What's in store with tax reform

Now that the repeal of the Affordable Care Act is sidelined, tax reform is at the top of the agenda. Even before the Republicans’ American Health Care Act was yanked from a vote on the House floor, President Donald Trump said he wanted to tackle taxes first and now the coast is clear.

How to get there is another matter.

Both the Trump presidential campaign and the House Republicans have put many options on the table, so there’s no shortage of ideas. We’ll hit some of the highlights, but the process Republicans choose to pass tax reform will be as important as the substance.

The tax reform menu

During the campaign, Trump posted the outlines of a tax plan. On the household side, for couples making up to $50,000 it cut income tax rates to 0 percent. For those making up to $100,000, the rate would be 10 percent. Here’s the table from the campaign.

Income tax rate

Long term capital gains/dividends

Single filers

Married filers

Heads of household

0%

0%

$0 to $25,000

$0 to $50,000

$0 to $37,500

10%

0%

$25,001 to $50,000

$50,001 to $100,000

$37,501 to $75,000

20%

15%

$50,001 to $150,000

$100,001 to $300,000

$75,001 to $225,000

25%

20%

$150,001 and up

$300,001 and up

$225,001 and up

Trump would preserve deductions for home mortgage and charitable giving, but reduce other unspecified deductions for taxpayers in the 20 percent and 25 percent brackets.

On the corporate side, Trump’s plan would slash the top rate from 35 percent (which many companies do not pay thanks to deductions) to 15 percent. And he promised to reduce or eliminate "some corporate loopholes that cater to special interests."

Trump has voiced support for a tax on all imported goods, a so-called border tax. The idea has its supporters, but large retailers argue it would raise prices for the average consumer.

In the House, Ways and Means Committee Chairman Kevin Brady said his committee is moving forward on tax reform. In 2016, House Republicans published a plan entitled "A Better Way." They too offered lower tax rates for households, and larger standard deductions, and lower taxes on capital gains. In exchange, popular deductions for home mortgage interest (for new home buyers) and charitable giving would be reduced. Here’s the tax table based on the GOP plan (using 2017 tax brackets).

Income tax rate

Long term capital gains/dividends

Single filers

Married filers

Heads of household

0% to 12 %

6%

$0 to $37,950

$0 to $75,900

$0 to $50,800

25%

12%

$37,951 to $191,650

$75,901 to $233,350

$50,801 to $212,500

33%

16.5%

$191,651 and up

$233,351 and up

$212,500 and up

For corporations, the maximum rate would be dropped to 20 percent. Businesses would be able to deduct the full value of a capital investment, such as a building or a piece of machinery, all at once. They would face no tax on profits made overseas. Interest payments however would no longer be deductible. And, like Trump, the House plan includes a border tax and would "eliminate special-interest deductions and credits in favor of providing lower tax rates for all businesses and eliminating taxes on business investment."

Lessons from the health care defeat

The crash of the GOP health care bill left some budgetary wreckage on the highway, and Trump and the Republicans will have to navigate around it.

The main impact is that the American Health Care Act would have done away with two hefty taxes on affluent households -- worth nearly $300 billion over 10 years -- and a few on the health care industry, the largest amounting to about $145 billion over 10 years.

The House Republican blueprint assumed those taxes would be gone. Without the bill, those taxes remain.

"The Obamacare taxes stay with Obamacare," House Speaker Paul Ryan said at a news conference after the bill’s defeat. "We're going to fix the rest of the tax code."

Ryan and House Republican leadership told reporters on March 28 that they will continue to press to unwind the Affordable Care Act. Importantly, they would stick with the strategy of using budget reconciliation.

The reconciliation process limits what can and can’t be included in tax and spending legislation. The main advantage is it cuts off the option for Democrats to filibuster the bill in the Senate. Molly Reynolds, a governance studies fellow at the Brookings Institution, an academic center in Washington, said the health care defeat amply revealed the consequences of this approach.

"When a party chooses to use a party-line based reconciliation strategy, it must be prepared to actually deliver the votes," Reynolds said. "By choosing reconciliation, Republicans shifted the debate from a debate between the parties to a debate within their own party."

While Republicans always have the option to go after votes among Democrats, Ryan seemed to embrace the idea of Republicans moving ahead as a block, at least on health care.

"I don't want us to become a factionalized majority," he said on March 28. "I want us to become a unified majority, and that means we're going to sit down and talk things out until we get there."

If House Republicans apply that to tax reform, they will again face the challenge of winning support across their party. That will come on top of the daunting task of taking away special tax provisions that favor particular companies and entire industries.

Joe Rosenberg, a fellow at the Tax Policy Center, a joint project of the Brookings Institution and the Urban Institute, told us that typically, all tax cuts need to be matched with cuts in spending or eliminating tax loopholes in order for changes to be considered deficit neutral.

Finding those offsets inevitably leaves somebody unhappy.

As Rosenberg put it, "In tax reform, the easy part is the reduction in tax rates, and the hard part is everything else."

Nothing in federal budget law is simple. In fact, there are ways around the erstwhile need to keep a tax reform package deficit neutral.

Reconciliation and deficits

There’s a two-step process in Congress. First lawmakers pass a budget resolution that spells out the goals for the second step, a reconciliation bill. The resolution passed this January called for at least $2 billion in deficit reduction, a low bar the health care bill easily met. But in theory, a budget resolution for the coming fiscal year aimed at clearing the way for tax reform could allow deficits to rise. At least temporarily.

Edward Lorenzen is a long-time budget hand, now at the Committee for a Responsible Federal Budget, a group that favors deficit reduction. Lorenzen told us that legally, under reconciliation, deficits can’t be projected to rise beyond the 10-year mark that begins once a bill becomes law. Before that 10-year window is up however, the budget resolution could approve deficit increases.

"This leads to lots of tricks and games such as having tax cuts or spending expire before the 10th year -- like the Bush tax cuts (of 2001 and 2003) or having savings designed to grow rapidly at the end, which was the case with some Obamacare provisions like the Cadillac tax," Lorenzen said.

Some GOP lawmakers have indicated that they might be okay with a temporary hike in deficits if it helped pass comprehensive tax reform.

There’s no hard and fast timeline for passing a tax reform bill although key Republican leaders have talked about being done by August.

One last detail

Both Rosenberg and Lorenzen pushed back against a popular belief that the deficit reduction in the Republican health care bill -- about $150 billion -- would have given the GOP more flexibility in tax reform.

"That is wrong," Lorenzen said. "Under Senate rules, any net savings from a reconciliation bill must go to deficit reduction and cannot be used to offset subsequent legislation."

We looked. That’s what the law says.