Tax Reform UpdateJune 7, 2017
In recent weeks, Treasury Secretary Steven Mnuchin and White House National Economic Council Director Gary Cohn have been on Capitol Hill for meetings with Republican leaders and members of the House and Senate tax-writing committees to discuss tax reform. On May 17, they held meetings with Ways and Means Republicans and both Republican and Democratic members of Finance Committee. Administration officials have indicated that they will continue to meet with members of Congress and other tax reform stakeholders.
Meanwhile, House Ways and Means Chairman Kevin Brady (R-Texas) has begun holding a series of hearings on the House Republican Blueprint. The first hearing was held on May 18 and focused on the potential for tax reform to increase economic growth. The Ways and Means Committee hearing held on May 23 focused primarily on the Blueprint’s border adjustment tax proposal.
At the hearing on increasing U.S. competitiveness and preventing American jobs from moving overseas, Chairman Brady called for tax reform that would lower the corporate tax rate, encourage repatriation of foreign earnings, and end the “made in America” tax by adopting a border adjustment provision that would tax imports and exempt exports in a new destination-based cash flow business tax system.
Chairman Brady acknowledged that there were “legitimate” concerns about how consumers and retailers will be affected by the border adjustment proposal, and committed to move forward with the Blueprint in a thoughtful manner that would provide transition rules and other modifications to address concerns that have been raised.
Ranking Member Richard Neal (D-Mass.) called the border adjustment tax proposal “interesting” and expressed a willingness to consider “outside the box” ideas. At the same time, Rep. Neal said the border adjustment tax raises a number of important questions, including the impact on consumer prices, concerns about whether currency exchange rates would fully adjust to offset the tax, World Trade Organization (WTO) compliance issues, the potential for creating winners and losers, and the impact on small businesses. Democrats on the committee also repeated their insistence that comprehensive tax reform focus on providing help for middle-class families. While most of the Ways and Means Republicans expressed support for the border adjustment tax provision, a few indicated that they could not support the provision in its current form, and it is unlikely to pass in the Senate, in its current form, as well.
Across the Capitol complex, Senate Republicans have not yet released a tax reform proposal or detailed outline of their own but are now working with House leaders and the Trump administration to hammer out a single tax reform proposal that can be advanced through both chambers.
On May 15, Senate Majority Leader Mitch McConnell (R-Ky.) said that tax reform “will have to be revenue neutral,” noting that “we have a $21 trillion dollar debt and we added an enormous amount of debt during the Obama years.”
That position aligns with the blueprint that House Republican leaders released last June, which calls for tax reform that is revenue neutral under “dynamic scoring” rules, which take into account certain macroeconomic feedback effects of tax and spending legislation. But it could be at odds with President Trump, who recently suggested that he could accept a tax reform plan that adds to the deficit in the short term because the plan would pay for itself through increased economic growth.
The issue of revenue neutrality is critical since congressional Republicans intend to move tax reform under budget reconciliation rules, which allow legislation that meets certain strict budgetary and procedural requirements to be approved in both chambers with a simple majority vote, thus obviating the need to garner Democratic support. Republicans control only 52 seats in the Senate and would need to win over eight Democrats to clinch the 60 votes normally required to overcome procedural hurdles that arise when legislation moves through that chamber under regular order.
A lot still needs to be figured out on how best to approach tax reform and McConnell is reluctant to “put a strict timeline” on enacting tax reform, but has said that he certainly wants to complete it during this Congress. The 115th Congress expires at the end of 2018.
House Speaker Ryan and Ways and Means Chairman Brady, on the other hand, still hope to complete action on tax reform in 2017. In May, Brady acknowledged the challenges posed by the congressional calendar and the process of adopting a bicameral budget resolution for fiscal year 2018—a prerequisite for moving tax reform legislation under reconciliation—but maintained that congressional taxwriters and the administration’s tax team are going “full bore” on tax reform and are “laser focused.” Ryan likewise discounted the idea of tax reform slipping into next year, “our goal, and I believe we can meet this goal, is calendar 2017 for tax reform. And I think we’re making good progress.”
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