Blake Rutherford and Howard Schweitzer of Cozen O'Connor Public Strategies analyze the future of tax reform and the implications on the business community.

Blake: Today for this special briefing on tax reform, which is a critical and important topic in Washington D. C. My name is Blake Rutherford. I'm joined by Howard Schweitzer, the managing partner of Cozen O'Connor Public Strategies and our friend and guest, Dawn Odell from D-Squared Strategies who has a long and rich history working on tax issues on the Hill. Dawn, we're very happy to be with you today.

Dawn: It's a pleasure to be here. Thanks for having me.

Blake: Howard, I want to begin our call with something that I don't think we can divorce ourselves from, which is the aftermath of whatever happened with healthcare repeal and replace. I want to get your take on that generally because I think there, as we get into this, there is a correlation between aspects of that and what we're going to preview with tax reform, not only on the policy side, but on the political side. I thought we'd start there. What are your thoughts?

Howard: I think, on healthcare reform, Blake, the reason it didn't happen, it's a combination of a bill that was rushed, although I think people are right to ask why, when you've been preparing for something for six years it was rushed. A healthcare bill that wasn't ready for primetime, they did the CBO process too late in the process, the White House was overzealous and ham-handed in the way they tried to muscle members of Congress. It was, I think, a symptom or a manifestation of symptoms we've been talking about on these calls for months and even before the election which is you've got to be set up to govern, and you've got to bring some people to the party who know how this town works. The administration didn't do that, and Paul Ryan didn't have his caucus together, and that's why we ended up where we ended up.

Blake: I'm reminded, Howard, of an op-ed you and our colleague, Mark Alderman, wrote a while ago about the things that Trump can't repeal in Washington, and it certainly seems like, reflecting on that op-ed, that not only were you right, that the rules of Washington remain true in the aftermath of healthcare. What are your thoughts?

Howard: There are certain laws of nature around this town. Congress hates the White House, the House hates the Senate. There are certain laws of nature that govern how things come out of the machine here in Washington and I think the Republicans have been out in the wilderness for a number of years now and just weren't prepared to lead.

Blake: It certainly seems a bit surprising that if you're just looking at the political calculus, to come out of the gate with healthcare in the manner in which they did, knowing how much time they had. Let's talk about political consequences. What do you see, if any, political consequences to the failure of healthcare reform?

Howard: Ryan and Trump are weakened. I think the Freedom Caucus is emboldened. Those are, I think, the basic political consequences. I think they've been running on this for six years, and they won the election, and they've gained seats in the Congress in part because of it. They couldn't get it done and that's really, really bad for them politically.

Blake: The speaker came out this morning and said it's not dead, despite what the White House has said. "We're going to go back to the drawing board."

Howard: Yeah.

Blake: "We're going to try and figure this out." What do you think about that?

Howard: Look, Washington ... It wouldn't be the first time a bill was called up and failed and got brought back up again. The program that I was intimately involved in, the TARP, the TARP bill failed the first time it came through the House. They took it back up and fixed it and passed it. It's certainly not unprecedented, but it's going to be tough and I think, look, this does have consequences for tax reform, for other bills, infrastructure that are imperatives under this administration, this Congress, and they've got to wake up to the political reality and I believe the White House has to bring in some folks that know how to govern and Congress has to get realistic about managing its caucus. Paul Ryan has to get realistic about managing his caucus. Then maybe they can get some things done.

Blake: Dawn, I want to get your thoughts about the ramifications of the failure of healthcare reform on tax reform. There are certainly some discussion in the public domain that in order for the dramatic tax cuts that the speaker wanted, we had to reform the healthcare system in order to finance those tax cuts. What correlation do you see, if any, between the failure of healthcare reform and tax reform on the policy level?

Dawn: I think what you just said is actually part of the problem, that we had to do healthcare first because the healthcare bill was going to raise money, and that money was going to be used to pay for tax reform. It's an unfortunate correlation because one shouldn't necessarily have anything to do with the other, but the fact of the matter was we were looking at the Ryan bill, the Ryan-Trump bill on healthcare to raise close to $1 trillion, which was going to make a big dent in a tax reform bill.

