It’s mid-September and Republicans still can’t pass a budget, a legislative holdup that could derail the centerpiece of President Donald Trump’s congressional agenda: tax reform.
Since coming back from August recess, Republican House leadership has been aggressively whipping the 2018 budget resolution, a nonbinding government spending guideline that both chambers have to pass if Republicans want to circumvent the threat of a Democratic filibuster in the Senate on tax reform. They haven’t had much success, according to House Freedom Caucus chair Rep. Mark Meadows (R-NC), whose group of archconservatives has been standing firm against the resolution.
“There still not enough votes to pass it,” Meadows said Tuesday.
That’s because the budget fight is really about tax reform: a clash between Republican leadership and a caucus 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. Already one of House Speaker Paul Ryan’s proposals to offset costs — the border adjustment tax, which would tax foreign imports and exempt exports, raising money because the US currently imports more than it exports — has been nixed amid widespread opposition among congressional Republicans.
The conservative members of the House Freedom Caucus say they are pushing Ryan to adopt an alternative plan: 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 and is now setting expectations for a potentially smaller tax cut package, which conservatives will be likely be unhappy with.
Rather than stage that fight over an actual tax reform bill, when the White House and conservative leaders will undoubtedly ramp up the pressure to pass something, the Freedom Caucus members have chosen to make their tax stand over the budget resolution.
Without the Freedom Caucus on board, the resolution will almost certainly 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 earlier this summer.
And so the budget resolution has become a proxy war within the Republican Party, amid more reports of President Trump’s meetings with Democrats on tax reform.
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 Republican-led 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 through several budgetary amendments to the Affordable Care Act. 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, it can also dictate how Republican actually implement tax cuts.
In budget reconciliation, each committee is instructed on how much savings it 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 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 savings could influence how Republicans can approach tax reform — specifically how they pay for their tax cuts. With Obamacare repeal, Republicans passed what is called a “shell budget,” with loose instructions that essentially gave them the flexibility to do whatever they wanted on spending within the budget reconciliation guidelines. But leadership promised the GOP conference that that was a one-time deal, and with tax reform the conference would pass a real budget.
The Freedom Caucus is holding leadership to that — they won’t support a “shell budget” for tax reform.
“We want a real budget that has real reconciliation instructions, that has real revenue targets and real spending cut targets,” Meadows said. “That is what we were promised by our leadership — that we wouldn’t be asked to vote for another shell budget.”
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 originally discussed, including a drop in the corporate rate from 35 percent to 15 percent. In recent weeks, both the White House and GOP leaders have said the reformed corporate tax rate would likely be between 22 and 25 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 originally floated implementing a border adjustment tax, which some analysts projected would result revenue-neutral after economic growth is factored in. But that plan has since been dropped after the Republican Party balked at the idea of adding a tax to a tax cut bill.
The most conservative faction of the Republican Party says there is no need for revenue neutrality with tax reform, arguing that deep cuts to 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 has the possibility of blowing out the deficit.
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 — and they won’t come close to making up the difference in revenues anyway.
Brady told Republican House members on September 13 that they should expect a more detailed framework by the week of September 25. Until then, conservatives won’t be moving on the budget — nervous about abandoning any political leverage they have over tax reform now, without the political pressure of holding up a major agenda item.
“Put it in writing, what are we getting?” Freedom Caucus member Rep. Dave Brat (R-VA) said. “The budget is already done, and the Freedom Caucus has already voted on all 12 appropriations bills at the budget levels. There is no debate on the budget. But the budget includes details on the reconciliation instructions on what tax reform will look like. We want to know what tax reform will look like.”
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, have voted 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 include an increase to non-defense discretionary spending from the $511 billion the House has proposed.
“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,” Rep. Jim Jordan (R-OH), a founding member of the Freedom Caucus, 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 says 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 if Republicans are intent on passing tax reform on a party line — 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.
Already Trump has made it clear that he is eager to get things done — even if it means going to Democratic leaders Rep. Nancy Pelosi (CA) and Sen. Chuck Schumer (NY).
It’s clear the White House is much more involved in the business of cutting taxes than it ever was 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 a Republican-led win.