House and Senate budget measures advance tax reform

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The House took a giant step on the path of tax reform Thursday by adopting a budget resolution for fiscal year 2018 by a 219 to 208 vote. The same day, the Senate Budget Committee advanced its own version by a 12-11 party-line vote.

“This puts wind in the sails of tax reform,” said Dean Zerbe, national managing director of alliantgroup and former senior counsel to the Senate Finance Committee.

“It is a critical piece to get through – It’s needed to set the table for reconciliation [the procedure used to pass bills in the Senate with a majority vote, not subject to filibuster]. Without reconciliation, there couldn’t be a tax reform bill.”

But members will have to adjust their hopes to accommodate reality, according to Zerbe.

“Already we’ve seen members start to posture,” he observed. “If they want ‘my way or the highway,’ they won’t get it done. My understanding is that members would like to get it completed this year. The Senate needs to get agreement on the resolution, and then work on the actual bill.”

“They achieved the buy-in of the more conservative members of Congress who were concerned about the debt. But it’s still a work in progress,” he said. “This is the undercard. The big show – an actual bill – comes next.”

“The House’s Oct. 5 passage of the budget resolution is an important step forward for tax reform, but the real test will come after the Senate approves its resolution and differences between the two are resolved,” said Carolyn Smith, counsel in Alston & Bird’s Legislative and Public Policy group.

“The House resolution calls for deficit neutral tax reform based on dynamic scoring,” she said. “The budget resolution approved Oct. 5 by the Senate Budget Committee takes a more dramatic approach, providing for tax cuts that add to the deficit by up to $1.5 trillion over 10 years -- also under dynamic scoring. At this point there appears to be some willingness on the part of House Republican fiscal conservatives to follow the Senate approach, assuming it does pass the Senate. Even with a budget resolution that allows for this type of increase to the deficit, there will still be a need for revenue raisers, and difficult decisions remain as to who will be the winners and losers in terms of revenue offsets.”

“A first test of how smoothly tax reform will go will be how the budget process plays out,” Smith said. “With the House having passed its resolution, if the Senate has difficulty passing a resolution or there is a delay in resolving difference between the House and the Senate, that will be an indication as to how hard it will be to agree on the details in tax reform. Delays will also push back the already tight time frame.”

“Given how close all of these votes are, it was a real accomplishment for Paul Ryan to get his caucus to vote for the resolution,” said Richard Levine, special counsel in Withers Bergman’s private client and tax team.

“There are two limiting factors which made it difficult to pass legislation this year,” Levine said. “One is the Senate filibuster. The other is the Hastert Rule [limiting floor votes in the House on bills not supported by a majority of the majority.] Ryan feels constrained in that he gets kicked out as Speaker 30 seconds after he puts a bill on the floor that passes with less than 217 Republican votes.”

“So it’s an accomplishment that he got 219 Republicans to pass the budget and start the budget reconciliation process,” Levine continued. “Now they can move on and try to get 50 senators on board.”

There are many issues that will have to be negotiated and compromised on, not the least of which is the deduction for state and local taxes, according to Levine. “Members from high-tax states such as California, New York and New Jersey will have to swallow hard to get rid of this,” he said.

“Now they will have to put pen to paper and come up with actual language,” he said. “It’s great theater, but it also has important consequences. For example, the mortgage interest deduction affects huge industries, state and local tax deductions affect migration patterns, and the municipal bond market is affected.”

“But even though we use sports metaphors and talk about winners and losers, let’s not trivialize it,” he said. “It’s serious policymaking, and affects trillions of dollars in spending and taxes.”

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