Ryan's tax plan may get familiar foes: GOP's conservative caucus

(Bloomberg) Far-right Republicans who helped block House Speaker Paul Ryan’s goal of replacing Obamacare may also be in position to imperil his dreams of a comprehensive rewrite of the tax code.

Ryan wants to recast the individual and corporate tax code permanently, which would require paying for tax-rate cuts with controversial long-term revenue-raisers so they don’t add to the deficit. One primary offset in Ryan’s plan is a border-adjusted tax that would raise more than $1 trillion over a decade by replacing the 35 percent corporate income tax with a 20 percent levy on companies’ domestic sales and imported goods. Exports would be exempted.

House Speaker Paul Ryan

Two leaders of the most conservative faction of Ryan’s party—Mark Meadows and Jim Jordan—have signaled that they don’t think it’s essential to keep the tax plan revenue-neutral. Their group—the House Freedom Caucus—could create a mathematical hurdle for Ryan by failing to support his plan. While Ryan can afford to lose about 20 Republicans without Democratic support, the Freedom Caucus’s roughly three-dozen members tend to stick together.

“I don’t think the party’s going to have the stomach or the fortitude to bring about revenue-neutral reform,” said William Gale, a senior fellow at the nonpartisan Brookings Institution and fiscal policy expert, citing divisions within the party and the need to take on powerful constituencies in a big tax overhaul. “The party seems very fractured after health-care reform.”

Temporary Cuts

If Ryan can’t unite his conference, one fallback plan would be to enact temporary tax cuts that would indeed add to the deficit—but they would also have to be set to expire after a decade, under Senate budget procedures. Republicans pursued that path under former President George W. Bush’s administration by cutting various taxes, only to have Democrats force some of them to expire in 2010.

Ryan has described the Republican-led White House and Congress as a once-in-a-generation opportunity to radically simplify the tax code. His insistence on a permanent overhaul was echoed on Monday by Representative Kevin Brady of Texas, chairman of the tax-writing Ways and Means Committee, and an ally of the Speaker.

“If we’re serious about leapfrogging America back to the lead of the pack, and if we’re serious about creating jobs and jump-starting this economy, a 10-year bill will not accomplish either of those. The most pro-growth tax reform is permanent tax reform, so we’re operating—I’m operating on that basis,” Brady said. “Permanence is a critical part of that.”

Representative Chris Collins, a New York Republican, said his biggest concern was that tax changes would end up becoming temporary because they added to the deficit.

“I want to make them permanent. But if my choice became, 10-year temporary or nothing? I’ll take 10-year temporary,” Collins said Monday. “It will be difficult to make this revenue-neutral. Our conference may have to have that discussion.”

Economic Boost

The House Freedom Caucus has reshaped the political landscape in its mere two years of existence. Formed in January 2015 by members of the conservative Republican Study Committee who thought the conservative caucus wasn’t pure enough, it helped bring about the fall of former Speaker John Boehner eight months later. Its members have repeatedly proven influential by withholding votes for pieces of legislation deemed too compromising, even at the cost of embarrassing their own party and—in the case of the Obamacare replacement bill—a Republican president.

Meadows, the Freedom Caucus chairman who led the charge that scuttled Ryan’s Obamacare replacement bill, said Sunday he doesn’t believe tax cuts need to be revenue neutral, which is necessary to avoid the 60-vote threshold in the Senate, where Republicans have 52 votes. The House plan is unlikely to have any Democratic support.

"Does it have to be fully offset? My personal response is no," the North Carolina Republican said Sunday on ABC’s "This Week."

"I think there has been a lot of flexibility in terms of some of my contacts and conservatives in terms of not making it totally offset. And that’s a move that we’re trying to do to provide real relief and economic growth," Meadows said, arguing that tax cuts will boost the economy and incomes.

Government Losing?

Jordan, a co-founder of the Freedom Caucus, has also called into question the revenue-neutral premise of a tax overhaul.

“That’s if you assume government needs all this money," he said in an interview last month. "I just never start from the premise that it’s got to be—I don’t view cutting taxes as the government losing money. I view it as allowing families to keep more of their money.”

Ryan alluded to the hard-right opposition to the health-care bill during a press conference Friday after the vote was canceled.

“Ultimately, this all kind of comes down to a choice. Are all of us willing to give a little to get something done?" Ryan said. "Are we willing to say yes to the good, the very good, even if it’s not the perfect?"

Smaller, Slower Overhaul

President Donald Trump was more direct, criticizing the Freedom Caucus in a Tweet on Sunday—“Democrats are smiling in D.C. that the Freedom Caucus, with the help of Club For Growth and Heritage, have saved Planned Parenthood & Ocare!”

It’s unclear if Ryan has buy-in from the president when it comes to balancing tax cuts with new revenue. During a press conference Monday, White House Press Secretary Sean Spicer said Trump’s tax plan would be focused on job creation and economic growth, rather than just making sure it’s revenue neutral. When asked about whether a tax overhaul could potentially add to the deficit, he said, “It’s a really early question.”

Ryan has already struggled to garner support among House conservatives for the border-adjustments provision in his plan. Brady has met with the group, which has expressed skepticism but still hasn’t taken an official position on the concept.

Ultimately, Republicans will probably have to give up their dream of revenue-neutral tax reform, said Steve Bell, a former Senate Republican budget aide who’s now a senior adviser at the Bipartisan Policy Center.

“It will be a very big blow,” Bell said. “It’s going to be smaller than people anticipated,” he said, referring to the scope of a tax overhaul. “And it’s going to be slower than people anticipated.”

Bloomberg News
Tax reform Corporate taxes Tax Paul Ryan Kevin Brady Donald Trump
MORE FROM ACCOUNTING TODAY