Why Republicans Can't Just Pivot to Tax Reform

The White House is promising swift action on the GOP’s next priority. But Congress must first pass a budget, and the details are once again dividing the party.

A close-up of Paul Ryan's face
Yuri Gripas / Reuters

Forget health care: Republicans are moving on to tax reform.

With last month’s collapse of their No. 1 legislative priority, the White House and GOP congressional leaders have made a nearly complete pivot to agenda item 1A—rewriting the nation’s tax code for the first time in more than 30 years.

This effort, they promise, will be different than health care. Why? The party is united around a broad set of principles, rank-and-file lawmakers are desperate for a legislative win, and congressional committees have spent years laying the groundwork for precisely this moment. Allied conservative groups have committed millions to ads promoting the effort, and President Trump will sell it to the country—something he did not do on health care. According to the grand plan, legislation will be introduced in the House in September, votes will be held in October and November, and Trump will triumphantly sign this once-in-a-generation reform into law by the end of the year. Easy peasy. “This is a pass/fail exercise, and we will pass tax reform,” Treasury Secretary Steven Mnuchin declared last week. “It’s going to get done this year.”

There are many reasons to be skeptical of these confident assertions, not the least of which is that the Trump administration made these exact same claims about repealing and replacing the Affordable Care Act six months ago. To name just a few hurdles: Tax policy is even more complicated than health care. The failure of an Obamacare repeal made tax reform more difficult both in terms of policy and politics. Congress will face even more pressing deadlines in September to fund the government and raise the debt ceiling. And Republican lawmakers are not nearly as unified around the details of taxes as their leaders would suggest.

But the biggest immediate obstacle in the way of quick action on tax reform is a fundamental one: Republicans have been unable to pass a budget for 2018, and without that, they can’t unlock the fast-track reconciliation process that would allow them to enact tax reform without Democratic votes in the Senate. It’s that same mechanism the GOP used to advance health-care legislation that would have passed the Senate last month with just one more Republican vote. Ordinarily, the annual budget is a non-binding document that sets spending levels for the government, which only take effect once Congress passes appropriations bills. But a budget is a prerequisite for the reconciliation process: It contains formal instructions for the tax-writing committees in the House and Senate to draft legislation.

Passing budgets used to be a point of pride for House Republicans. The party approved the fiscal blueprints written by then-Budget Committee Chairman Paul Ryan for four consecutive years beginning when the GOP assumed the House majority in 2011. Each of them called for steep reductions in domestic spending, tax reform, and an overhaul of Medicare and Medicaid. But in recent years, the divisions between moderates and conservatives that have plagued the GOP on so many issues have stymied the budget process as well. The House failed to pass a budget last year and only approved a shell of a resolution in January to set in motion the reconciliation process for health care.

This year, Republicans have been more united in their opposition to some of the deep discretionary spending cuts proposed by Trump than in agreeing to a fiscal vision of their own. Under the leadership of Chairwoman Diane Black of Tennessee, the House Budget Committee approved a budget on a party-line vote in mid-July, months later than usual. But it did not come to the floor before the House left for a five-week recess, and lawmakers and aides acknowledged it lacked the votes to pass. Unwilling to wait any longer, the House actually passed a package of appropriations bills covering defense and security spending despite the lack of action on the budget. “The only reason we need a budget now is reconciliation,” said Representative Jim Jordan of Ohio, a leader in the conservative House Freedom Caucus. Once it gets through the House, the budget would still have to go through the Senate, where Republicans have learned the hard way that their majority is quite fragile.