Now, that's not to say that on tax reform it still can't get done in a number of different ways, but not having the revenue that would be raised from ACA repeal is going to put a lot of people's pet credits and deductions and provisions on the chopping block, because in order to lower the corporate tax rate, which is the single most important thing to Republicans in both the House and the Senate, you need to pay for it. Especially if you're going to use that special procedure called reconciliation. It has to be paid for. How do we pay for it? Well, if someone is going to win getting a lower corporate tax rate then someone is going to lose by getting rid of their credit in the code, so it's going to be a very messy period going forward, but I do feel positive about tax reform in that I don't think ideologies will play the same role in tax reform as they did in healthcare reform.

Blake: What do you mean by that?

Dawn: On healthcare reform, you had a moderate ... If you just look at the Republican party, you've got a group of moderates, and then you've got a group of serious conservatives, the Freedom Caucus. Every time ... You need to get them both if you want ... I realize that they're in control of the party, but everybody's got to get together, and this is the tough fight that Ryan had. It's the reason that Boehner left because it's really hard to bring these left and right factions within the Republican party together. Every time a piece of policy went in the ACA bill that made the moderates and the left-leaning Republicans happy, the Freedom Caucus said, "No way. We're out." Every time they put in something for the Freedom Caucus, they would start losing votes as they whipped, which is the process of counting votes on the floor in Congress, both houses. Every time they whipped they would lose someone from the left. It was like that ball where you ... Where it hits one side and goes out the other side. Hits one side and goes out.

That was where even ... Trump got schooled on this, and I say that just in ... He thought, without understanding the policy, and without understanding the nature of how Congress works, he likes to forget that there are three branches of government and his threats or his charm are not going to get it done.

Blake: Howard, I want to bring you back into this because I'm particularly intrigued by the lessons of healthcare and their applications to tax reform. By all accounts, tax reform is not something that will come quickly, despite what the secretary of the treasury has promised. Your take-aways from healthcare, what has the White House learned from that experience as it forges ahead? The press secretary, Sean Spicer, says, "We're in charge of this." That's what he said in his briefing yesterday.

Howard: I don't think they've learned anything yet. I think they've got to take a much more nuanced view of how to manage the Freedom Caucus in particular, which, Dawn, I think this is what you're suggesting, they're not as united around tax policy as one might think that they ...

Dawn: Exactly. They're more united around tax policy than they were health policy, but the fact that the White House is saying, "I'm running this," I think therein lies the problem.

Howard: Yeah.

Dawn: The White House doesn't write legislation. The White House doesn't pass legislation. Even in 1986, which I don't like to compare this tax reform to that tax reform, because it's such a different world. They would put things in the bills that people wouldn't notice until weeks later, and in our 24-hour news cycle, social media stuff, everybody knows everything the second it happens. Ronald Reagan and the White House didn't run the bill. Rostenkowski and Packwood ran the bill in '86. For Trump to say, "I'm controlling this," if he thought that was the problem, that he didn't have enough control, I think that's a little misguided. Kevin Brady, and ... On the House side Kevin Brady and Paul Ryan should, for sure, be in control and will be in control. It's the legislature that writes the laws. That's in the constitution, by the way.

Blake: Let's talk about what we might see, and the civics lesson is greatly appreciated for the moderator. Let's talk about what we might see in a tax reform bill. Brady has come out and said, "We're somewhere between 80 and 90% aligned in the Republican caucus," whether that's actually true or not.

Dawn: Yeah, I'm not sure that's true.

Blake: Right. Dawn, what are your thoughts in terms of ... Kind of set the table here. What are the big-ticket items we're likely to at least debate in the context of a tax reform?

Dawn: Okay, well to their credit, Ryan and Brady ... Last June, when no one thought that President Trump would be President Trump, and the world wasn't looking at tax reform, they came out with a blueprint. There was no legislative language, but it's some very firm and thought-out ideas about how to change the tax code because we have an opportunity right now, Brady likes to say that it's a once in a generation opportunity, to make changes that would bring manufacturing back to the United States, that will lower the unemployment rate, which is at pretty much an all-time low for us, and will really turn the tax code on its head and they think they need it. I give Brady and Ryan an enormous amount of credit for coming up with this thing when they had no idea how tax reform would fare after the presidential election.

People in the tax world looked at it and had thoughts about it, but no one really looked at it until the morning after the election and then people had very visceral reactions. Everyone came screaming and crying to Brady and Ryan and I'll tell you why in just a second, but I give them credit for doing what they did. I might not agree with everything in their draft, but I appreciate their vision of trying to change things, and they're getting beat up by a lot of companies in America partly because of the ideas in their bill and partly because it's the only thing out there to react to. We're humans. We need something to focus on and react to and the Brady-Ryan blueprint is out there.

