Analysis: How consensus for corporate rate cut turned into partisan tax brawl

Tax Reform Dow Jones Newswires

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Both candidates in the 2012 presidential election ran on a corporate tax cut.

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Five years later, a unified Republican government made that a reality, and a bipartisan idea has turned into a deeply partisan brawl.

President Donald Trump signed the 21% corporate tax rate into law Friday and Democrats are talking about which pieces of the bill they will keep and which they will toss aside should they assume power.

If there are problems with the law, Republicans are unlikely to have willing partners in Democrats to fix it, in the same way Republicans have stood against making many repairs to the Affordable Care Act.

The political backdrop to the tax overhaul is a warning sign. The new tax system encoded by Republicans is fragile. There are many challenges on the horizon that are likely to warrant changing the law -- expiring provisions, tax competition from other countries, the risk of revenue shortfalls, the potential for flaws in the law itself that might be gamed by households or businesses.

As has been the case with the ACA, addressing them won't be easy.

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"It's like training for a marathon. And you finally run a marathon," said Jon Traub, a former Republican staff director at the House Ways and Means Committee who is now a managing principal at Deloitte LLP. "You can't go back the next day and run another marathon."

The new law was designed, at least partly, with that idea in mind. Rep. Kevin Brady (R., Texas), one of its chief authors, talked frequently about the rate cut to 21% from 35% as a "leapfrog," a way to get ahead of moves by other countries, in recognition that the U.S. system can move slowly.

But less than two hours after the bill was formally enrolled by congressional leaders on Thursday, Mr. Brady said the U.S. isn't necessarily done jumping.

"For our foreign competitors, I want to make it really clear, we are not going to fall behind like we have as a country. We're not waiting another 31 years," he said, referring to other countries' rate cuts since the previous U.S. reduction in 1986. "So we'll do what it takes to compete and give our workers and businesses a fighting chance around the world."

Mr. Brady has also talked about technical corrections, especially in international tax rules, as companies get familiar with the new system. He mentioned changes to retirement savings and education tax policies as possible areas for bipartisanship.

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His Senate counterpart, Orrin Hatch (R., Utah), on Wednesday proposed extending a long list of tax provisions that expired at the end of 2016, an issue that lawmakers had hoped to address in the broader bill they just finished.

Republicans could try again to use the legislative process that let them pass this year's tax law with a simple majority, but that is far from certain at this point. Anything else will require 60 votes in the Senate, and that means Democrats. The minority, sensing electoral opportunity in the bill's low poll numbers, isn't ready to engage.

"This bill is so bad that it's very hard to fix in small little tweaks," said Senate Minority Leader Chuck Schumer (D., N.Y.). "We'll see what they propose."

Democrats seem unlikely to roll back the increased child tax credit, larger standard deduction or lower tax rates in low- and middle-income brackets. But other provisions are in play. Rep. Richard Neal (D., Mass.) would become Ways and Means chairman if Democrats retake the House in 2018. The first two items on his list were pushing the top individual tax rate back from 37% to 39.6% and reversing the doubled exemption for the estate tax.

Asked whether Democrats would help plug revenue holes if the new GOP law spurs more tax avoidance than expected, Mr. Neal demurred.

"We have to wait and see after there is an acknowledgment on their side that it didn't work," he said.

The path to the corporate tax cut is instructive in just how hard it might be to replicate anything like it.

For a long time, Republicans and Democrats agreed that U.S. corporate tax rates were too high, encouraged tax avoidance and made the U.S. uncompetitive globally.

In 2005, President George W. Bush's tax overhaul commission proposed setting the rate as low as 30%. Then Rep. Charles Rangel (D., N.Y.) offered a 30.5% rate in his 2007 "mother of all tax reforms." Sen. John McCain (R., Ariz.) included a rate cut in his presidential campaign in 2008.

When Republicans took the House in 2010, then-Rep. Dave Camp (R., Mich.) took up the charge for a 25% rate, joined by a coalition of companies that sensed an opportunity.

"There was some point in the late 2000s where everybody started to realize that the United States was just behind the rest of the world. We were sticking out like a sore thumb," said Rachelle Bernstein, tax counsel at the National Retail Federation. "It's a dozen years that we've sort of been in the wilderness of getting to this point."

President Barack Obama joined in 2012, seeking a 28% rate. His rival that year, Mitt Romney, pushed for 25%. At times, a deal looked possible, whether between Mr. Obama and then-House Speaker John Boehner or between Mr. Camp and then- Sen. Max Baucus (D., Mont.).

In the end, the only way to move forward was to look inside the Republican Party itself.

Beyond the worsened Washington gridlock, the corporate rate cut took a long time because Republicans had trouble deciding what to package with it. Removing business tax breaks would erode support. Leaving out pass-through businesses -- partnerships, S corporations, sole proprietorships -- would fracture the GOP. Ignoring individual taxes would make the idea politically treacherous.

Something had to give and that was the stated Republican commitment to reducing budget deficits. When they agreed to allow adding $1.5 trillion to deficits over the next decade, the door opened to drive the corporate rate all the way down to 21% without some of the other painful trade-offs they had considered.

There were still last-minute efforts this month to get a bipartisan deal, after Mr. Trump signaled that the 20% corporate tax rate he had insisted on might go to 22% in the final version.

Sen. Bob Corker (R., Tenn.) said he told Mr. Trump and his advisers that an agreement with Democrats was possible to create a more durable bill, a legacy for the president that wouldn't be ripe for immediate reversal. Mr. Corker said he pushed for the president to meet with 10 to 12 Senate Democrats to see what was possible. It didn't happen because a process was in train that Republican leaders didn't want to derail.

"Their concern was: They had the votes," Mr. Corker said in an interview this week. "If they brought in Democrats and began adjusting anything, it could cause the Republican side of this to fall apart."

--Siobhan Hughes contributed to this article.

(END) Dow Jones Newswires

December 22, 2017 11:38 ET (16:38 GMT)

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