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Republicans' Tax Overhaul Could Face Its Own Slings and Arrows

26 Mar 2017 12:38 pm
By Richard Rubin 

Bruised and beaten by an intraparty fight over health care, Republicans are heading for what they see as safer political ground: A major tax bill. But they might be heading right into another minefield.

In theory, rewriting the tax code could be easier than revamping the whole health-care industry. Republicans pride themselves on ideological unity in favor of lower tax rates. And the stakes appear lower for Americans -- paperwork and money are far different than matters of life and death.

"Tax reform is less visceral," said Rep. David Schweikert (R., Ariz.) "I can pull up a calculator and say 'it's this or this'...it's hard legislating to anecdotes and stories."

Treasury Secretary Steven Mnuchin said Friday that a tax bill would be "a lot simpler" than a health-care overhaul. "There is very, very strong support."

But scratch deeper, and the GOP quest for a full overhaul of the tax code is fraught with squabbles, procedural hurdles and difficult trade-offs. The party's failure on health care -- after having seven years to prepare -- shows how hard it is for Republicans to write complex legislation that attracts support from their moderate and conservative wings.

"It's just a reminder of how incredibly hard transformational legislation is," said John Gimigliano, a former GOP congressional tax aide now at KPMG LLP.

To succeed, Republicans need to bridge at least three big gaps.

First, they need to balance competing desires to cut tax rates sharply and to slow the rise of national debt. Republican leaders in Congress say they want a revenue-neutral plan -- one that brings in about as much money as today's tax system. Faster economic growth might help, but it doesn't fully bridge the divide. To accomplish revenue neutrality while sharply lowering rates, they will attempt to whack popular tax breaks, such as business deductions of interest on debt and individual state and local tax deductions. They will meet resistance from groups that want to protect those breaks.

Second, they have to reconcile alternate visions of what they are setting out to accomplish and who will benefit. Mr. Trump has said his priority is middle-class tax cuts for individuals. "Not the top 1%," said Mr. Mnuchin. House Speaker Paul Ryan (R., Wis.) and Ways and Means Chairman Kevin Brady (R., Texas) want an overhaul primarily focused on promoting economic growth, even if that means tax cuts that favor the very top of the income scale. The plans they all campaigned on are tilted to the top, according to independent analyses.

Third, the party is at odds over the Ryan-Brady plan for border adjustment -- taxing imports and exempting exports. The Trump administration has been ambivalent and sometimes critical of the idea. Senate Republicans are outright cold to it. Messrs. Ryan and Brady say it's crucial because it provides about $1 trillion to offset corporate-tax-rate cuts and it discourages companies from shifting profits abroad.

None of those divisions inside the GOP have been resolved yet, and dozens more are lurking, including debates over tax breaks for renewable energy, credits that aid low-income households, and the treatment of carried interest income for private-equity managers.

"The notion that tax is easier than health is not borne out by the facts, " said a Senate GOP aide. "Having discussed health care for seven years, Republicans were 75% in agreement on the policy. On tax, none of the foundational questions have been answered."

The big-picture tax debate -- higher taxes vs. lower -- breaks down along party lines, but little issues can quickly turn parochial. For example, Republicans from high tax states such as New York and New Jersey may be less willing to kill the state and local tax deduction than their counterparts from Texas and Florida, which lack income taxes.

"A million details come out of the woodwork that you never thought of," Mr. Gimigliano said.

Procedural challenges also loom. Democrats are unlikely to go along with deep tax cuts, so Republicans are likely to use rules that allow a party-line vote in the Senate. That means they can't increase deficits outside of the budget window, typically 10 years.

That constraint is why the 2001 and 2003 tax cuts under President George W. Bush were set to expire at the end of 2010. Eventually, many of the tax cuts were extended permanently, but not all of them. Democrats restored the estate tax and raised the Bush-era rates on high-income households.

A repeat of temporary cuts is possible, but potentially counterproductive, particularly if Republicans want to achieve a corporate-tax overhaul. Business owners want permanent policy so they can plan for the long-run. Without permanence, an overhaul might damp the boost to spending and investment that Republicans want.

Mr. Mnuchin said the administration will soon release its plan. Mr. Brady is aiming to push a bill out of his panel by the end of the spring.

So far, said Rep. Kenny Marchant (R., Texas), Ways and Means members have been reviewing concepts. He said he doesn't expect text of a tax bill for weeks and said he learned from the health-care bill's collapse about the dangers of an accelerated legislative process.

"Deadlines," he said, "are not helpful."

Write to Richard Rubin at richard.rubin@wsj.com
 

(END) Dow Jones Newswires

March 26, 2017 08:38 ET (12:38 GMT)

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