There are a few main staples on the corporate side of the Brady-Ryan blueprint. The first is something called a border-adjustable tax. Now, I don't know if anybody recalls when they first mentioned, or when Trump first got ahold of the border-adjustable tax. Some people are calling at a BAT, as opposed to a VAT, which is a value-added tax. When Trump first heard border-adjustable tax, and I will say that if you're not in the tax world I can completely see why Trump thought this, he thought, "Here's Mexico, here's the United States. There's a border between us. If a tax gets adjusted at the border, then people will pay tax at the border and it can pay for that wall." However, that's not what a border-adjustable tax is. It's really kind of a misnomer unless you're inside baseball on tax.

A border-adjustable tax means there is a disallowance of deduction for anything imported. Not just Mexico, not just Canada, the UK, Australia, Brazil, Venezuela, anywhere. If you make a motorcycle in this country and you are getting parts from other places in the world, right now a corporation can deduct the cost of those parts and whatever it took to get those parts here, so the cost of transportation on getting those parts inside the United States under the Brady-Ryan plan they would not be able to deduct the cost of those parts. That's on sort of the smaller level, if you're buying pieces from other places to manufacture what you have here.

Then you've got retailers, which is really the other end of the spectrum, and those are people that import completely finished goods. They're the Targets of the world and the Wal-Marts of the world and the fashion houses of the world. They're bringing in whole goods, meaning they would not be able to deduct the cost of goods from their taxes, which means ...

Blake: Are you telling me my TVs at Wal-Mart are going to go up in price?

Dawn: That's exactly what I'm telling you, Blake, is if we're paying $19.99 for a remote control car, let's say, but now it's going to cost them 20% more to bring it in, we're going to get charged more. As part of the blueprint, they believe, and some people believe it, and some people don't believe it, and some people believe it but don't trust in it, and that is the value of the dollar will go up. Your dollar will buy more ... $4 will buy more goods. I can completely understand where the retail industry is on this, and unless you're an exporter, because the great thing about being an exporter under the Brady-Ryan blueprint is that you won't have to pay taxes on what you make from exporting. They want us to make things here and sell them to other countries. It doesn't mean that other counties aren't going to retaliate and have an import tax from our exports, but that's not what this blueprint is about.

Howard: It's on the primary impetus for this is what?

Dawn: Is on ... Thank you, Howard, for getting me in that direction. The primary impetus for this is our companies, U. S. companies, have been what we call inverting. They've been being bought, or buying out, or somehow merging with companies from other countries who have lower corporate tax rates, and instead of their intellectual property and everything being done here in the U. S., they're considered domiciled in another country with a lower corporate tax rate. They can still sell and do business in the United States. They just don't have to be part ... We'll tax them. The United States will tax them here and wherever they go. If they're domiciled in Ireland, let's say, the United States can't do anything about it. They're not a U. S. company anymore. They can still do all their business in the U. S. and pay Ireland taxes in Ireland, U. S. taxes in the U. S. and inversions, both Republicans and Democrats, both Houses, have seen as, I'm using air quotes now, "unpatriotic." That's the impetus for this.

Blake: What else can we expect to see because we're ... You mentioned earlier lowering the corporate tax rate is sort of priority number one. What else can we expect to see in a bill, and then Howard I want to get your take on where we're going to see gaps in the support structures for something like that. What else is going to ... ?

Dawn: Let me just finish focusing on the blueprint because that's where we're going to start. No matter what we end up seeing, we're absolutely going to be starting at the blueprint. Again, not because everybody loves it, but one, because Brady and Ryan, the House Ways and Means chairman, that's the chairman of the tax writing committee in the House, and the Speaker of the House both like this. That's the beginning. I had mentioned the border-adjustment tax, which really is a disallowance on deduction of imported goods. I know it sounds like, "I'm at the border. I'm paying a tax like a toll." No. That's not how it is. Trust me. It's a disallowance of deduction.

