With the 115th Congress nearing the end of month two, tax reform continues to be a focal point of the political debate in Washington. Intent to move forward with their tax reform “Blueprint” released in June 2016, Speaker Paul Ryan (R-WI), House Ways and Means Committee Chairman Kevin Brady (R-TX), and other high-profile tax-writers have spent a significant amount of time and energy in recent weeks promoting their proposal, which would dramatically overhaul the U.S. tax system and make significant reforms to the Internal Revenue Service (IRS). Though initial expectations were that the text of the Blueprint might be available as early as March, Chairman Brady has since indicated that he now hopes to have the legislation released “during the first half of the year,” which likely means that the text of the bill will be finalized by June of this year.
Once the legislation is drafted, it will then be taken up and debated by the Ways and Means Committee – a process that will likely be contentious given the current political divide in Washington. That divide, however, is not solely a partisan one; signs of GOP discontent can be seen in the Senate (and, according to our sources, can also be seen even among House Ways and Means Republicans) and could potentially extend to the White House. The main issue dividing Republicans at the moment? The Blueprint’s Border Adjustable Tax (BAT), which would essentially: (1) disallow deductions for imports when calculating the cost of goods sold; and (2) exclude revenues earned from exporting goods from taxable income.
Though Senate Republicans have generally avoided opposing BAT outright, several influential Senators have either expressed concerns about the proposal or indicated that they have doubts and are thus withholding judgement. Perhaps the most vocal opponent of BAT to date has been Senator David Perdue (R-GA) who recently sent around a “Dear Colleague” letter arguing that the BAT is “regressive, hammers consumers, and shuts down economic growth.” Opposition in the Senate appears to be growing. In fact, concerned about the rhetoric coming out of the Senate on the BAT, Speaker Ryan recently began outreach to Republican Senators urging them to “keep their powder dry.” Reports suggest that his visits have not been well-received and are, at best, having minimal impact in the Upper Chamber. Notably, despite the most recent efforts by the Speaker, the skepticism in the Senate seems to be growing, with Senate Finance Committee Chairman Orrin Hatch (R-UT) just last week acknowledging he “[does not] see [BAT] happening, not the way the House has configured it.”
At the White House, a group of the nation’s largest retailers (who oppose BAT) recently met with President Trump to discuss the BAT and its negative implications for businesses and the economy. Though the President walked back his earlier comments suggesting that the BAT may be overly-complicated, he has at the same time failed to fully embrace the concept (or at least the concept as proposed in the Blueprint). Notably, though, the Trump Administration plans to release an outline of its “phenomenal” comprehensive and bipartisan tax reform proposal in the next several weeks (likely by March 14, 2017) as part of its FY 2018 budget proposal. The process of putting together such a proposal is something that will benefit from the recent confirmations of Treasury Secretary Steven Mnuchin and Director of the Office of Management and Budget Mick Mulvaney. How the President ultimately addresses BAT in his budget will be critical to whether the BAT survives.
As for timing of tax reform, much will depend on the success of the House Blueprint. Assuming the proposal moves forward largely as is, the House is aiming to wrap up debate and successfully enact tax reform by August. That said, the likelihood that final action on tax reform – if it happens – slipping until the end of the year appears to be a possibility growing more likely by the day, as the politics of tax reform seem to be slowing the process. Moreover, on the other side of the Capitol, it is becoming clearer with every passing day that Senate Finance Committee members do not appear to be wedded to the Blueprint. As such, the Committee appears to be proceeding as if it may need to do its own bill or, at a minimum, take up and significantly amend the Blueprint.
It is also important to note that, unlike their House counterparts, Senate Democrats have the potential to wield significant influence over the tax reform process – especially given the makeup of the Senate (52 Republicans and 48 Democrats/Independents) and the fact that 60 votes are needed to pass legislation through regular order. While the Senate Democrats have pushed back on the Blueprint (e.g., the Senate Democratic Finance Committee staff memo released in December 2016), calling it regressive and urging Republicans to fill out the details, they have nevertheless pledged to work with the GOP in an effort to come together on a solution that both parties can support.
However, while this all adds extra pressure to do tax reform on a bipartisan basis, Republicans have the fallback option of reconciliation. Doing tax reform under reconciliation, however, also comes with certain drawbacks, as it cannot add to the deficit in any year outside the 10-year budget window. As currently drafted, this would likely require sunsetting at least portions of the tax policy changes called for in the Blueprint – something Republicans want to avoid if possible. Nevertheless, Republicans do not want to miss the opportunity to lower rates, thus – as Senate Majority Leader Mitch McConnell (R-KY) continues to remind his fellow Senators – reconciliation remains a real possibility if lawmakers cannot come to agreement on a bipartisan bill.
In sum, key policymakers remain committed to seeing tax reform across the finish line this year. However, with many consequential tax policy issues yet to be decided, the path to tax reform grows more perilous with each passing day. In particular if proponents of tax reform let too much time slip away, they will soon find themselves running up against the 2018 Election, which makes potentially politically difficult votes all that much harder to take.