It has become a cliche for conservatives to invoke Ronald Reagan’s signature 1986 tax legislation when proposing their own overhaul of the tax code. Reagan’s outlined his proposals in the 1984 State of the Union address before sending a formal plan to Congress a year later, where it went through a lengthy debate process. Even liberals like Ted Kennedy, swayed by the promise of closing tax code loopholes, supported the measure.
This time around, as Republicans seek to implement their own landmark tax legislation, the process has been neither as smooth nor as steady. Instead, legislators seek to pass their plan through the reconciliation process, which allows certain bills concerning taxes, spending, and the debt to be passed through a simple majority vote with limited amendments. The framework for reconciliation directives must be outlined in a budget resolution, which G.O.P. lawmakers passed in the US Senate on October 19th and the House of Representatives on October 26th. This budget set in motion reconciliation for both the new tax initiative and mass reductions in social spending. Together, these policies will have sweeping implications for Americans who depend on government services and tax incentives to level the playing field, as well as the politicians seeking to enact these reforms.
For conservatives, the stakes are high to push through an overhaul of the tax code. Despite having a unified government, the G.O.P. has been unable to pass any of the landmark legislation they’ve campaigned on for years, such as a repeal of the Affordable Care Act. Under the Obama Administration, conservatives were able to blame legislative failure on opposition from the executive branch. Now, the pressure is on for party leaders staring down the 2018 midterm campaign season.
“Republicans are facing the very real prospect of having to go back to their constituents without having accomplished anything on their agenda even though they have unified control of government,” Rebecca Sinderbrand, former political editor at The Washington Post, told The Politic.
Senator Lindsay Graham told The New York Times that failure to pass tax law now, “will be the end of us as a party.” This pressure could mean that even an unpopular proposal may gain support from legislators who decide the benefits of being able to say something has been accomplished outweigh the costs of the policy itself.
The House budget resolution passed on October 5th sought to enact “deficit-neutral” tax reform, meaning tax reductions would need to be balanced by spending cutbacks to prevent an increase in the deficit. However, the pressure to get a budget on the books led the House to approve the Senate budget on October 26th, which does not require the tax code to maintain deficit levels. This contradicts months of promises by G.O.P. lawmakers that any tax reform would not increase the deficit.
The most recent House bill would issue sweeping tax cuts for corporations and more modest reductions for middle-class Americans which would leave a $1.5 trillion-sized hole in government revenue over the next ten years. This latest plan would reduce the corporate tax rate from 35 percent to 20 percent amounting to about $1 trillion in savings (two-thirds of the total). Additionally, the proposal would reduce the number of tax brackets from seven to three, set at 12, 25, and 35 percent. Middle-class families would see their standard deduction nearly doubled, up from $12,700 to $24,000. In order to make up the cost of the bill, House Republicans have discussed ending tax breaks for medical expenses, moving expenses, and student loan interest among others. The bill likewise seeks to limit access to the child tax credit by requiring a Social Security number, rather than just a taxpayer identification number. Analysis by the Center on Budget and Policy Priorities found that this move will render three million children ineligible for the credit. Notably, families with immigrant parents will be affected most directly.
Moreover, the revamped tax code would lower the tax rate for “pass-through” businesses, which see their profits and losses pass through directly to owners. These comprise 95% of businesses in the US and already benefit from rates below the standard corporate tax, as they are taxed based on the company owners’ tax returns through the individual income tax. Pass-throughs are thus exempt from paying the additional tax on C corporations. Such firms would see an income tax cap of only 25%, a reduction from the current 39.6%. The rationale behind this reduction is that it would encourage investment and hiring and thus enable higher economic growth. However, the lack of clear distinction between “business income” and “labor income” for those who work in pass-through corporations creates an incentive for high-income individuals to structure income as pass-through firm rather than as a wage in order to qualify for the lower tax rate.
Additionally, while it’s clear that the plan seeks to benefit corporations, not all companies will receive the same degree of support. Small business owners have voiced complaints that the bill doesn’t do enough to relieve their tax burden. Already, only 13% of companies pay more than the 25% rate. Thus, the companies most likely to benefit from the tax decrease are those that were previously paying higher rates as a result of their size and income level.
Further, the G.O.P. plan would double the estate tax exemption, eventually phasing out the estate tax entirely over the next six years. Those subject to the estate tax are only the heirs of the wealthiest 2 out of every 1,000 estates. Analysis by the Center on Budget and Policy Priorities found that repeal of the estate tax would deliver $3 million windfalls to each of the top 0.2 percent of estates.
Budget constraints that mandate new tax legislation not increase the deficit by more than $1.5 trillion have forced conservatives to make amendments to their initial wish list of cuts which further call into question their ability to deliver benefits to middle-class Americans. Changes made to the bill on Friday, November 3rd establish the use of a “chained CPI” measure of inflation, which tends to grow more slowly than the unchained metric, to determine future updates to tax parameters. Analysis by the nonpartisan Joint Committee on Taxation found that this move would reduce a number of tax cuts for individuals by $81 billion over the next decade. The new bill retains the measures intended to benefit corporations and estates.
