When Republicans in the House and Senate unveiled their tax bills to great fanfare over the last two weeks, they glossed over a small but critical detail: Neither of them, as written, can pass Congress with GOP votes alone.
Both proposals are over-budget, analysts say, and would require significant revisions to abide by Senate procedural rules. Republicans likely will adjust their plan by making some of the biggest tax cuts expire in the next decade, a change that limits the legislation’s potential for economic growth and would force lawmakers to confront potential tax increases years in the future.
To circumvent a Democratic filibuster in the Senate, Republicans are following the same budget reconciliation rules they used when they tried to repeal the Affordable Care Act earlier this year with a simple, 51-vote majority. Under parameters set by the congressional budget resolution adopted last month, the tax bill can add up to $1.5 trillion to the deficit in the first decade after its enactment, but it cannot add anything to the deficit in the years following that. The rule is named for the late Senator Robert Byrd of West Virginia, the long-serving Democrat known for his parliamentary expertise.
The proposal House Republicans approved in the Ways and Means Committee last week meets the first test but not the second: Steep cuts to the corporate and individual tax rates would cost more money than the government would bring in through the elimination of popular deductions and exemptions, even when accounting for economic growth.
The Senate “has an even bigger problem,” said Ed Lorenzen, a senior adviser for the Committee for a Responsible Federal Budget. The bill released on Thursday differs from the House proposal in a number of respects. While it completely eliminates the deduction for state and local taxes, it maintains the mortgage interest tax deduction and a few other expensive tax breaks. The Senate bill also reduces the income tax rate paid by the wealthiest earners, while the House bill does not. “The Senate bill on a permanent ongoing basis has a much larger cost, a much larger deficit than the House bill,” Lorenzen told me.
Both House and Senate tax-writers have treated the budget rule compliance as fine print to be filled in later. “We’re confident that the committee’s tax overhaul proposal will comply with the Byrd rule and other budget rules before it goes to the Senate floor,” said Julia Lawless, a spokeswoman for the Senate Finance Committee.
But the changes to come could significantly curtail legislation that Republicans have touted as the most far-reaching tax rewrite since 1986, making it far closer in scope to the temporary tax cuts that President George W. Bush enacted in the first years of his presidency. The centerpiece of the GOP plan is a drop in the corporate tax rate from 35 percent to 20 percent, which right now would be permanent. But Republicans might have to cut it off after a decade or less, a move that would anger businesses who say it would undercut their economic benefits. Conservatives have already objected to the Senate’s plan to delay the corporate rate cut by a year to make the math in its bill work.
The alternative to sunsetting the business tax cuts would be to cut off provisions aimed at individuals, such as the doubling of the standard deduction, a reduction in income tax rates, or the increase in the child tax credit. But that would be a political gift to Democrats, who have accused House Republicans of setting up a tax hike for middle-class families by adding a $300 family credit and then letting it expire in 2022. (Republicans have responded by insisting that no future Congress would let that tax actually increase and would act to extend it instead.)
And because Republicans won’t be able to let the revenue-raising provisions expire—such as the elimination of the state-and-local-tax deduction—the final bill is likely to look like much more of a tax increase for some people than it does now. “Whatever they decide to sunset is going to make people unhappy and be an unpopular decision and generate a lot of blowback,” Lorenzen said. “That is a tough choice they may not want to reveal until the end.”
Under the Senate voting process, provisions that violate the Byrd rule would be subject to a point of order, meaning they would need 60 votes to stay in the bill. While a few Senate Democrats remain in play for Republicans, they are nowhere close to the eight they’d need to meet that threshold. Republicans could try to structure the tax bill in such a way that Democrats would be forced to vote down its most popular middle-class benefits, but even that would be a long shot.
GOP leaders are struggling to win over 50 of their 52 members as it is. On Thursday, Senator Jeff Flake of Arizona raised concerns about the bill’s impact on the debt, and he and other Republicans might also be leery of “gimmicks” like setting certain tax cuts to expire.
The search for more revenue has led conservatives, with an assist from President Trump, to push for Republican leaders to repeal Obamacare’s individual insurance mandate as part of the tax bill. That would generate $338 billion over 10 years, according to a new estimate from the Congressional Budget Office, although it still wouldn’t be enough to solve either bill’s math problem, Lorenzen said. “Repealing the individual mandate really would be a drop in the bucket for the problem they have,” he said. “There’s really no easy way to get around the Byrd rule without having significant parts of the bill sunset.”
The good news for Republicans is unlike in their health-care push earlier this year, conservative activists recognize the Senate’s complex budget constraints and are largely holding their fire. “Permanence in tax rates is better. At the same time, they’ve got to keep the momentum moving for tax reform,” said Tim Phillips, president of Americans for Prosperity, the conservative advocacy group backed by the Koch brothers. “There are very few red lines for anyone at this point.”
With Republicans reeling from election losses and carrying a record devoid of major legislative wins, the political imperative of enacting some sort of tax cut in time for the 2018 campaign season is taking priority over policy purity. “After the epic fail on health care, if they follow that with an epic fail on tax reform, their odds of holding Congress drop dramatically,” Phillips told me, “and I think they know that.”
For conservative activists and lawmakers alike, that urgency means cheering a tax bill knowing full well that for it to have any chance of passing, it’s eventually going to shrink.