Another major part of the Brady blueprint, I should stop calling it a bill because there is no legislative language yet, but the blueprint is that interest on debt would not be able to be deducted, and that is a huge problem for capital-heavy industries and the financial services industry who loves to issue debt and doesn't want a disincentive on issuing debt. They are right now debt and equity financing are treated equally under the tax code. Under the Brady bill, equity financing would be treated better than debt financing. A lot of these capital-heavy industries, when I say capital-heavy, with a lot of buildings, with a lot of power plants, with a lot of pipelines, they have a nice balance, most of them, if they're in good financial shape, of debt and equity financing, and they need to ... Not being able to deduct the interest from your loans could end up closing doors for some companies, and agriculture for example ... Just like you don't buy a house with cash, you put down a piece of it, equity, and you finance the rest of it, debt. They do the same thing with farms. If small farmers can't deduct the interest from the note that they took out on their farm, what happens to Ag?

The key thing here is that there aren't any carve-outs, there aren't any exceptions to the rule for any reason in the Brady blueprint. Brady and Ryan have been stalwart, god bless them, I've never seen anything like it, "No, we're not doing any carve-outs." A lot of that is not just because they believe in this, and they believe it's the right thing, but because the World Trade Organization will have a lot to say about how we tax imports and exports. Once you start carving out pieces of their house of cards, or pulling out cards, it's going to fall apart for the WTO. It's a place to start. They're being very, like I said, stalwart about it, but why should they negotiate with themselves. They know that this is not something that can fly in the Senate. They're basically saying, "This is what's going to come from the house." It's hard because if your constituents are Target, or Best Buy, or utilities, it's hard to vote yes when there are provisions in this bill that ...

Blake: Yeah, Howard, that's what I really want to talk about is the political calculus here, because there are a lot of constituencies to manage in a tax reform bill. Dawn, I think, has done a great job of identifying all the various constituencies that are affected, at least just by the blueprint, and then again to ... For our listeners we haven't even seen legislation yet. What are your thoughts? It sounds complicated.

Howard: Yeah, of course it is, and I think we've increasingly seen members of the United States Senate weighing in particularly on the BAT, Dawn.

Dawn: I know, right? The Senate has nothing to do with it, yet they're so riled up by it ...

Howard: That they're getting out and coming out hard against it, and sending a signal to the House that they'd better think twice. I think one of the structural ... It's more philosophical than structural, but impediments to getting something done here is Ryan and Brady ... They need to be willing to accept something imperfect. They're not going to get a perfect bill.

Dawn: That's a ... Don't let the good be the enemy ... The perfect be the enemy of the good.

Howard: Exactly.

Blake: Dawn, what do you think about that? Where is the compromised position on some of this stuff? How do you raise enough revenue? How do you structure a bill that's 80% of what you want, but not 100%?

Dawn: Thank you for that easy question. What I think needs to happen, and I'm going to go back and I would love to hear your thoughts on this, Howard, is let's look at the ACA for a second again. I want to focus on tax reform, but in the ACA, what couldn't the Republicans do? They couldn't get their left and right flanks to get them enough votes to get it over the edge. Trump was out there, according to a lot of members, negotiating, because that's what he does, and that's what he's an expert at, but really didn't understand the policy or the politics. Again, it was either charm or threats. He, who is in my belief, not really a rank and file Republican ...

Blake: No, he's not a non-rank and file Republican. He's not a Republican.

Dawn: Okay, fair enough. I think what needs to happen, and this is the beauty of this, and I hope that they latch onto it, and Trump has talked about it, is reaching over the other side of the aisle to the Democrats. That's how the sausage is best made, and how you want to see it made, and how the framers of the constitution wanted to see it made that way. If you can get some middle-of-the-road Democrats, and middle-of-the-road Republicans, some rank and file Democrats, some rank and file Republicans, you can pass a bill. What's in the bill is a different story, but it doesn't have to go through reconciliation, which means that the bill is not really going to be tax reform if it goes through reconciliation, and I say that because the process ... It's a very technical, in the weeds process, that I'm sorry to even have to mention to you, because there's no reason you should be burdened with the knowledge of reconciliation, is that it is going to be so narrow, and so specific, that you could make changes to the tax code, but not major changes to the tax code.

Blake: The alarms are going off for you, Dawn. You said reconciliation.

Dawn: Exactly.

Blake: The whole world came to a screeching halt.

