Midterm election could produce gridlock on tax laws in Congress

The results of Tuesday’s midterm elections will lead to Democrats taking control of the House’s tax-writing Ways and Means Committee in January, but with Republicans retaining control of the Senate and the White House, the Democrats aren’t likely to get their way on tax policy.

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“They can’t get any legislation passed because it’s not going to get past the Senate,” said Bill Smith, managing director of CBIZ MHM’s National Tax Office in Washington, D.C. “Everything they do is likely to be campaigning for the next election.”

Chairmanship of the Ways and Means Committee is expected to pass from Rep. Kevin Brady, R-Texas, who led the charge in passing the Tax Cuts and Jobs Act last year, to the ranking Democrat on the committee, Rep. Richard Neal of Massachusetts. “There’s going to be a shakeup in the House Ways and Means Committee,” said Smith. “There will be hearings on the Tax Cuts and Jobs Act where more people will be heard from.”

Roger Harris, president of Padgett Business Services, doesn’t expect to see any major tax legislation passed in Congress’ next term, though. “My first reaction to the election results is that it probably means we won’t have any tax changes for two years — we got what we got,” he said. “The idea that Democrats and Republicans can agree on something is far-fetched. They don’t have a good recent history of working together on big pieces of legislation. Look at what the stock market is doing today. They know now the tax bill is there to stay, and it gives some sense of predictability to know what the law is and that it’s unlikely to change.”

The Dow Jones Industrial Average climbed Wednesday and closed 545 points higher at the end of trading.

Marc Gerson, chair of law firm Miller & Chevalier and former majority tax counsel to the Ways and Means Committee, believes there may be some action during the lame-duck session before the next congressional term starts in January. “In the short-term, the impact of the midterm elections on the lame-duck session is uncertain,” he said. “It’s unclear whether there will be a robust session and an available legislative vehicle to which to attach tax items such as extenders, technical corrections to the TCJA, a pending retirement security package and potentially an IRS modernization package.”

The prospects for congressional gridlock are high now that the two parties are splitting control on Capitol Hill. There will be changes in leadership not only in the House's tax-writing Ways and Means Committee, but in the Senate's main tax committee, the Senate Finance Committee, with Chairman Orrin Hatch, R-Utah, retiring at the end of this term.

“As we turn to next year, there will first be some start-up time given the changes in tax-writing committee membership, given the change in control in the House, a change in the chair of the Senate Finance Committee and the large number of members who retired or ran for other offices, as well as incumbents who were defeated,” said Gerson. “As a result of the divided control of the Congress, significant gridlock of the tax legislative agenda is anticipated. While there certainly will be messaging bills and exercises by Democrats in the tax space, including potential examination of the president’s business and tax returns, there also may be areas of bipartisan cooperation such as middle-class tax relief, infrastructure spending and the retirement savings and IRS modernization packages if they are not enacted in lame duck.”

Trump tax returns

Democrats on the Ways and Means Committee are reportedly eager to demand President Trump’s long-hidden tax returns from the Internal Revenue Service's new commissioner, Chuck Rettig. Trump maintained during a post-election news conference on Wednesday his longstanding position that his tax returns remained under audit with the IRS so they can’t be shared. “Nobody turns over a return when it’s under audit,” he said. He admitted that an IRS audit wouldn’t necessarily preclude a release of his tax returns, but attributed his stance to legal advice. “I didn’t say it prevented me,” he added. “I said lawyers will tell you not to do it.”

But Democrats hope to use a 1924 law dating back to the Warren Harding administration in the wake of the Teapot Dome scandal to force the IRS and the Treasury Department to release the president’s tax returns.

“I’m confident that this president who’s had no oversight, only overlook, will feel that he’s above the law on this also,” Rep. Lloyd Doggett, D-Texas, said during a conference call with reporters, according to The Wall Street Journal. “While we may not get those returns immediately, we ought to. And we ought to be asking for them immediately, aware that the president will be resistant to oversight.”

