In June 2001, George W. Bush signed into law a measure that would become a central part of his economic legacy: a $1.3 trillion package of tax cuts that reduced income rates across the board. The legislation fulfilled a key Bush campaign promise to return about one-third of the nation’s budget surplus back to the voters, but it came with a timer attached: To comply with Senate procedural rules and secure enough support to pass, Republicans made the tax cuts temporary, set to expire after 10 years.
This June, a new Republican president is trying to make good on a similar pledge to slash taxes, and he’s running up against the same political and procedural hurdles as Bush did. But Donald Trump has, in House Speaker Paul Ryan, a considerably more ambitious legislative partner. Ryan voted for and championed the Bush tax cuts. But his goal now is not merely cutting taxes (although that remains central to his goal). He wants instead to revamp the tax code entirely, reducing rates for individuals and businesses while also eliminating many of the deductions and exemptions that make filing taxes such a complex and often expensive undertaking. Most crucially, Ryan has no interest in a temporary tax cut.
In a speech on Tuesday, the speaker delivered a warning to conservatives—including those in the White House—who would sacrifice a lasting overhaul of the tax code for the fleeting economic jolt, and the easier legislative victory, that a quick fix might bring. “These reforms, these tax cuts—they need to be permanent,” Ryan told a meeting of the National Association of Manufacturers. “Every expert agrees that temporary reforms will only have a negligible impact on wages and economic growth. Businesses need to have confidence that we won’t pull the rug out from under them. They need the certainty from permanent tax cuts to hire more workers, invest in their businesses, and plan for the future.”
Ryan’s aides billed the address as his first major speech on tax reform, an attempt by the Republican lawmaker to reinvigorate an effort that appeared to be flagging amid divisions within the party. But aside from Ryan’s aspirational vow to finish legislation by the end of the year, his 20-minute talk offered few new details. He made no direct mention of the biggest bone of contention: the House GOP’s proposal to use a tax on imports known as border adjustment to raise $1 trillion in revenue to offset the cost of rate cuts. And while Ryan said Republicans would preserve popular tax exemptions for homeowners, charitable giving, and retirement savings, he did not delve into the many loopholes lawmakers might seek to eliminate, such as those protecting employer-provided health insurance and allowing individuals to deduct state and local taxes from their federal bill.
What he did do on Tuesday was try to head off a shift toward a more limited tax plan that would short-circuit his long-running push for broad-based reform. As Ryan often jokes, the last time Congress truly overhauled the tax code, in 1986, was the year the 47-year-old Wisconsinite got his driver’s license. Along with reforming entitlement programs, no issue is more important to the speaker, who is the former chairman of the tax-writing House Ways and Means Committee.
While the principles Trump’s advisers unveiled last month align with Ryan’s vision in the abstract—lower rates, fewer income brackets, a simpler overall code—the president is desperate for a legislative win and loathe to wage the much more difficult battle to raise the revenue necessary to offset a steep fiscal cost. Conservative groups and a number of Republicans in the Senate are already running an aggressive campaign to kill Ryan’s preferred border-adjustment tax on the grounds that it would result in higher retail prices for consumers. Without that tax, however, Republicans would have to find $1 trillion somewhere else to pay for reducing rates.
Simply cutting taxes would be easier. Yes, it would add trillions to the deficit, but Republicans have long argued—despite evidence to the contrary—that the economic growth generated by cutting taxes ultimately leads to increased revenue. As Treasury Secretary Steven Mnuchin said last month: “The tax plan will pay for itself with economic growth.”
The problem with a straight tax cut is the Senate. As with health care, Republicans plan to use the budget reconciliation process to expedite tax reform and ensure that it does not succumb to a Democratic filibuster. But to pass with a simple majority of 51 votes, the bill must not add to the deficit after 10 years. Therefore, Republicans must either find enough additional revenue to offset the tax cuts or, as they did under Bush in 2001, set them to expire after a decade. Led by Senate Finance Committee Chairman Orrin Hatch, some Republicans are pushing to change the rules so that the budget window extends 20 or even 30 years, so that tax cuts could last longer without being offset.
Just because tax cuts are temporary doesn’t mean they go away. Despite campaigning against the Bush tax cuts for years, Democrats under President Barack Obama extended them for two years in 2010 and then, in a bipartisan deal with Republicans, made nearly all of them permanent in 2012 except for an increase on income above $400,000 a year. But businesses that are lobbying for tax reform prize certainty, and as Ryan noted, Republicans worry that companies won’t make major, long-term investments or expansion plans if they believe their taxes will go up again after a decade.
Conceptually, top Trump administration officials agree with Ryan. They want permanent, comprehensive tax reform. But they want a bill, and a win, more than anything. Speaking to the same convention shortly before Ryan, Vice President Mike Pence also made a pitch for tax legislation. But he didn’t demand permanence, and he didn’t emphasize overall tax reform. “We’re going to pass the largest tax cut since the days of Ronald Reagan, and we’re going to do it this year,” Pence vowed. It’s a subtle distinction—cuts versus reform. But like the bitter divide over border adjustment, it’s a fault line in the looming tax debate that Republicans have yet to close.
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