Dawn: I wasn't kidding. It's a big deal to go through this process. That's what they did on Affordable care Act. For reconciliation everything must be paid for. When I was on the committee, I worked on the 2001, 2003 book tax cuts. Those are the kinds of things you can get through on a narrow process of reconciliation and reconciliation just means that a bill is filibuster-proof in the Senate. That you need only 51 votes, a simpler majority, whereas every other bill, which is subject to a point of order in the Senate, you need 60 votes for. Being in the majority in the Senate is very cool, but being in the minority in the Senate is plenty cool too. There's plenty you could do.

Blake: You talk about that quite a bit, Howard. You talk about the effective minority, and not to ... We'll preview a call for next week when we talk about the Supreme Court nomination of Judge Gorsuch, and what that looks like, but the minority is playing a very prominent role in that debate. What do you sense from the Democratic perspective, because as Dawn has pointed out, Republicans in the House are leading the charge in terms of the blueprint. You've got Sean Spicer coming out and saying, "Well, no, we're driving the train on this."

Dawn: Yeah, best of luck there.

Blake: Yeah, best of luck, as Dawn says. We don't have to invoke the constitution again. I think we know who does what, but what do you sense from the Democrats on this? Right now, sort of the perception walking the halls of Congress and wandering around Washington is Democrats have their chests out a little bit. They're feeling more emboldened after defeating the Trump-Ryan healthcare plan.

Dawn: Well the Democrats didn't defeat the Trump-Ryan healthcare plan.

Howard: Republicans defeated it. Exactly.

Dawn: Democrats stood back with Mitch McConnell and watched. That's it.

Howard: Right, exactly. They're walking around with their chests our and pretty darn happy because they didn't have to lift a finger. The thing imploded on itself. Right now, they're not invited to the party.

Dawn: That's the problem.

Howard: If they get invited to the party, then they have a decision to make. Does Chuck Schumer play ball with Trump or does he lead an obstructionist's minority in the Senate for the next two years and hope that he comes out even or ahead of where he is today. I think if you're Chuck Schumer, and Trump engages you, and you've got Heidi Heitkamp, and John Tester, and Joe Donnelly that you've got to see get reelected next year in states that Trump won last year, you'd better think twice. Dawn, we've seen this movie 1,000 times. People judge an administration, a Congress, by where it is at its low point. They think the world is coming to an end and nothing's going to get better. I mean, we're two months into this thing, and ...

Dawn: It feels like two years, though.

Howard: It feels like two years, but Trump, I think, is more pragmatic than people give him credit for.

Dawn: I do too.

Howard: I think we're going to see, as I said earlier, some White House turnover. We're going to ... He doesn't want to have a failed presidency and whatever he has to do, come hell or high water, he's going to do, even working with Democrats, which isn't that big a deal because he himself has been a Democrat.

Dawn: He wants to win. He doesn't care who he wins with.

Blake: Let's sort of dig into that a little bit because I go back to the ... To what we saw from healthcare, because really it's the only case study so far, this notion that Trump wants to win. The Democrats were not invited to the healthcare party. We know that to be true.

Dawn: Why would they? We were repealing the Democrats bill.

Blake: I do think, though, that the Democrats telegraphed during the campaign, certainly President Obama and Hilary Clinton both telegraphed that the ACA is not perfect, and changes needed to be made. Look, we don't have to debate the politics of whether ...

Howard: They were politicking too.

Blake: Right. Sure, but ...

Dawn: But it's the truth, and I think that everybody believes it.

Blake: Right. I don't think it was disingenuous. How you get from A to B ...

Dawn: I mean, think about it. You pass a huge bill, then as it starts working you realize, "Maybe we should have done that instead." You know?

Blake: We're always ...

Dawn: Tweaking.

Blake: In life we're always tinkering. Right? I mean, that's part of it. Here, Howard, you've said Democrats have to be invited to the party and Trump doesn't want to lose, to Dawn's point, sort of combining your theses here, but Trump's deference to Paul Ryan and to Tom Price and others certainly didn't lead to a successful outcome. How does he win on this, Dawn? How do you win on tax reform knowing that tax reform probably ... How do you win on tax reform if you're Trump? Let me start there, and then we'll talk about [crosstalk 00:31:21].

