GOP Steams Ahead With Tax Overhaul

By Richard Rubin Features Dow Jones Newswires

Republicans are powering tax overhaul plans through Congress with remarkable speed, having departed town for a Thanksgiving recess after important victories in the Senate and House.

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In late October, they had no public bill text for their rewrite of business and individual taxes and were mired in messy debates about limiting tax benefits for 401(k) plans. Now they have a House vote with a comfortable margin, a Senate plan that moved through committee and fresh momentum to finish before Christmas.

Republicans' pedal-to-the-metal pace is driven in part by political necessity. They are looking for an economic policy victory after having failed to overturn the Affordable Care Act as previously promised. Primary election campaigns will crank up soon after the new year starts and midterm elections aren't far off. With this week's legislative wins they stand a chance to finish a tax rewrite before a new senator is seated from Alabama to succeed Luther Strange, who took the seat vacated by Attorney General Jeff Sessions.

There are still roadblocks, especially in the Senate, where concerns about business taxes, health care and deficits could slow them down or even derail the effort. They don't have 50 votes locked down yet. But close watchers of the legislation caution against underestimating Republicans' motivation to finish the tax bill very soon.

"There's a chance that it happens even more quickly than people think," said Rohit Kumar, a former Senate GOP aide now at PwC LLP.

To get this far, Republicans have been flexible, setting aside their ideal proposals in favor of what is doable. The Senate plan, in particular, pushed aside several planks of the framework that party leaders wrote in late September. Unlike the framework, the Senate plan has seven individual tax brackets instead of four, a 32% top rate on businesses that don't pay the corporate tax instead of 25% and a doubled estate tax exemption instead of full repeal.

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Republicans have benefited from their decision to move along the spectrum from "tax reform" toward "tax cuts" and create a net tax reduction of nearly $1.5 trillion. That cushion means that most households would get tax cuts, at least in the early years of the plan.

Even with that leeway, Republicans committed themselves to removing tax breaks and there are trillions of dollars of tax increases embedded in the bills. Some of those higher taxes are canceled out by the tax cuts, but the proposal still creates multitudes of winners and losers.

House members voted to raise taxes on 1 of every 12 households, a number that would rise to 1 in 5 by 2027. They voted to repeal or limit tax provisions that once seemed untouchable, like the deduction for medical expenses often used by nursing home residents, the capital-gains break for home sales, and the deduction for casualty and theft losses used by people whose homes are destroyed in fires and disasters.

The Senate proposal would repeal the individual mandate to have health insurance, set individual tax cuts to expire after 2025 and make a corporate tax rate cut permanent. Some of those decisions were driven by the budgetary procedures Republicans are using. As a result, in the Senate bill, there would be tax increases for all income groups below $75,000 in 2027, though Republicans say future Congresses would prevent that from happening.

To Democrats and their allies, the tax bill's speed is a maddening mess that is likely to lead to errors and unintended loopholes.

But they also see the GOP policies fitting more perfectly in their TV ads and sound bites than they had ever imagined.

"I never would have thought that they would do something so brazen and politically explosive as raising taxes on all individuals and undermining the health-care system to pay for corporate tax cuts," said Seth Hanlon, a senior fellow at the Center for American Progress, a Democratic-aligned policy group. "It's the most toxic, radioactive thing I can think of."

Democrats complain, accurately, that the specific language of the tax bills hasn't been vetted through public hearings or through outside tax lawyers spending months finding potential problems.

Republicans respond, also accurately, that they have held dozens of hearings about their ideas over the past few years.

Although these particular bills are moving quickly, Republican leaders have been preparing rank-and-file members for tax votes for years, said Sage Eastman, a former Ways and Means Committee aide.

"A lot of these politically tough provisions have been out there now for years," he said. "So we've gotten used to saying this is what it takes to get lower rates. Folks have been desensitized to the individual [pieces] and taught to look at it as a holistic document."

Republicans are, at least for now, moving more efficiently than they did on health care earlier this year, which saw several false starts and eventually fell apart.

"Repealing entitlements is something Republicans spend a lot of time talking about but they don't have a lot history doing," Mr. Kumar said. "This is more of their happy place."

The remaining trouble spots are clear in the Senate, where Republicans can lose only two votes if Democrats hold together in opposition, as seems likely.

Sen. Ron Johnson (R., Wis.) says he opposes the current bill because it does too little for pass through businesses such as limited liability companies and partnerships. He says he wants to work toward a solution. Sens. Susan Collins (R., Maine) and Lisa Murkowski (R., Alaska) have sounded wary about including the individual mandate repeal, which is projected to increase health insurance premiums.

Sens. Jeff Flake (R., Ariz) and Bob Corker (R., Tenn.) have expressed concerns about the budget deficits caused by the tax bill.

Republican senators said late Thursday as the Finance Committee finished its work that they were continuing to address pass-through business issues.

"We still have quite a bit of work to do," said Sen. John Cornyn (R., Texas), the second-ranking Republican in the Senate.

Lawmakers left Washington and won't be back until Nov. 27. Expect a sprint to the finish that will last for roughly four weeks.

"This could all still crumble and come to nothing. But even the most hardened tax reform skeptic at this point has to acknowledge that this could happen," said John Gimigliano of KPMG LLP. "They really want to pass something."

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

(END) Dow Jones Newswires

November 17, 2017 17:46 ET (22:46 GMT)