Quietly, a fight has bubbled up in the ranks of House Republicans, which could derail the centerpiece of President Donald Trump’s congressional agenda.
The battle is really about tax reform, but its stage is the fiscal year 2018 budget resolution, which passed out of committee this week with unanimous Republican support.
Behind it all is a clash between Republican leadership and a group of archconservatives who see this moment — months before any major tax bill is likely to come before the full House — as their best chance to force deep cuts to both tax rates and social welfare spending.
Republicans are unified in their goal to cut taxes, but they are locked in an intraparty struggle of how deeply to cut rates — and whether to offset those cuts at all with increased taxation elsewhere. GOP leaders have proposed a tax reform blueprint that would include such an increase to offset lost revenue from rate cuts and keep the budget deficit from growing.
The conservative members of the House Freedom Caucus say that proposal is dead on arrival, and they are pushing House Speaker Paul Ryan to adopt an alternative: one that relies on draconian welfare spending cuts and incredibly optimistic economic growth projections in order to avoid swelling the deficit. Ryan has resisted their efforts, particularly their proposed spending cuts.
Rather than stage that fight this fall, when the White House and conservative leaders will undoubtedly ramp up the pressure to pass a tax bill, the Freedom Caucus members have chosen to make their tax stand over the budget resolution — a nonbinding government spending guideline that both chambers have to pass if they want to circumvent the threat of a Democratic filibuster in the Senate on tax reform.
GOP leaders are refusing to back down from a resolution that Freedom Caucus members warn would force a vote on a smaller batch of tax and spending cuts in the fall. But without the Freedom Caucus on board, the resolution will fail a floor vote — which is why caucus members have identified the budget resolution as their best leverage to get what they want on tax reform, Freedom Caucus member Rep. Mark Sanford (R-SC) said.
And so the budget resolution has become a proxy war, while President Trump’s attention is still on health care in the Senate.
It is the same game of chicken, with the same key players that nearly killed the House health care bill in March. If neither faction blinks, Republicans, in control of the House, Senate, and White House will be stuck in a stalemate: No budget resolution means no tax reform.
For now, at least, Freedom Caucus members are saying they’re willing to take that chance.
Republicans have tied their whole agenda to something that’s really hard to get done
At the beginning of this year, thinking only Senate Democrats — with the power of a filibuster — would stop them from repealing Obamacare and cutting taxes, Republican leadership devised a plan to bypass Democrats altogether: They would tie their major agenda items to the budget through “budget reconciliation,” a bill that can impact spending, revenue, or the debt ceiling, with only a party line vote in the Senate.
It’s a process President Bill Clinton used to pass welfare reform in 1996 and President George W. Bush used to pass tax cuts in 2001 and 2003. It’s how President Barack Obama saw several budgetary amendments to the Affordable Care Act through. Republicans also attempted to use budget reconciliation to try to pass an Obamacare repeal bill in the Senate.
Budget reconciliation requires passing a budget resolution, forcing Republicans to thread the needle between members’ competing spending priorities and the larger contingents of tax cutters, deficit hawks, and defense hawks. This is hard, and because budget resolutions don’t actually fund the government or go to the president’s desk, and spending bills can be done without them, it’s a step that’s often skipped.
But this year Republicans have tied their hands. The budget resolution unlocks a path to tax reform, and depending on how the instructions for budget reconciliation are written in, it can also dictate how Republican actually implement tax cuts.
In budget reconciliation, each committee is instructed how much savings they must produce in order to pass a “reconciliation bill.”
Committees can only find these savings through mandatory spending — which most notably covers programs like Medicare, Medicaid, and welfare programs like 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 savings could influence how Republicans can approach tax reform — specifically how they pay for their tax cuts.
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 those cuts. But under most projections, growth alone won’t be enough to offset the full losses from the deepest cuts Republicans have discussed, including a drop in the corporate rate from 35 percent to 15 percent.
Ryan and the tax-focused Ways and Means Committee Chair Rep. Kevin Brady (R-TX) are adamant about executing a revenue neutral tax plan. To do that, they have floated implementing a border adjustment tax, which would tax foreign imports and exempt exports, raising money because the US currently imports more than it exports. Some analysts have projected that plan would be revenue-neutral after economic growth is factored in.
There’s a problem, though: So many Republican lawmakers — and major conservative donors — hate the border adjustment idea that it appears to have no chance of passing the House.