Dawn: If you're Trump, you win on tax reform by engaging Chuck Schumer and Ron Wyden and maybe even Richie Neal, who is probably the Democrat that Republicans love most in the House. You engage the other side and see what their basic needs are. I actually ... I have incredible respect for Paul Ryan and Kevin Brady, but if Ryan were to be the one to get everyone together, and jump in here Howard if you have a thought because I'm kind of spit-balling, if Ryan would be the one to lead the effort on tax reform, he's going to have the problem that he had on ACA repeal, keeping his left and his right flank in the same place, whereas if Trump brought the Dems to the table, she might have a winning combination, but I'm afraid he would lose the Speakership. He never wanted to be Speaker, the poor guy. He was really forced into it, and I don't know if they ... If he can't do it, I'm not sure, in terms of the Speakership making it work with the left and the right. If he can't do it, I don't know that there is someone who can. I think that they probably ... I think honestly that you cast off the ... Not the crazies, but the hard right, the hard ...

Blake: The extremes.

Dawn: The extremes, thank you, in each party, and everybody else comes together, and I think Trump can do that. Trump's not very fond of the Freedom Caucus right now. For him to be able to say, "I don't need you people. I can get some Dems." Trump actually is in a position where he can get some Ds. I'll tell you, the Schumer and Ryan actually get along very well. They'd be pretty happy working together, I think. I mean, I certainly ...

Blake: And Wyden and ...

Dawn: Yeah.

Blake: Yeah.

Dawn: These are all very reasonable people. They're all negotiators at heart, and I think that they can get a bipartisan bill. I will mention one thing that's interesting is that the Freedom Caucus, first of all, one of the members dropped out after ...

Howard: Yep. Poe.

Dawn: After the ACA repeal, or the ACA repeal failure, and is it Mark Meadows, the head of the Freedom Caucasus, said, "I'd be fine doing a tax reform bill that isn't paid for.

Howard: Great.

Blake: Right, and that was one thing I did want to ... Howard, I wanted to get your take on because it ... The preview may be that tax reform doesn't need to be revenue-neutral.

Dawn: If it's reconciliation, it does, but otherwise ...

Blake: Right, but if the carrot is tied to infrastructure, does it present and opportunity to pull some of those Democrats along?

Howard: Yeah, it definitely does.

Dawn: Tax reform presents an opportunity. There are things that Dems want in tax reform. They want middle class tax cuts. The only thing that they really don't like are the tax cuts for the wealthy. That's hard for the Republicans to vote for in both Houses.

Howard: I guess everybody is looking at the healthcare bill as a spectacular failure, which it was for the Republicans, but it wasn't for the system. It wasn't for the constitution. This is the way the system is set up. The system is set up to avoid the tyranny of the majority. It's set up to push people to work together, to negotiate. That's how the sausage gets made, and so I look at the healthcare bill as a wake-up call. It's a wake-up call for an administration that needs to get more realistic and not say stupid things like we're going to have tax reform done by August, which there's no chance ...

Blake: I wanted to ask about the timeline. [crosstalk 00:35:24]

Howard: Yeah, I mean ...

Dawn: It's just tax law. It's not an appropriations, like, "Here, let's write a check for a road." I mean, I'm simplifying appropriations there, but tax takes years. I've worked on tax projects for years before things get done, and they have. I mean, people have been working over the past 10 years on tax reform. Dave Camp, when he was chairman of the House Ways and Means Committee had a draft. In fact, I think that's what the Senate will end up working from. It's a much more traditional kind of tax reform than the blueprint. You're not changing major policy, but you ... There are industries that get hurt. It is revenue-neutral, let's just say that, but I do think that everybody should dust off their Camp drafts and start looking at that as opposed to what the House is doing, even the the House may use the blueprint, may move the blueprint through a committee.

Howard: They're already reworking it.

Dawn: Right. I would say don't ... It's going to get scary. People who are afraid of the blueprint are going to be veery afraid before things calm down a little bit, and that is when, just like Howard was saying, this is how the constitution is supposed to work. Once it goes to the Senate, the Senate is going to go, "This is nutty, crazy stuff." They've already said it. "We can't do this." That's the reason the Senate was created, to kind of tamp down on the ...

Blake: To moderate the House.

Dawn: To moderate the House. Exactly.

Blake: Dawn, if you're in the ... Let's say you're in the real estate industry today, or you're in financial services. What are you looking at? What are you watching? What are you most concerned with on tax reform?

