“If there’s anything that unifies Republicans, it’s tax reform,” Senate Majority Leader Mitch McConnell assured reporters on Tuesday who were wondering if President Trump’s latest feud with a GOP senator would threaten his top legislative priority.
McConnell is undeniably correct. Tax reform, even more than repealing and replacing Obamacare, is the GOP lodestar. But the reason Republicans haven’t unveiled a tax bill, much less held a vote on one, is that they haven’t figured out how to pay for their ambitious economic plan. And on that score, the president isn’t making their jobs any easier.
Like a game of whack-a-mole, Trump has taken a mallet to one GOP proposal after another for offsetting the expensive cost of reducing taxes for corporations and average American households alike. He jettisoned House Speaker Paul Ryan’s pitch for a border-adjustment tax, or BAT, that would have raised about $1 trillion over a decade. He’s wavered on the GOP’s plan to scrap the state-and-local-tax deduction after facing blowback from allies in the states that would be hit hardest by the $1.2 trillion provision. And with a single tweet on Monday, Trump popped the latest Republican trial balloon, which would have capped tax-free contributions to 401(k)-retirement accounts so that the federal government could collect more revenue up front.
In each case, the president was probably playing good politics, as none of these proposals would be broadly popular. The BAT would have hit retailers who might have passed the cost onto consumers with higher prices. Millions of Americans in states like New York, New Jersey, Illinois, and California benefit from deducting their high local taxes off their federal bill. And tens of millions more take advantage of 401(k) plans, which allow employees to accrue investment earnings that won’t be taxed for decades to come.
Then again, there’s probably not a single lucrative tax increase that would poll well among the nation’s vast middle class except for those that target only the wealthy or Wall Street. And that’s the essential challenge Republicans are facing as they write their tax bill: Do they want to enact comprehensive tax reform, or do they simply want to cut people’s taxes?
There have been plenty of indications over the last few months that Trump and Republican leaders in Congress would have different answers to that question. For years, Ryan and his allies in the House have talked up the idea of a “once-in-a-generation” reform that would simplify the code, cut rates both for businesses and individuals, and pay for it by eliminating exemptions, deductions, and other loopholes that taxpayers use to their advantage. Implicit in that goal is the need to make difficult political choices; every loophole is someone’s prized and essential tax break, with a team of highly-paid lobbyists fighting to keep it. “We will not wait for a path free of obstacles because it does not exist,” Ryan said in a speech in June. “And we will not cast about for quick fixes and half-measures.”
Trump, however, doesn’t talk nearly as much about tax reform as he does about tax cuts—specifically, the “biggest tax cuts ever in the history of this country.” While he’s embraced the idea that Republicans can simplify the code so that people can file their taxes on a postcard, he rarely talks about the tradeoffs that’ll be required to make it happen—except when he’s ruling them out.
Again, from a purely political perspective, this makes sense. Voters probably care less about reform than if they’re going to pass less money to the government, and by how much. And if there’s a through-line in the president’s advocacy, it’s that he’s trying to keep Republicans focused on helping middle-income earners more than the wealthier constituents that have traditionally benefitted from GOP tax proposals. Trump has reportedly persuaded congressional Republicans to keep the current 39.6 percent tax bracket for millionaires, a move that could blunt Democratic attacks that the plan is skewed in favor of the rich.
But Republicans in Congress need the president to be a salesman not just for the popular parts of the tax plan but for the unpopular parts as well, said William Gale, co-director of the Urban-Brookings Tax Policy Center and a former White House senior economist under President George H.W. Bush. “What the president can do is essentially provide air cover for Congress,” Gale said on Tuesday. “President Trump seems to be doing the opposite of that. Instead of providing air cover, he’s dropping bombs.”
Republicans on Capitol Hill have noticed. Appearing on “CBS This Morning,” Senator Bob Corker said the president should “stay out of taking things off the table and really negotiating against the process before it even begins.” Corker’s brushback was part of comments that reignited his feud with Trump, but the Tennessean is a critical vote on tax reform and has warned that he will not vote for a final bill that he believes will add to the deficit.
The GOP has set constraints for itself through the budget that the House will try to pass this week. It allows Republicans to cut $1.5 trillion in taxes over the next decade while averting a Democratic filibuster in the Senate, but under the budget rules the bill will not be able to add to the deficit in the years after that. That could force the GOP to make some or all of their tax cuts temporary if they can’t agree on provisions to offset the revenue loss. An analysis by the Tax Policy Center of the party’s initial framework found that the tax plan could add $2.4 trillion to the deficit over the next 10 years. “They have to cram a $2.4 trillion peg into a $1.5 trillion hole,” Gale said.
There are additional revenue-increasing measures Republicans could still consider that the president hasn’t yet ruled out. They are likely to limit the ability of businesses to deduct interest payments from their federal taxes, which the Tax Policy Center did not include in their study. They are also negotiating a compromise on the state-and-local-deduction that would raise some revenue, if not the $1.2 trillion that a full repeal might have recovered. And Trump’s insistence on a fourth tax bracket for the wealthy would limit the revenue loss of their tax cuts. “It’s possible all we see at the end of the day is a temporary tax cut,” said Scott Greenberg, a senior policy analyst at the nonpartisan Tax Foundation. “But it’s clear a number of Republicans are still looking for something more than that.”
It’s up for debate whether Trump’s interjections on tax policy will ultimately harm the party or save Republicans from politically dangerous choices they would later come to regret. But the more fundamental question is whether Trump actually shares the party’s desire for a bold and comprehensive tax overhaul, as opposed to a quicker and easier tax cut. If he does, the president may have to start helping Republicans make the case for some tax tradeoffs, instead of just nipping them in the bud.
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