“You are adding a whole new tax and revenue stream on the economy and not getting rid of another one — that is always dangerous because it is just one more tax that could go up over time,” Rep. Jim Jordan (R-OH), a founding member of the Freedom Caucus, said of the BAT. “From a purely philosophical standpoint, I think this is problematic.”
There’s no need for revenue neutrality with tax reform, Jordan and the Freedom Caucus argue, in an attempt to make the case that these corporate tax rates would lead to what looks like extremely unrealistic GDP growth. But it’s unlikely Republicans will be able to convince members to vote for tax reform that removes the BAT without an alternative; the possibility of blowing out the deficit won’t gain much traction with a Republican conference that’s campaigned on doing the opposite.
The Freedom Caucus’s alternative is to make up the difference with deep cuts to welfare programs. Meadows said his caucus has identified upward of $500 billion in mandatory savings options Republicans could exercise. Most other House Republicans, though, seem unlikely to go along with those cuts.
The Freedom Caucus’s demands go too far
The Freedom Caucus knows that even without the BAT, if the party leadership is determined to be revenue-neutral, conservatives might be pressured into accepting a higher corporate tax rate to offset revenue losses, which they believe would reduce the economic growth generated by the bill.
That’s why caucus members are fighting for more dramatic mandatory spending cuts in the budget resolution — a welfare reform package that they say could in part pay for tax cuts.
With Medicare and Social Security off the table, the Freedom Caucus wants to put Medicaid, cash assistance, and food stamp programs on the chopping block. Currently the budget resolution has written in $203 billion in mandatory savings cuts overall. The Freedom Caucus wants something closer to $400 billion.
There are a lot of other dynamics at play here as well.
House Republicans, with overwhelming consensus, want to hike defense spending to $621.5 billion, which would bust the defense budget caps in the Senate — set at $549 billion. Authorizing that level of spending requires negotiating with Democrats, which would almost certainly increase to non-defense discretionary spending from the $511 billion the House has proposed.
House leadership has floated avoiding Democrats altogether by putting the additional defense funding in the Overseas Contingency Operations fund, which covers unplanned military expenses outside of the budget’s baseline. The proposed budget resolution already calls for $75 billion in OCO. For defense hawks in the House, like Armed Services Committee Chair Mac Thornberry (R-TX), “it’s better to have the money than not have the money,” but more than $100 billion in OCO is not ideal.
House conservatives, anticipating this negotiation with Democrats, are only heightening their call for more mandatory savings.
“Maybe we as the Freedom Caucus can live with a higher budget number if in fact we do real welfare reform on the tax bill — work requirements, time limits on able-bodied adults [are] part of that package,” Jordan said of a proposal to tie tax reform to welfare reform.
Because budget reconciliation instructions denote specific savings requirements for each committee, the Freedom Caucus is pushing for higher savings assigned to committees with purview over welfare programs, like the Agriculture Committee, which oversees food stamps.
That’s a difficult ask for committees that have their own spending priorities.
For example, Rep. Mike Conaway (R-TX), who chairs the Agriculture Committee, has a farm bill to think about — to cover rural, low-income, and farming constituents. He and Budget Committee Chair Rep. Diane Black (R-TN) have made assurances that he would push for reforms including renewed work requirements for the food stamp programs, but not necessarily through the reconciliation bill.
Leadership say members can sign on to either $203 billion in savings overall or zero, one Republican aide close to the Budget Committee said — and that’s not enough to bring the archconservatives on board.
But for now, the Freedom Caucus isn’t buying this “binary choice” — without their votes, this resolution will fail on the House floor, and with it any hope for tax reform.
Last time House Republicans played chicken, Paul Ryan blinked
The question is, who will give in to the pressure first?
There’s no wiggle room for a failed budget resolution — and no faction of the party will want to come out against the president.
The battle ultimately comes down to the same two political dynamics that almost choked the health bill earlier this year: an era of extreme partisanship, in which congressional Democrats and Republicans are unlikely to work together, and a Republican Party that is polarized between its own moderates and conservatives.
Despite an ambitious agenda to repeal Obamacare, rein in government spending, and slash taxes, congressional Republicans have yet to enact a single piece of major legislation.
That’s left the White House desperate for some big policy wins fast. This game of chicken between House leadership and Freedom Caucus members is a big gamble. The lower chamber’s far-right contingent might have been able to successfully extract key concessions from Trump on health care — but it’s not certain they can do it again.
The White House is much more involved in the business of cutting taxes than it has been on health care policy. And the reality from this fight over the budget resolution is that if it continues — and is exacerbated by the Senate — it could keep Trump from yet another win.