconciliation rules.
Sen. Pat Toomey of Pennsylvania has started pushing the idea that Republicans should pass a bill that extends the deficit window to more than 10 years. Temporary tax cuts could then expire after, say, 20 years. In that case, Congress wouldn’t need to find ways to offset the lost revenue, even as the cuts almost certainly added to the national debt.
“I would like for you to consider seriously a 20- or 30-year budget window, something that would allow us to have a great, growth-maximizing tax code that lasts a long time,” Toomey told Mick Mulvaney, the White House budget director, at a Senate hearing on Thursday.
Mulvaney said the White House has been “toying” around with that option, and that he would like to explore it further. Treasury Secretary Steve Mnuchin also suggested last week that temporary tax cuts are still “better than nothing.” But neither of them committed to permanent or temporary cuts.
2) Decide how to offset any lost revenue
If Republicans choose to go big and permanent with tax reform, which many in the party seem to prefer, then they need to come to an agreement on how to pay for their tax cuts, via offsetting tax increases, spending cuts, economic growth, or some combination of all of them. So far, they’re nowhere close to that agreement.
Trump wants massive tax cuts that would slash business tax rates by more than half (to 15 percent) and eliminate taxes on millionaires’ estates. For such a plan to balance out over 10 years, the government needs to raise a lot of revenue — anywhere from $5 to $7 trillion dollars, according to independent analysts.
The administration has resisted choosing who will lose special tax breaks and deductions to offset the tax cuts, instead relying on optimistic forecasts of additional economic growth. Most economists do not believe that growth alone can carry that entire burden.
Last week, though, Mulvaney signaled that the White House believes its plan can go even further — and raise enough revenue to pay for its rate cuts. During a hearing with the Finance Committee, Mulvaney said that the White House will now rely on static scoring to make a tax-reform bill revenue neutral. That means the rate cuts will be fully offset by non-growth effects — such as closed loopholes or spending cuts or new taxes elsewhere — but will still spur faster growth, and with it, higher revenues.
“It’s a huge shift from the campaign and a huge shift from what they were saying even a few weeks ago,” says economist Doug Holtz-Eakin, the president of the conservative American Action Forum and former director of the Congressional Budget Office.
Such a pivot would mean that the White House has a lot of work ahead to figure out which tax breaks to sacrifice to fund its rate cuts. But Mulvaney did not give any indication about who that would be. He only mentioned that the administration was sticking to the idea of removing the deduction for state and local tax payments — a move that would hurt taxpayers in blue states with high tax rates. Even so, that deduction would only raise $1.3 trillion in revenue over 10 years, and would not be enough to pay for all the tax cuts.
Mulvaney was vague, but Trumpian, about where the rest of the money would come from. “We’re going to get rid of a whole host of deductions, which are massive,” he said.
3) Pick winners and losers
Getting rid of deductions — essentially, choosing whose taxes will go up even as rates fall across the board — is politically fraught. It’s the main reason why tax reform hasn’t happened in more than 30 years, and it’s clearly a hold up this time around.
Only House Republicans have come up with a serious solution to raise enough revenue to pay for tax cuts after accounting for growth effects: the border-adjustment tax. Such a tax would essentially levy a 20 percent tax on imported goods, while exempting exports. The idea has sparked outrage among retailers, like Walmart and Target, and raises questions about price increases on middle-class consumers.
The Senate doesn’t seem to support such a tax, and the White House has been wish-washy about it.
But no one has proposed a better plan to make the tax-reform bill revenue neutral.
They’ll need one, soon.
Glenn Hubbard, dean of the business school at Columbia University and a former chair of President George W. Bush’s Council of Economic Advisers, says Trump needs to propose a more detailed plan on how he intends to pay for the tax cuts he wants. Then he can move on to the next crucial step of the effort: selling his plan to the American people.
“If the public isn’t doesn’t think it’s good,” Hubbard said, “then it won’t happen.”