CBIZ's Smith is sure that not only politicians, but plenty of tax professionals would like to see Trump’s tax returns after Democrats request them.

“The big question is whether they’ll ask for the president’s tax returns,” he said. “That has the tax community all abuzz. Who knows what will happen with that?”

Middle-class tax cut

Last month, Trump floated the idea of a 10 percent middle-class tax cut, which he at first said could be passed before the midterm elections, even though Congress wasn’t in session. Later, Brady and Trump issued a joint statement pledging “swift action” early next year if Republicans retain control of Congress. But that prospect seems to have dimmed now that Democrats have captured control of the House. However, there are still a few months until the end of the year, offering lawmakers the possible opportunity of advancing legislation during the lame-duck session after the election. But Smith believes it’s more likely for them to try to get some technical corrections to the Tax Cuts and Jobs Act through Congress, particularly when it comes to write-offs for improvements to property such as restaurants and retail stores.

“It will be interesting to see if the Republicans try to cram something through in the lame-duck session,” he said. “If they don’t, there are some mistakes in the Tax Cuts and Jobs Act that need a legislative fix. If the Democrats agree to it, they will want to extract a pound of flesh.”

The prospects for any legislative action are murky given the hyper-partisan atmosphere in Washington and around the country. “Nothing that the president wants is going to happen anytime soon,” said Smith. “You have some very bitter people on the Democratic side of the aisle because they were completely left out of tax reform.”

SALT deduction

One possible area for negotiation might be the $10,000 limit on the state and local tax deduction, also known as the SALT deduction.

“That’s one of the few areas where there might be some headway made because you have the high-tax-state senators backing that, but they’re going to have to pay for it somehow if they do it,” said Smith.

He doesn’t believe Republican lawmakers will be able to use a reconciliation procedure in the Senate to advance tax legislation by a 51-vote majority without the threat of a filibuster, as they did last December, even though Republicans are picking up several more seats in the Senate thanks to the midterms.

“You’re certainly not going to get any tax legislation through reconciliation, so if they want to remove the $10,000 cap, they’re going to have to figure out how to pay for it,” said Smith. “And if [Democrats] want to do it, the Republicans are going to want their pound of flesh. I don’t think there are going to be enough senators to pass it through reconciliation, even if you have some senators from high-tax states.”

Gerson is dubious about the prospects for rolling back some of the provisions in the Tax Cuts and Jobs Act. “There certainly will be interest by Democrats in analyzing and modifying the TCJA, but such efforts are likely to face significant opposition from Senate Republicans and the administration, which will be particularly reluctant to unwind its signature legislative achievement,” he said.

Tax Reform 2.0

As for the “Tax Reform 2.0” package that Brady and other Republicans passed in the House in September, which would extend the tax cuts for individuals and pass-through businesses beyond 2025, Smith is also skeptical. However, he pointed out there was bipartisan support for one component of the package, which would create Universal Savings Accounts to allow workers and families to save for retirement.

“There was some Democratic support for one of the three bills that the House passed that created benefits for retirement accounts, so there’s some hope that can pass, because that’s a Republican bill, so presumably if the Democrats want to back it they can still get the Republicans on their side,” said Smith.

Brady told The Wall Street Journal Wednesday that Republicans may try to push through technical corrections to the Tax Cuts and Jobs Act and the retirement account provision from the Tax Reform 2.0 package during the lame-duck session, but not the 10 percent middle-class tax cut. "If Democrats are serious about governing and showing immediately that they want to make a positive difference, those bills I think could be very positive steps forward,” he said.

Smith believes there might be some pressure to get the technical correction incorporated to allow restaurants and retail stores to qualify for the 100 percent bonus depreciation provisions in the Tax Cuts and Jobs Act.

“For some of the issues, the one that jumps out is the qualified improvement property,” said Smith. “We’ve had at least four bills passed since the Tax Cuts and Jobs Act and they didn’t address it in any bill. You’ll see a frenzy of lobbying activity in the lame-duck session.”

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