Where cuts have been made, the middle class will bear the brunt of the changes. The JCT confirmed that under the new bill, beneficiaries of the individual tax cut will receive only 16 percent of the total fiscal impact. Indeed, Richard Kogan, a Senior Fellow at the Center on Budget and Policy Priorities, told The Politic that, “Broadly speaking, Republican tax policy suggests that they think the problem is that rich people are too poor and poor people are too rich.”
The Chopping Block
The programs placed on the chopping block by the new budget speak to the electoral priorities of the G.O.P. The new budget calls for $5.8 trillion in program cuts over the next ten years, including $1.8-trillion from Medicaid, Medicare, and other healthcare entitlements. Non-defense discretionary (NDD) programs, which include job training and education, public health, and scientific research would also see significant downsizing, to the tune of $800 billion. Still, these reductions would only reduce the existing deficit and wouldn’t cover lost revenue from the new tax plan.
Despite significant decreases in social spending, the House budget would increase defense spending by $90 billion. On Wednesday, October 18th, Senator Ted Cruz defended increases in military spending in a CNN debate against Senator Bernie Sanders over the G.O.P. tax plan, arguing that, “Democrats want to cut the military, Republicans want to defend our nation.”
In past years, the fear that voters are more likely to notice downsizing of the services they rely on than a deficit increase has prevented major decreases. Now, however, the voting populations most affected by these programs or most likely to support these programs may not be part of the G.O.P. coalition. As a result, in a conversation regarding the original House budget proposal, Sinderbrand told The Politic, “You could see dramatic cuts…you would see the budget reflecting the priorities of the Republican party to an extent we haven’t seen before.” The resolutions tax cut provisions also create a pretext of economic necessity for reductions in social services.
Further, the electoral incentives to support cutbacks depend largely on the voting demographics in a given district. The majority of conservatives are running in safe red districts where they most have to worry about a primary challenge from the right. For lawmakers in swing districts, however, who may have to worry about a competitive Democratic challenger come 2018, supporting reductions in spending could threaten their electoral prospects. The party of the President may have learned its lesson from the overwhelmingly negative response from voters to efforts to repeal the Affordable Care Act. Some, like Representative Barbara Comstock, opposed the House budget proposal, explaining in a press release that she believes “we cannot balance the federal budget on the backs of our federal workforce.” Representative Comstock faces nine Democratic challengers for 2018 in what’s considered to be a swing district.
These political incentives may result in a final budget with no teeth, allowing conservatives to preach cuts without practicing them. Because budget resolutions are non-binding, individual committees may fail to fulfill their obligations to downsize, especially if they fear the electoral backlash. This is especially true for entitlements headed by Senate committees, which must be automatically funded to meet their demand. If the committees charged with reducing spending on entitlements do not restructure their projects, there is no real enforcement mechanism to stop them. The only way to hold committees accountable for their appropriations is for a Senator to raise a point of order blocking the appropriation, which can’t be done if there is no new appropriation bill, to begin with.
A Bumpy Road Ahead
The October 26th vote on the House budget resolution fell mostly along party lines, with twenty Republicans voting against the resolution. The lack of consensus among conservatives on this issue reflects deeper fissions in the party which have continually obstructed the passage of landmark conservative legislation. Some representatives from high-tax states like New York and New Jersey, like Representative John Faso, opposed the budget’s measure to forward a tax plan that caps deductions on state and local taxes. In a press release, Representative Faso explained that could not “vote in support of a resolution that singled out for elimination the ability of New York families to deduct state and local taxes. Others like Representative Matt Gaetz couldn’t get behind a measure that doesn’t balance the budget. This party division may continue to plague the G.O.P. as they attempt to reach consensus between the House tax bill and the Senate version, which was unveiled on November 9th. Republicans hope to have a tax bill on President Trump’s desk by Christmas.
The normal budgeting process has also been largely obstructed by the unusually adversarial relationship between the White House and the Legislature. “What counts as a win for the White House on a host of issues is often substantively different from what counts as a win for the Hill,” Sinderbrand told The Politic. On tax reform, the White House and the Legislature have similar objectives in that they both “would like to pass something called tax reform,” said Sinderbrand. Yet while the new proposal would reduce government revenue by about $1.5 trillion over ten years, the Trump administration’s tax plan seems to add up to about $6 trillion.
President Trump’s lack of experience in government raises additional concerns about his ability to build consensus, a role the President would normally play in helping to pass key legislation for their party. One doesn’t exactly need to build consensus for a corporate policy the way you do for federal law. Successful implementation of this budget, and whether tax reform is passed under its framework, will require a level of cooperation between two legislative bodies, the White House, and divergent interests within the Republican party, the likes of which have yet to be demonstrated by this Congress.