The GOP Tax Plan: Tough Choices With Limited Room to Maneuver

By Richard Rubin and Siobhan Hughes Features Dow Jones Newswires

Republicans face a daunting challenge as their tax plan comes into sharper focus: They are trying to fit more than $5 trillion of tax cuts inside a $1.5 trillion box.

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This week's planned release of a unified GOP blueprint from the Senate, the House and the Trump administration marks the beginning of a race to a tax overhaul that will likely take months to complete. The plan will call for driving down the corporate tax rate into the low 20% range, from 35%, according to a person familiar with the discussions. It will also likely include a doubling of the standard deduction that would benefit many individual filers, lower individual rates, fewer tax brackets and sharply reduced rates for "pass-through" business owners who pay tax on business income through their individual returns.

The tax rates laid out in the plan will present achievable guideposts that could shift as tax bills move through the House Ways and Means Committee and Senate Finance Committee, the person said.

Republicans also have said they want to eliminate the estate tax, repeal the alternative minimum tax, expand write-offs for business investments and reduce taxes on U.S. corporate foreign profits.

In all, the Republicans' wish list will likely add up to more than $5 trillion worth of tax cuts over a decade, estimates Kyle Pomerleau of the Tax Foundation. Getting it into a budget blueprint that allows for just $1.5 trillion in cuts over 10 years could require paring back ambitions for rate cuts and curtailing long-cherished breaks. It could also mean resisting calls to use the bill to repeal a whole other set of taxes created as part of the 2010 Affordable Care Act.

"To fit every policy you want, you need a full-size SUV, but at best you have a midsize crossover," said Sage Eastman, a former Ways and Means GOP aide. "Some stuff just isn't going to fit, no matter how much cramming you do."

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That $1.5 trillion benchmark came from an agreement reached by Sens. Bob Corker (R., Tenn.) and Pat Toomey (R., Pa.) in the Budget Committee that would be locked into the budget resolution governing the tax debate. A budget resolution, which hasn't yet been adopted, is necessary because it lets Republicans pass a subsequent tax bill on a simple-majority vote in the Senate without Democratic support, using a procedure known as reconciliation.

Under this agreement, the $1.5 trillion would be the maximum tax cut over the next decade. Mr. Corker, who has expressed concern about budget deficits, said in an interview that he agreed to the compromise because it gave the Trump administration room for its agenda while forcing Congress to make difficult decisions about taking away tax preferences.

"Giving them some headroom to make this work, to me, was an important thing to do," said Mr. Corker. He has come under criticism for abandoning a revenue-neutral tax policy, which wouldn't expand budget deficits at all, that Senate Majority Leader Mitch McConnell (R., Ky.) and others repeatedly backed this year.

Mr. Corker said how he will vote on the ultimate tax bill will depend on assessments on the economic growth it is likely to produce and whether that growth is enough to keep budget deficits from rising.

The compromise "kept enough pressure on Congress to do things like doing totally away with state and local deductions," Mr. Corker said. "I care deeply about deficits, and at the end of the day, this cannot produce deficits."

The $1.5 trillion in budget plans doesn't include an assumption that tax cuts will spur faster growth. Even if Republicans assume tax changes will help stoke growth, they will still face tough decisions about eliminating popular tax breaks to pay for the cuts, Mr. Corker said.

One such tax break is the individual deduction for state and local taxes, especially important to high-income residents of high-tax states such as New York and New Jersey. Getting rid of this deduction could face resistance from House Republicans representing these states.

The party will also likely look at limits on the ability of businesses to deduct interest costs, which could face resistance from real-estate and finance firms. Other deductions and credits are on the chopping block, too, such as breaks for renewable energy.

Most breaks don't amount to much in a tax plan in the scale of trillions of dollars, meaning many different deductions and credits need to be targeted to have much of an impact. Conceding one small tax break to one constituency might lead to demands for concessions to others.

Republicans have other options, including phasing in some rate cuts to minimize the 10-year cost, Mr. Pomerleau said.

"There is probably an endless number of...things you could do to get a plan to fit within a budget number," he said.

Write to Richard Rubin at richard.rubin@wsj.com and Siobhan Hughes at siobhan.hughes@wsj.com

(END) Dow Jones Newswires

September 26, 2017 05:44 ET (09:44 GMT)