Dawn: Good question. Let's start with real estate. If I'm commercial real estate, I'm concerned about the Brady blueprint interest, or non-deduction of interest. Individually, if the bill has to be paid for, I'm concerned about non-deductibility of individual mortgage interest, or like a cap on deductions, I would call it.

Blake: Are they really going to take away our mortgage interest deduction? I mean ...

Dawn: If I had a crystal ball, I could tell you all of this. All I'm saying ...

Blake: So toxic.

Dawn: It's weirdly in play. It's weirdly in play. The same thing with charitable ... I mean, there are three things you could take on your individual income tax deductions. Your mortgage interest, charitable deductions, and state and local taxes. Capping the deductions for charities is going to ruin charities, because that means the federal government would have to step in where, right now, wealthy people are building the hospitals, and the research centers, and reviving old, run-down downtowns into more vibrant areas. The deductions that I give will put a picture on the wall of a hospital, but it won't build the hospital, and you're dis-incentivizing them, the deduction for charitables is an incentive for everyone to give, but who ... People who are going to give the most are the ones that have the most. In a lot of cases, and I'm not saying that people aren't giving because their hearts are good and they care about these issues, and they care about their legacies, but there's a reason that 60% of all charitable donations come in in the fourth quarter. It's hard to say I'm going to cap charitables without capping interest deduction, or they might say, "I'm going to cap deductibles. Choose your path. You want your charities? Take them. You want your interest deduction? Take them." That is an option.

I don't like any of it. I'm just saying that's out there. For real estate, I'm concerned both individually and commercially. What was the second ... Financial services. Same thing, same industry. You're talking about people who are loaning people money in order to buy capital. In order to buy concrete and steel.

Blake: Howard, I want to get your thoughts. I mean, we've identified the things that industry ought to think about. What do you do about it? I always come back to engagement. What are your thoughts about how to get engaged with this?

Howard: You hire us and Dawn. That's ... We formed this partnership with Dawn specifically because of tax reform. It's going to be the biggest issue in town for the rest of the year.

Dawn: At least the rest of the year.

Howard: At least the rest of the year into 2018.

Dawn: I have to give you a lot of credit, Howard, because when you reached out to me for this, I think that was very forward-thinking, because probably every one of your clients was affected or will be affected.

Howard: You need to be engaged. You need to ... There are these massive issues, but then there are these ... Dawn, you should speak to this. There are all sorts of issues that are deep in the weeds that people need to be educated on, they need to be thinking about, they need to be ... Members need to understand the issues that are going to impact their constituents and you need to be heard.

Dawn: I completely agree. Let me touch on some of those smaller issues. Wind, the wind production tax credit, solar, think about all of your little energy tax credits, which are ticks on the butt of the dog right now because we're talking about huge things like changing a worldwide taxation system that we have in America to a territorial taxation system. If people have questions on that, I can ... I'm happy to go much more into depth on the big issues.

Blake: I don't think this will be the only call we have about taxes. We'll get more into it.

Howard: No.

Dawn: The little issues where we create tax incentives to grow industries, to grow American industries where there are consumer tax credits. Again, I think ... I'm always thinking in the energy sector. It's what I ... One of the things I handled on the Hill and many of my clients are in that sector. We need to think about ... We [inaudible 00:41:55] moving power, we need to think about using the tax code to incentivize. The tax code is a social document. It basically says, "If you're married, we're giving you a break. If you have kids, we're giving you a break. If you adopt, we're giving you a break. If you invest in wind and solar energy, we're going to help subsidize that. We're not going to pay for it fully. It's not an appropriation. We're not going to write a check and say, 'Here is the check for this,'" but through tax credits and tax incentives, which include deductions as well, it's the federal government saying, "You know what? I like what you're doing. I like where your head is. We're not wiling to pay for it straight out with cash, but we are willing to share some of the pain." That is why tax credits exist.

They are going to ... If you get a tax credit, if you do something that is worthy of a tax credit, research and development, perfect example, because it's the sacred cow of tax credits and it's only going to get bigger and more robust, if you do that and you have a tax credit, it's money that you would otherwise be paying the federal government, you're taking a credit for on your tax bill. If you have a $300 tax credit and you owe the federal government $1,000, you will only be remitting $700 to the government. It's the government losing tax revenue. What they're doing in those credits is saying, "We're willing to lose that bit of tax revenue in order to forward this policy, in order to stop pretending that we're friends with Saudi Arabia, and we want to stop needing the oil from the Middle East." That's where I think a lot of the renewable stuff is coming from. It's saying, "We're wiling to change our tax position and collect less for you to do what we think is right.

