Making changes to American tax policy has the potential to be the big achievement of 2017 for President Trump and Republicans in Congress.
In theory, tax reform could be much easier to accomplish than reforming health care: The Republicans could put forward a tax plan (as the party has successfully passed in the past) that cuts taxes for tens of millions of people across economic brackets and ignores whatever implications that might have for the deficit. That might get some level of pushback from budget hawks, but unlike the Obamacare repeal effort, it would have no obvious mass constituency of angry people worried that something was going to be taken away from them. And Republicans tend to be in more agreement among themselves on tax policy (lower is better), which could defuse some of the internal divisions that made health care so difficult for them.
But nothing has been easy for Trump and the Republicans in Congress this year. And the early signs are that the Republicans running Washington, who debuted an outline of their tax policy Wednesday, are taking many of the same steps that plagued their health care efforts.
1. Cutting a lot of taxes on the very wealthy while cutting some benefits for people less rich
Many of the early versions of the GOP’s Obamacare repeal bills included rollbacks of taxes put in the original Affordable Care Act, almost all targeting the most wealthy Americans. The result was headlines saying Republicans were cutting Medicaid while at the same time reducing taxes for the rich.
The new GOP tax plan, while including income tax cuts for millions of middle-class Americans, also calls for cutting estate taxes (which primarily affect those with significant wealth to pass on), reducing the top individual tax rate from just under 40 percent to 35 percent and cutting the rate for certain kinds of smaller businesses.
I don’t think a broad-based tax cut that also benefits wealthy taxpayers is a huge political problem. But Republicans are floating the idea of finding ways to increase taxes, too, in order to reduce the amount that this proposal raises the budget deficit.
The idea that party leaders seem to have have landed on — even though it was not part of Wednesday’s outline — is cutting some federal tax deductions, particularly the cost of state and local income taxes. This provision is likely to raise the taxes of upper-middle-class people (it would also hit the very rich, but not only them) in high-tax states like California and New York. (It’s not yet clear if other parts of Trump’s tax proposal would ensure that people affected by the elimination of this deduction still come out paying fewer taxes because the increase was offset by other cuts.)
Sure, those are blue states. But Republicans are risking the problem of a family making $200,000 facing a tax increase (or getting a pretty small tax cut) because it can no longer deduct local taxes, while people who make $4 million get a huge windfall on balance.
2. Relying on a slim majority
Trump has been meeting with some Democrats on tax policy. But the people who have been writing the tax legislation behind the scenes so far are an all-GOP group, and there is little sign that Democratic ideas are being considered.
Senate Majority Leader Mitch McConnell has publicly suggested that Republicans would seek to move taxes through Congress using the so-called reconciliation budget rules, which would require only 50 votes in the Senate (plus the tie-breaking vote from Vice President Mike Pence) and therefore no Democratic support. But the party holds the Senate majority by such a narrow margin that even the reconciliation process requires nearly every GOP senator (50 of 52) to sign on.
It’s not yet clear who might emerge in the Senate as a roadblock on taxes. I will be closely watching Tennessee’s Bob Corker and Arizona’s John McCain, members who have expressed concerns about the growing deficit and national debt before and are in some ways freed from bowing to the demands of Trump or Republican leaders in Congress. (Corker just announced he’s not running for re-election, and McCain’s brain cancer diagnosis means he is unlikely to seek another term.) McCain actually voted against George W. Bush’s major tax cut bill in 2001, one of only two Republican senators to do so.
In the House, the Freedom Caucus, could demand that GOP leaders enact the largest possible tax cut without regard to the deficit. Such a move would put the caucus in direct tension with more deficit-conscious members.
3. Cutting out the Democrats
There are also the bad political optics — though they shouldn’t be overstated, as both parties have used the reconciliation method for passing major legislation before. More fundamentally, though, the Republican-only focus seems a tactical mistake. Trump does not seem particularly grounded in Republican orthodoxy on tax policy (or really any policy). He could probably reach an agreement with some Democrats on taxes.
I would argue that a broadly popular tax cut focused on the middle class would be hard for some Democratic senators to oppose, particularly those in red states and up for re-election in 2018, like Missouri’s Claire McCaskill and West Virginia’s Joe Manchin.
A tax cut supported by at least some Democrats in the Senate would both have the imprimatur of bipartisanship and also shift the policy left in a way that Trump might like, even if more conservative Republicans in Congress did not. And Trump has shown that he’s willing to cut a deal across the aisle even if his own party stalwarts don’t like it.
4. Saying one thing while doing another
Republicans and the administration spent months writing bills that reduced Medicaid spending and loosened regulations, like the requirement under Obamacare not to charge people more for coverage if they have pre-existing conditions. These provisions were not surprising, and they reflected conservative views on health insurance policy. But perhaps because of Trump’s promises that all Americans would get coverage that was better than Obamacare, Republicans throughout the Obamacare repeal process insisted that they were not actually cutting Medicaid or loosening rules on insurance policies.
On taxes, Republican orthodoxy calls for making cuts — on corporations, small businesses, estates, people of all income brackets — as reflected in Wednesday’s tax plan outline. That combination of policies will tend to tilt tax cut benefits toward the wealthy, since low-income people aren’t usually paying as much in federal income taxes. But Trump in particular seems determined to sell this tax policy as one benefiting the middle class and not the rich.
Miscasting the plan on offer was politically problematic during the health care process. It effectively forced Republicans to criticize the nonpartisan Congressional Budget Office as it repeatedly released analyses of the repeal proposals contradicting GOP rhetoric. That phenomenon led to the unusual viral spectacle of comedian Jimmy Kimmel accusing the author of one of the Obamacare repeal bills of lying to him about the legislation.
5. Setting unrealistic timelines
Remember how Obamacare repeal would pass Congress in early January and be signed by Trump on his first day in office? Now, Trump aides reportedly think that tax reform can be passed by the House by the end of October, and the president’s legislative director publicly suggested that Trump would sign this provision into law by the end of the year.
The idea that America’s tax policy will be overhauled in two months seems very optimistic — a kind of time pressure that was not overly helpful to Republicans in the health care process.
None of this is to say that Republicans can’t pass some kind of major tax overhaul in the next few months or early next year. Tax reform has the potential to be simply a party-line issue, like the Supreme Court nomination of Neil Gorsuch, where Democratic opposition didn’t transform the vote into a huge national controversy. And I don’t expect the left to be as organized in opposing a bill largely made up of tax cuts, rather than one that takes away billions of dollars from Medicaid while gutting one of President Obama’s signature achievements.
That said, the start to tax reform seems awfully similar to the start of Obamacare repeal.