An Ambitious Schedule for Tax Reform

It has been over thirty years since the last major reform of the federal tax code, and congressional Republicans believe the time has come to push a tax package across the finish line. It’s going to be a big week for tax reform. On perhaps one of the most ambitious schedules to date for such comprehensive legislation, the House is likely to pass its tax bill, H.R. 1, later this week, while the Senate Finance Committee marks up its language at the same time. It remains to be seen whether congressional Republicans can notch a win on taxes. While the NDAA, nominations, and the looming expiration of the Continuing Resolution (CR) will also garner attention between now and the middle of next month, significant time and effort will be spent on hammering out a tax agreement.

Schedules and Procedures

The House Ways and Means Committee marked up its tax reform bill last week. While a final manager’s amendment was adopted at the committee level, we know there will be another opportunity to amend the bill via the manager’s amendment that will be considered by the Rules Committee, which will meet on tax reform this Wednesday. Today, the House is doing a last scrub of its bill for “Byrd issues,” also known as a “Byrd bath.” For example, we know that some language related to a tax treaty must be removed due to the Byrd rule. A whip count is expected when members are back in town later today. We understand the full House will take up the NDAA tomorrow, leaving tax reform for floor consideration later this week. The House is likely to pass its tax reform bill on Thursday, and probably without any additional amendments. Once the House passes its bill, the House-passed bill will be placed on the Senate calendar.

In the Senate, the Finance Committee is planning to markup its tax reform bill starting today. The Senate Finance Committee will release a “modified chairman’s mark” tomorrow, likely to include Republican consensus amendments and other changes to the original measure. Senators filed an initial 355 amendments over the weekend. As a reminder, the Finance Committee does a conceptual markup, rather than a markup of actual legislative text. Chairman Hatch will face the difficult task of producing a bill that is not only aimed at getting out of committee, but also thinking about how to get to 50 votes in the full Senate. For example, we know that Senator Corker is key, as his support for the tax reform bill is predicated upon the bill adding no more than $1.5 trillion to the deficit. Furthermore, Senator Collins has conditioned her support on maintaining the upper income tax bracket and some estate tax.

The Finance Committee markup will start with opening statements, or as some like to call them, “opening insults.” Committee staff is expected to walk through the Chairman’s mark beginning tomorrow morning. This is expected to take several hours. Beginning on Wednesday and concluding by week’s end, the Finance Committee will consider amendments, primarily Democratic, but also potentially a handful from Republicans who want to offer and withdraw amendments to make a show of something not included in Sen. Hatch’s mark. The chamber will prepare for the bill to be on the Senate floor the week after Thanksgiving, perhaps as early as Monday, November 27th. Once its markup is completed, Senate Finance will send its reconciliation bills to the Budget Committee, where Chairman Enzi is expected to combine the Energy Committee’s ANWR legislation with the Finance Committee’s tax package. As far as floor action is concerned, Majority Leader McConnell will call up the House-passed bill and then use the Budget Committee bill as a substitute amendment.

A conference committee on tax reform is still believed to be more likely than not. However, it remains possible that we could see a scenario similar to what we saw with the FY18 budget resolution, where there is a curative amendment that would make the Senate-passed tax reform legislation acceptable to the House, though this is simpler to do for the budget than it is for tax reform. Regardless, we’re hearing a very ambitious target date for a conference report by December 12th, scheduled to coincide with the AL special election. Many believe that the current situation in AL, where Roy Moore is facing controversy surrounding reported sexual misconduct, makes it all the more important to get tax reform entirely through the Senate before the winner of the special election arrives in DC. Normally, a defeated conference report is a death knell, but it’s less troublesome under reconciliation.  In this case, if there is a conference report and for whatever reason it is defeated on the floor, the rules for reconciliation would allow the bill to go back into conference and reach the floor again under expedited consideration.

Additional Insights

Even though the House is moving quickly and the Senate is planning to follow suit, a lot of analysis is still underway. For example, one tax staffer to a senior Finance Committee Republican indicated on Friday he had received calls from private sector companies expressing their support for the House bill, who then called back on Monday to reverse their position.

Staff continue to see the big challenge as whether or not the GOP will be able to talk about tax reform helping the middle class. Another challenge is the pressure to make the 20% corporate tax rate permanent. If the corporate rate were to jump back up to 35% after ten years and many deductions were eliminated, we would likely see an effective tax rate of 35% drive a spike in inversions and a “fudging” of corporate books on profit. We understand the Senate is still trying to address these “out year issues.” Furthermore, the Senate bill is viewed as more of an “economic stimulus” bill than the House bill. For example, the Senate bill would delay the cut in the corporate tax rate by one year, but full expensing would kick in right away.

Finally, Senate Republicans have proposed fully repealing State and Local Taxes (SALT), because they need the revenue. There are no Republican senators in the states that would be most impacted by a SALT repeal – IL, CA, MA, NY. There is a view that the full SALT repeal in the Senate language weakened the House Republican’s ask. As a result, the House bill included a $10,000 property tax deduction, as House members impacted by a SALT repeal were willing to settle for less rather than pushing for bigger asks. SALT is likely to remain a significant sticking point in the Senate and potentially between the chambers.