After months of meetings, the so-called Big Six are preparing to release some sort of summary of their work the weekend of the 23rd. The Ways & Means Republicans have a retreat that weekend, and Chairman Brady intends to use the time to sell the plan. The idea is to get the Committee R’s comfortable, and then move on to the broader membership and the public.
What’s in the plan? Recent conflicting accounts over rates suggests it’s still a moving target, but there are a few areas that seem firm.
For starters, we expect it will include a combination of specifics, options, and principles. Where specifics are lacking, it could be due to ongoing disagreements, but it also could be out of a desire to give the committees some flexibility to craft their own plans within a certain framework.
Moreover, since the demise of the border adjustment and the $1 trillion in revenues it provided, the overall size of the package should significantly smaller, which means top tax rates will be higher than what was in the House Blueprint and many other beneficial provisions could be pared back or excluded entirely (such as the AMT repeal and full expensing).
We expect the health care tax provisions targeted for repeal in health reform to remain outside tax reform. In other words, repeal of the device tax and investment surtax likely will have to wait for health care reform. There should be lots of pressure on the tax writers to reconsider this approach, but we expect that’s where they will start.
Finally, paring back expensing coupled with higher tax rates on business income suggests the growth potential of the plan will be significantly smaller than the Blueprint, which means less positive economic feedback, which means less revenue from the new dynamic scoring. It’s the opposite of a virtuous circle and in the end, key provisions in the Blueprint will have to be excised to make it all work.
Process: The process from here resembles a game of Jenga, where everything is connected and one false move brings the whole effort crashing down. That is because adoption of tax reform is contingent upon adoption of a budget resolution for FY 2018, but adoption of the budget resolution is contingent upon acceptance of the tax reform plan.
The latter is due to the fact that the House Freedom Caucus, representing a key voting bloc of about three dozen conservative (populist?) Republicans, has made clear they won’t support a budget until they are comfortable with the details of the tax plan it would enable. As Politico points out, it’s putting the cart before the horse, but in practice it means that the tax writers will have to release the details of their plan before the budget resolution can move forward.
So that’s what they are going to do at the end of the month. Will it work? Here are some of the obstacles they will face:
House v. Senate: While the Big Six includes both House and Senate negotiators, there is a strong chance the respective bills those bodies consider will be substantially different. Differences between the two stopped them from releasing details just prior to the August recess, and those differences could signal fewer specifics this time around too. In practice, both bodies will have to move their own bills anyway, so initial differences aren’t a deal killer. But after all these months of negotiation, it does suggest getting the two bodies together on a final package won’t be easy.
Message Discipline: The Administration continues to suffer from a remarkable lack of message discipline. Over the last week, Treasury Secretary Mnuchin has talked about one tax reform plan, while the President has talked about a plan that sounds completely different. How this resolves itself is anybody’s guess, but it does raise the possibility that the plan released by the Big Six at the end of the month may have one very prominent opponent.
Freedom Caucus Opposition: The Freedom Caucus, or at least their leader, Congressman Mark Meadows, has put together a list of priorities that are difficult if not impossible to meet. After leading the charge to kill the border adjustment and expensing, he has argued in recent weeks that tax reform should cut the corporate rate to 16 percent, among other things. That’s well outside where Congress can go on tax rates, and begs the question of whether the Freedom Caucus will ever be satisfied with a plan that could actually pass?
Revenue Raisers: To date, opposition has focused on big ticket items like the border adjustment and full expensing. But the demise of the border adjustment puts increased pressure on tax writers to include lots of revenue raisers in the plan, and all those raisers have constituencies that will fight for them. Are the benefits of the plan compelling enough to overcome this opposition? That’s a key question that will have to be answered.
So that’s the overview. Tax reform is by no means a done deal and as the above list of concerns makes clear, there are lots of hurdles to overcome. That said, the fact that Congress is preparing to transition from talking about tax reform to acting on it is a positive, and we look forward to seeing what they come up with.
Regarding S-Corp, we are focused on three things: 1) ensuring pass through businesses enjoy rate parity with C corporations; 2) making certain the international rules don’t penalize S corporations if the tax code transitions to territorial; and 3) making sure our modernization act is ready to be included in whatever tax bill is moving.
Expect to hear more from us on tax reform in the coming weeks. It’s crunch time.