How Far Will the Tax Ball Roll?

The House GOP is expected to unveil its tax reform bill Wednesday or Thursday this week, though that may slip a bit. It’s unknown when the Senate GOP releases theirs, though the general wisdom has been that it will come a week later, dependent upon how the Senate bill is viewed as helping or hurting efforts in the House. The House Ways and Means Committee is expected to markup the week of November 6, with the Senate to follow the week of November 13.

Before the House Ways and Means Committee marks up the measure, we will likely see a Chairman’s substitute, and then a leadership substitute from the Rules Committee prior to full House consideration. Those substitutions will incorporate the ongoing discussions that Ways and Means Chairman Kevin Brady (R-TX) and House GOP leadership are having with members of their committee and caucus, respectively.

There are substantial scoring issues and challenges in both chambers. For example, Finance Committee Republicans have reportedly only come to an agreement on $600 billion of their targeted $3.5 trillion in offsets. Members have yet to have conversations about integration or international tax implications.

This tax reform attempt is on perhaps one of the most ambitious schedules to date for such comprehensive legislation, especially considering the plan to go through the committee process. The only way Congress could be more ambitious is if they could clone the chief of staff for the Joint Committee on Taxation, because if he could be in two places at once, House Ways and Means and Senate Finance could markup legislation simultaneously!

We think that at some point, the wheels are going to start coming off. It’s relatively easy for congressional Republicans and industry to offer tacit support for tax reform, but as Senator Corker said a few weeks ago, “the spinach comes later,” and once it does, it’s not likely to taste all that good! Of course, this explains why Republican tax writers are holding a lot of the specifics close.

Ultimately, there are a couple of possible outcomes for tax reform. Either Congress gets tax reform done, more than likely on a straight party line vote, or congressional Republicans are forced to do something more along the lines of a tax cut:

1. Congressional Republicans pass tax reform on a party line vote. It is uncertain when passage might happen, though congressional Republicans in both chambers remain committed to letting this play out first, perhaps by the end of the year, or going into early 2018. As we’ve said above, tax reform done on a partisan basis is very difficult, and we don’t see many prospects for Democrats voting for it in its current form.

2. Congressional Republicans compromise on tax reform, settling for tax cuts instead, or they combine it with an infrastructure package in the hope of securing bipartisan support. Comprehensive tax reform on any timeline and even under the best bipartisan cooperation is difficult. If passage of a Republican tax reform package looks bleak, congressional Republicans may settle for a tax cut that retains the tax reform name, includes repatriation, and is retroactive to this year.

Another potential scenario, if perhaps less likely, is that President Trump may turn to Minority Leaders Pelosi and Schumer and suggest a bipartisan approach or the idea of combining tax reform with infrastructure. That may or may not happen, and if it does, it opens up a whole slew of other considerations. In addition to hammering out an agreement on both the tax and infrastructure components, Senate Democrats may not want to give their Republican counterparts a win, and so may drag out the debate, at least through the midterm elections. If they go that route, they’ll have to be careful, especially given the three conditions listed in their August tax reform principles letter. As a reminder, the letter, signed by the entire Senate Democratic caucus except Senators Manchin, Donnelly, and Heitkamp, lays out three main tenants any tax reform bill must include to garner Democratic support: 1.) tax reform should not benefit the wealthy or increase the tax burden on the middle class; it may not include tax cuts for the top one percent; 2.) tax reform must go through regular order rather than reconciliation; 3.) tax reform should be revenue neutral. In case you’re keeping count, so far, Democrats are one of three. Republicans are seen to be giving a little on the first tenant in order for them to message the bill as positive for the middle class. But, right now Republicans are going alone, and they’re going the opposite direction on the deficit!

The ball is likely to start rolling officially later this week. It remains to be seen just how far it rolls.