The White House is showing “softness” on ending a $1.3 trillion federal tax deduction filers get for their state and local taxes, Senator Bob Corker said Monday, warning that it raises questions about the GOP’s “intestinal fortitude” and could imperil a tax overhaul.
The framework that President Donald Trump and Republican leaders released Wednesday calls for deep rate cuts and would abolish existing tax breaks to help pay for them. Without such “pay-fors,” Congress might have to settle for only temporary tax cuts.
Corker, who insists he won’t vote for a tax bill that adds a penny to the deficit, said in an interview that he’s concerned about the early signals from the White House. On Friday—two days after the tax framework was rolled out—National Economic Council Director Gary Cohn said that ending the state and local tax break was negotiable.
“That’s the easiest one,” said Corker, a Tennessee Republican. “Some of the others are actually more offensive and produce lesser amounts of money.”
The budget rules that Senate leaders plan to use to pass the legislation require that any changes that boost the federal deficit would have to expire in time. But the nine-page framework released Wednesday provided few details on revenue raisers. It calls for eliminating deductions, but doesn’t specify them. By showing its willingness to negotiate on one such deduction, the White House appears to be charting a rocky path.
“As a general matter in tax reform you have to acknowledge that you cannot negotiate with everybody’s single pay-for,” said Doug Holtz-Eakin, who runs the American Action Forum, a conservative group that’s working with GOP leaders on taxes. “If you do that for everything, you don’t get tax reform.”
Ending the state and local deduction, which Trump’s aides proposed in April, faces resistance from Republican lawmakers in high-tax states like New York and New Jersey.
The same day Cohn commented on the state tax break, tax-writing chiefs Senator Orrin Hatch and Representative Kevin Brady dismissed a study that found ending personal exemptions, another one of the few offsets set forth, could raise taxes for some middle-class families. Their response: The committees haven’t made decisions about which tax breaks to end.
Asked if the state tax break and personal exemptions were negotiable, Brady reiterated Monday the bill is a work-in-progress. "We’re continuing to work on the final design of the tax reform plan that we’ll have ready after the budget is completed,” he said.
White House Budget Director Mick Mulvaney is signaling similar flexibility, saying on CNN Sunday that decisions about deductions remain up in the air as “the bill is not finished yet.” He took it a step further on Fox News Sunday, by adding that a tax plan that doesn’t add to the deficit won’t spur growth.
“I’ve been very candid about this. We need to have new deficits because of that. We need to have the growth,” Mulvaney said. “If we simply look at this as being deficit-neutral, you’re never going to get the type of tax reform and tax reductions that you need to get to sustain 3 percent economic growth.”
GOP leaders have been laying the groundwork to get tax legislation through the Senate without Democratic support. They need 50 votes to pass a bill, and hold 52 seats, leaving little margin for error.
$2 Trillion Cost
Republican leaders have insisted they want a permanent overhaul, similar to the scope of the changes enacted under President Ronald Reagan in 1986. “I want it to be the right kind of bill,” Hatch said. Asked what his biggest challenge would be in getting a tax bill across the finish line, the Utah Republican quipped, “fellow senators.”
In line with the White House, a growing number of GOP members, such as Senator Rand Paul of Kentucky and Representative Jim Jordan of Ohio, have said they prefer tax cuts that would stimulate growth, even if they add to the deficit.
Corker has said he’d consider the budget effect of economic growth that results from tax cuts as long as it’s based on reasonable modeling. Senator Mike Crapo, an Idaho Republican, told reporters Tuesday that he also wants a tax plan to be deficit neutral when it’s evaluated using a reasonable dynamic score. Unlike Corker, Crapo didn’t pledge to vote against a tax bill that would add to the deficit when it’s dynamically scored.
“This is going to make health care look like a simple thing to do,” Corker said, referring to a tax bill. The GOP has faced a months-long, wrenching fight to repeal the 2010 Affordable Care Act, which ultimately failed on the Senate floor.
“This bill when it comes out of the House and Senate will increase the deficit,” said Steve Bell, a former Senate Republican staff director. “That’s going to be a stumbling block for some people.”
Eliminating state and local deductions along with personal exemptions would generate about $2.9 trillion in revenue over a decade, according to an analysis by the Urban-Brookings Tax Policy Center. Even with those offsets, the framework is more than $2 trillion in the red, according to estimates by the TPC and Committee For a Responsible Federal Budget.
Despite the unified framework that enjoyed broadly positive reviews from within the party last week, the House and Senate are still likely to pass separate tax bills, according to Senator Pat Toomey, a Pennsylvania Republican. Then, they’ll have to be merged into one bill in a conference committee that can pass both chambers.
Congress has a Dec. 8 deadline to keep the government funded, which threatens to distract from the tax debate. With just 35 legislative working days left this year, some congressional Republican aides privately have said the issue could get pushed into 2018, an election year.
Trying to reconcile two bills could highlight the different agendas in each chamber. One example: House GOP leaders have pushed to allow companies to immediately write off their capital expenditures while eliminating the deductions they take when they pay interest on loans. Hatch has backed a corporate integration plan to revamp the business taxation system that would incentivize companies to pay dividends to investors.
The tax-writing committees in the two chambers may also disagree over whether to tax top earners at a rate above 35 percent—as they’ve been given the power to do under the framework—or how to follow through on the promise to provide the middle class with a tax cut.
Senator John Thune of South Dakota said Republicans are committed to maintaining a progressive tax code and the tax-writing panels will have to “ensure the people on the high end, as the president has said, aren’t getting a big tax cut.”
That won’t be easy. The framework includes tax breaks for some top earners by creating a new rate of 25 percent for pass-through businesses—down from 39.6 percent. It also repeals the Alternative Minimum Tax and estate tax, which hit high earners and the wealthy, respectively. The Tax Policy Center’s analysis last week found that about half the plan’s tax breaks would go to the highest earners. GOP lawmakers said the study was flawed because it presumed details that they haven’t yet decided to include in legislation.
‘Army of Lobbyists’
Paul, a Kentucky libertarian who’s never an easy vote to win over, has been critical of the tax plan. He posted a message on Twitter Monday saying: “This is a GOP tax plan? Possibly 30% of middle class gets a tax hike? I hope the final details are better than this.”
Thune said there have been discussions about having a “top-end surcharge” of more than 35 percent on the highest incomes to mitigate the high-end tax break. Hatch cast doubt on the prospect, saying he prefers to limit it to three brackets, but hinted that political pressure could motivate the White House to add a fourth one.
“If they get beaten up enough, they might want to,” Hatch said.
Across Washington, lobbyists of all stripes have been waiting for months to see tax details and keeping their powder dry until full details are revealed—suggesting that ready-made opposition awaits actual tax legislation.
The real estate industry opposes doubling the standard deduction, arguing that it would lead to fewer people itemizing deductions and therefore diminish the value of the mortgage interest deduction. Charities also oppose it, saying it lessens the use of the deduction for charitable giving. They’re also concerned about the prospect of ending the estate tax, which they argue drives millions of dollars in charitable contributions.
Corker warned that raising trillions of dollars to pay for the individual and business tax cuts will require making “very tough decisions” that’ll be made tougher “when the army of lobbyists roll in here” to protect their treasured carve-outs.
- With assistance from Erik Wasson