Black’s proposal calls for a spending level of $621.5 billion for defense in fiscal 2018 and $511 billion for non-defense programs. Like previous Republican proposals, it would eliminate the federal deficit in 10 years under the party’s projections. But rank-and-file lawmakers are divided over an extra $200 billion in cuts to mandatory spending accounts—which include Medicare, Medicaid, and food stamps—that would help accommodate the tax cuts Republicans want to enact. Moderates in the Tuesday Group protested the cuts on the grounds that regardless of the budget proposal, Republicans would ultimately need to strike a deal with Democrats in the Senate to fund the government for the next year. “Absent such a bipartisan, bicameral agreement, we are reticent to support any budget resolution on the House floor,” a group of 20 moderates wrote in a letter to the leadership in late June.

Conservatives in the House Freedom Caucus, meanwhile, want even deeper mandatory spending cuts and a commitment that they will go toward trimming back welfare programs. With moderates already balking, however, Republican leaders are unlikely to go much further. “That number is not changing,” a senior GOP aide told me. “The choice is not between $200 billion and $500 billion. It’s between $200 billion and zero.”

Another demand from the Freedom Caucus points to a bigger potential problem for Ryan and his lieutenants—a lingering mistrust between conservatives and the leadership that was exacerbated by the contentious debate over repealing Obamacare. They want to see the tax-reform proposal before voting for the budget that would allow it to move forward. “At a minimum, we’ve got to know more than we know now,” Jordan told me in a phone interview. “Once you open up the door, you can’t close it. So you’d kind of like to know what’s on the other side before you open it.

“We tried this with health-care reform,” he continued. “The plan that we thought we were going to do was not the plan that was undertaken, and look what's happened.”

“We just don’t want some surprise popping in there,” added Representative Dave Brat, a Virginia conservative.

Jordan and other conservatives scored a victory last month when Ryan agreed, in a joint statement with Senate and White House negotiators, to set aside his push for a border-adjustment tax that would help pay for cuts to the individual and corporate rates. But Jordan is worried that GOP leaders will propose other taxes as a means of offsetting rate cuts that they don’t believe are necessary.
“All we’re saying is: Show us the bill,” he said.

Right now, the bill doesn’t exist. Negotiators released only a five-paragraph statement of principles before the congressional recess and are working on writing legislative language this month. But while the White House wants the House to begin marking up a bill right after Labor Day, there is little expectation it’ll be ready that quickly, and leaders on the House Ways and Means Committee have notably set no timetable for finishing their work beyond saying it’ll get done this year. Another option for House leaders is to abandon the full budget altogether and do what they did on health care: pass a stripped-down “shell” budget that merely contains instructions for tax reform and sets aside other policy issues. “Everyone wants to get a real budget. We're not entertaining that option yet,” a senior GOP aide told me.

The irony is that among Republicans, conservatives are the most invested in the reconciliation process that they are, for the time being, holding up. GOP leaders could skip right to tax reform without a budget, but then they’d need 60 votes in the Senate and Democratic support. That would move the bill further to the left, meaning conservatives would not get nearly the level of tax cuts they want, and certainly no spending cuts. In the Senate, a vast majority of Democrats have told Trump and Republican leaders that, unlike on their drive to repeal Obamacare, they would be willing to collaborate on tax reform as long as the bill benefits the middle class more than the wealthy and does not add to the deficit. But Majority Leader Mitch McConnell quickly rejected their entreaty, saying Republicans would pursue the party-line reconciliation process instead. “I don’t think this is going to be 1986, when you had a bipartisan effort to scrub the code,” McConnell told reporters.

For moderates who blame the failure of health-care legislation on the GOP’s partisan approach, those words were already a worrisome sign. “I've always thought that going down the path of Republican-only type of tax reform, to me, is not the wisest course to take nor is it the best course to take for America,” Representative Tom Reed of New York said in an interview. “I’ve expressed that opinion. Obviously my opinion has not won out.”

An early endorser and ally of Trump, Reed said he’d nonetheless support the House budget despite his concerns both about the reconciliation process and its $200 billion in mandatory spending cuts. But he did not sound confident that his party’s next major legislative push would be any more successful than its last. “We have an eternal conflict within ourselves,” Reed told me. “I think that’s going to be very difficult to get done.”