Tax Reform: A Primer or Another False Start?

July 21, 2017 - (4 min read)

While summer in Washington, D.C., is a time typically marked by six weeks of Congressional recess, the talk of tax reform is heating up in the nation’s capital. With the release of the anticipated House budget blueprint, titled “Building A Better America,” it seems legislators are ready to turn their attention from healthcare to tax reform. Coupled with the Senate and House conducting hearings on consecutive days, many are wondering if 2017 will be the year tax reform finally happens. But under budget reconciliation rules and failed healthcare bills, others are questioning the viability of a real tax reform plan.

Budget reconciliation is a parliamentary term describing a legislative process that allows tax, spending and debt limit adjustments to pass with a simple majority, avoiding minority filibuster in the Senate. This tactic can be used once per fiscal year, with FY2017 focused on the repeal of the Affordable Care Act (ACA) and FY2018 on tax reform. The FY2018 budget, released this week, instructs the committees of jurisdiction to draft tax language and find $200 billion in offsets with a focus on entitlement programs over the next decade. The budget also relies on the assumption that the House-passed American Heath Care Act becomes law, which looks increasingly unlikely.

The tactic of budget reconciliation is also running into friendly fire in both chambers of Congress.

On the House side, Freedom Caucus members, led by Congressman Mark Meadows (R-NC), are calling for deeper cuts, while moderate Republicans are warning that the cuts may already be too large.

In the Senate, any reconciliation bill from the House may be dead on arrival. Despite efforts by Senate Majority Leader Mitch McConnell (R-KY), the body is at a standstill with healthcare. Without passage of a health bill, tax reform will start in a major fiscal hole, as $1 trillion saved from the ACA repeal was expected to cushion deficit margins.

While Capitol Hill works out its differences, details have started to trickle out from 1600 Pennsylvania Avenue — a sign that the Trump Administration is ready to pivot to find a win in tax reform.

This week, the White House announced that, in August, they plan to release a blueprint for a comprehensive overhaul. Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohen have been working with Congressional leadership to find a plan that the majority can unite behind. While most details are not public, these high-level discussions have yet to dive into policy specifics.

The Senate Finance and House Ways and Means committees appear to be on a similar trajectory as the administration. Both committees held preliminary hearings this week, but both lacked specificity and policy details. Last week, Senate Finance Chairman Orrin Hatch (R-UT) requested comments from stakeholders, which the National League of Cities (NLC) responded to with information on the importance of the tax-exempt status of municipal bonds and the state and local tax deduction (SALT). While these topics were mentioned in the hearing, Senators gave little insight into direction.

Both chambers are still working through internal battles over whether or not the measure needs to be revenue-neutral — in other words, not contribute to the national deficit. Some members of Congress believe tax reform will spur economic growth that would allow tax cuts to be offset by the gains.

House Speaker Paul Ryan’s Border Adjustment Tax (BAT), a tax on imports, is as the center of this contentious battle. The BAT would provide the needed money to make tax reform revenue-neutral, allowing for the cuts to be permanent under reconciliation rules. If the BAT continues to die slowly, all itemized deductions may find their way onto the chopping block. The National League of Cities (NLC) has been proactive in taking measures to ensure Congress is well-equipped to defend local taxing authority, particularly the SALT deduction and the tax-exempt status of municipal bonds.

NLC stands ready to continue the fight to protect local interests in tax reform by simplifying the tax code — both business and personal — and creating a fairer system that empowers cities to continue driving the nation’s economy. While the outcomes and the direction of discussion on tax reform are still unknown, we know one thing: this is the start to what is sure to be a long, contentious process.

Photo: White House National Economic Council Director Gary Cohn (left) and Treasury Secretary Steve Mnuchin leave the offices of Speaker of the House Paul Ryan (R-WI) at the U.S. Capitol on May 17, 2017 in Washington, DC. Cohn and Mnuchin met with Ryan and other Congressional Republicans to talk about President Donald Trump’s tax reform plan. (Chip Somodevilla/Getty Images)

About the author: Brett Bolton is the principal associate for Federal Advocacy (Finance, Administration and Intergovernmental Affairs) at NLC.