As Trump Renews Tax Debate, GOP Lawmakers Weigh What to Do

By Richard Rubin Features Dow Jones Newswires

President Donald Trump dives back into the tax debate on Wednesday with a Missouri speech aimed at emphasizing the need for major changes as Republicans try to figure out what they want to do and how to proceed.

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When Congress returns from its August recess next week, lawmakers will have a long list of non-tax items to resolve that will occupy their time and attention for weeks, from the federal debt limit to hurricane relief efforts. In the background, they will set the parameters for the tax debate with the goal of racking up a major legislative victory before year's end.

The summer collapse of health care legislation puts even more pressure on Republican tax writers to give lawmakers something to campaign on in 2018.

Although Republicans generally agree on lower tax rates, they're not sure yet how low they can go, what breaks would go away and whether their plan would reduce government revenue or be "revenue neutral." Mr. Trump himself sometimes talks about "tax reform" -- which typically means a combination of cuts in rates, the elimination of breaks and creation of new revenue raisers -- and other times mentions "tax cuts," meaning just a reduction in rates.

The "reform" that Republicans have talked about for years is much tougher politically than tax cuts because it would require crossing some business interests and eliminating deductions that some Republicans would prefer to keep. Tax cuts, meanwhile, would be constrained by Senate rules that limit the ability of Republicans to increase budget deficits and by lawmakers' appetite for fiscal conservatism.

The resulting bill may end up looking more like a tax cut, said David McIntosh, president of the Club for Growth, an advocacy group that backs lower taxes.

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"There's a real consensus among Republicans that they need to get a tax cut bill through," Mr. McIntosh said. "A positive for the tax cuts is the donor base is very strongly in favor of it. That will help leadership get the votes it needs in the House and the Senate."

Treasury Secretary Steven Mnuchin and White House economic policy chief Gary Cohn have met for months with congressional leaders and released a bare-bones framework in July that ditched the House GOP's border-adjustment plan for taxing imports and exports, which would have raised revenues to help pay for deep cuts in corporate tax rates. Going forward, the administration is ceding many of the details to Congress and having the president make the public case for whatever plan emerges.

For now, Republican lawmakers are pursuing a revamp of the corporate and individual tax systems. It may take months before they determine whether the arithmetic and politics of a revenue-neutral tax bill -- raising some taxes and lowering others -- can work before deciding whether to switch to a tax cut bill.

"They'll have a really strategic decision to make at some point in November," said John Gimigliano of KPMG LLP, a former GOP aide at the House Ways and Means Committee. "We could continue to try this and we may not succeed at all and get nothing this year. Or we can shift from tax reform to tax relief and do what we can."

Most Democrats reject the GOP framework for tax policy, saying it tilts too heavily toward high-income households and corporations.

Republicans will be constrained by Senate rules that limit their ability to pass a tax bill without Democratic votes. To do so they would first have to agree on a budget. And then, to pass a bill with a straight majority, the resulting tax bill can't increase long-run budget deficits.

They have a few ways to get around that.

First, they could assume that they don't have to offset the cost of extending tax breaks that have lapsed or are scheduled to expire. Under the typical approach Congress uses to analyze budgets, the revenue that would be generated when those breaks lapse is part of baseline projections. By starting instead with the assumption that those breaks continue indefinitely, Republicans would lock in roughly $450 billion in tax cuts over a decade because they either wouldn't count the cost of extending the breaks or they could replace them with other tax cuts.

Democrats and budget hawks call this a loophole at odds with Congress's decision in 2015 to set tax break expiration dates.

Second, Republicans could assume tax cuts can partially pay for themselves by creating faster economic growth. This so-called "dynamic scoring" will be limited by the nonpartisan Joint Committee on Taxation's estimates for the effects of tax cuts on growth.

Third, they could take a page from the GOP's 2001 and 2003 tax-cut playbook and make some or all of the tax cuts temporary. That would create tax cuts within the 10-year budget window without adding to deficits beyond that point. Businesses want a permanent tax cut to give them long-run certainty for investment decisions. Mr. Mnuchin has said that permanent is better than temporary, but that temporary is better than nothing.

If Republicans do opt for a tax cut, their budget will set its maximum size. Because Republicans have just 52 votes in the Senate, they can lose just two of their own members on a budget vote.

That means the third-most deficit-conscious member of the Senate GOP could set the outer limits for the tax cut. That person's identity and the size of the Republican tax-cut appetite isn't clear now.

"The later it gets in the year," says GOP tax lobbyist Rick Grafmeyer, "maybe the more flexible people get."

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

August 29, 2017 15:22 ET (19:22 GMT)