Howard: I think it's helpful to step back again and think about this in addition from a social policy perspective, from an economic policy perspective, it's the economy that drove Donald Trump to the presidency, it's the economy, stupid, and it's people who are down on their luck and suffering through hard times because jobs have been off-shored, and growth is slow, and we've been through a difficult time as a nation with the bailout ...

Blake: You saw first-hand ...

Howard: I saw first-hand. People were rightly ... They were pissed off and they took that out on the incumbents in 2016, they took it out on the Ds and I think that has a lot to do with where we are today. Now they need to show something. They need to get the economy juiced up and moving. The tax code is one way they think of increasing ...

Dawn: There are only two ways. You either pay with cash or you use the tax code to incentivize behavior.

Howard: Yeah. They're clearly not going to be paying more with cash. They want to shrink government.

Dawn: In fact, even the infrastructure program, which normally gets paid for by cash, Trump was really focusing on public-private partnerships and getting private investors. I think he has a really good chance of success. He is a negotiator. The problem is, he negotiates in the real world, and he came and moved to Oz, and it's even more Oz. We speak a completely different language and that's when I ... When I say he got schooled on the ACA repeal, he did because he had no idea how it all worked. Once this guy figures out how this works, and that's for him to find out, that's for advisers, he needs to listen to his right advisers, once he figures this out, I think that we have the potential of making some good laws. It's in no one's interest that Trump fails.

Howard: Look, calling the Freedom Caucus into the White House and telling ... Steve Bannon telling them, "Thou shalt vote for this bill," is like ... It's Congressional relations 101. I've seem people on the inside that have done it really well, and I've seen people that have done it extremely poorly. How you do it actually matters. How you talk to these people matters. What you tell them matters. They've got to be more sophisticated in their approach.

Dawn: I absolutely agree. In fact, it's embarrassing a little bit, especially as someone who is inside baseball here. I just kind of shook my head ruefully when all this happened.

Howard: The executive branch never wants to work with Congress. They're overseen by Congress. Congress is always biting at their heels. It's ... There's always attention. The people that do it successfully are people in the executive branch that swallow their pride and go up to Capital Hill and bow at the feet of people that represent congressional districts and make them feel like they're the most important people in the world, even though they're not. That's how you do this.

Dawn: It's so sad, but you're so right.

Howard: It is what it is.

Dawn: It is what it is, and I realize that's what I do for a living. It is. There's a dance that's done here. This is ... Like I said, we are a completely different world inside the beltway. It's a different language, it's a different rhythm, it's a different way of doing things.

Howard: Minuchin and Bannon and ...

Howard: Yeah, I mean, they need to sit up and take notice and rethink how they're approaching things.

Blake: It will be ... This is a fascinating debate, it's a fascinating topic, it is difficult to be sure, both policy-wise and on the political side, which means we'll be back together talking about this.

Dawn: It's also scary, Blake. I have a lot of clients who are genuinely afraid for their businesses. The Brady blueprint has scared a lot of people. One, everyone's afraid of change, but this is change that you can point to in certain industries that could close doors. It's not just about can I buy this new piece of equipment. You should be able to. We want to encourage people to buy the new equipment and hire more people. These are things that would close doors here, and to think that we can be ... The manufacturing capital of the world, we've got labor issues here, training issues here. I realize that China does it so much cheaper than we do, but there's also a reason you can't breathe in Beijing.

Blake: Yeah, well look, I mean ... That is ... Actually why you can't breathe in Beijing is the topic for next week. That's what we're going to do next week. We've reached our limit. Dawn, I want to thank you so much for joining us.

Dawn: It's my pleasure.

Blake: Certainly the partnership we have with you will be great and beneficial to us and to our clients.

Dawn: I want to help. We want to help.

Blake: We'll certainly look forward to your continued thought and analysis as we track tax reform. Howard, as always, great to be with you.

Howard: Thanks, Blake.

Blake: Thanks for your insight.

Howard: Thanks, Dawn.

Dawn: My pleasure.

Blake: To everyone listening, we appreciate you taking the time to join us. Comments, questions always welcome. Presidential analysis at cozen.com. Otherwise, thanks again and we'll talk to you next week.