Remember how divided Republicans in Washington were on their plans to repeal the Affordable Care Act? Well, they are even more divided so far on their push to change America’s tax system — a bad sign for a party desperate for a big achievement in a year in which they control both houses of Congress and the presidency.
The congressional GOP divide on Obamacare repeal was fairly simple and one dimensional: a bloc of conservative members (such as the House Freedom Caucus and senators like Utah’s Mike Lee and Kentucky’s Rand Paul) who wanted to eliminate as much of the ACA as possible versus a group of more moderate Republicans (such as Maine Sen. Susan Collins) who wanted to preserve many parts of the law. White House officials and party leaders spent months unsuccessfully trying to find a middle course between these two camps.
With taxes, though, there are three dimensions on which key figures in the party disagree:
1. How much does increasing the deficit matter?
This divide is fairly similar to the main fault line on health care, pitting the most conservative members of the GOP, like the Freedom Caucus, against more traditional establishment Republicans such as Tennessee Sen. Bob Corker, an increasingly sharp critic of President Trump. I emphasize Corker because he has been the most vocal Republican in insisting that the party’s tax plan not increase the federal budget deficit. Because the GOP is aiming to pass its tax plan through the so-called budget reconciliation process (which requires only 51 votes rather than the 60 needed to break a filibuster) and has largely sidelined Democrats from the discussion, Republicans need at least 50 of the 52 GOP senators to back this proposal so that Vice President Mike Pence can cast the tie-breaking vote.
Freedom Caucus members, meanwhile, are pushing for a big tax cut on corporations and small businesses, and placating them is important, since they initially blocked the Obamacare repeal. Caucus chairman Rep. Mark Meadows of North Carolina promised to vote against the final tax legislation if it does not bring the corporate tax rate from the current 35 percent down to 20 percent. The draft proposal released by congressional leaders and Trump last month included a 20 percent corporate rate, and the Freedom Caucus has praised it.
But an estimate by the Tax Policy Center of the draft proposal suggested that it would reduce federal revenue by $2.4 trillion over 10 years and $3.2 trillion over the following decade. So the draft is not addressing Corker’s concerns. And Trump’s attack of Corker via Twitter on Sunday could further embolden the Tennessee senator; he now has the opportunity to play a leading role in killing a cherished policy goal of a president he seems to loathe.
The trio that opposed the Obamacare repeal (Arizona’s John McCain, Alaska’s Lisa Murkowski and Collins) has been circumspect so far on the tax plan. But if they align with Corker, this is a huge barrier.
2. Is it temporary tax cuts or permanent tax reform?
Republicans are fairly unified about cutting taxes, although they differ on exactly how much. But some key figures in the party, such as House Speaker Paul Ryan, want a comprehensive “reform” of the tax code. These broad changes worry other Republicans because the reforms could make their constituents’ taxes go up.
Ryan favors reducing the number of tax brackets and limiting deductions, along with cutting taxes on individuals, estates, small businesses and corporations. And that’s where the GOP process is starting; the draft proposal would eliminate most tax deductions and reduce the number of tax brackets from seven to three.
Why would Ryan, the leader of a Republican Party committed to tax cuts, want to get rid of some tax deductions, thereby potentially raising some Americans’ taxes? Well, under the reconciliation rules, the GOP’s eventual tax bill (or any bill) can’t increase the deficit after 10 years. So Republicans can either pass a deficit-neutral policy or adopt tax cuts that increase the deficit but expire after 10 years.
In other words, a simple tax cut that increases the deficit may be easier to pass in the short term because Congress wouldn’t have to raise taxes on anyone. But in the long term, the entire policy might go away. House Ways and Means Committee Chairman Kevin Brady has emphasized that he wants the tax cuts to be permanent, as has Ryan.
Here’s the problem: The draft Republican plan would raise a lot of people’s taxes. Estimates from the Tax Policy Center suggest that limiting tax deductions and going from seven tax brackets to three would cause tax increases for about 12 percent of taxpayers,1 including a third with incomes between $150,000 and $300,000, who would pay on average $1,800 more in taxes. The Institute on Taxation and Economic Policy, which is affiliated with the left-leaning Citizens for Tax Justice, estimates that about 17 percent of U.S. taxpayers would pay more under the GOP draft.
So there is early opposition from Republicans who think their constituents will be hit hard by these increases. For example, one of the deductions that the GOP is considering eliminating is for state and local taxes. House Republicans such as Peter King of New York and Tom MacArthur of New Jersey are already criticizing this idea, likely because it would disproportionately limit deductions for residents of high-tax states like New York and New Jersey.
And Ryan doesn’t only have to worry about GOP members from high-tax states. Trump has reportedly told GOP allies that he thinks the party should define this policy as tax cuts, not tax reform. It’s not clear he cares that much if this tax policy will be around in, say, 2027, when he will be long gone from the White House.
3. Who gets the cuts?
Beyond the debate over how big a tax cut the GOP should pass, there are disagreements in the party about which Americans should get the cuts.
I haven’t seen any Republicans explicitly call for tax cuts that disproportionately go to the rich (doing so might be a bit politically risky), but their draft tax proposal does exactly that. Some Republicans, though, are pushing for a less regressive plan.
Kentucky’s Rand Paul, one of the key roadblocks for Republicans in the Obamacare repeal effort, is now blasting the draft tax plan, arguing that “it just should not be a tax hike on anyone.” (This is slightly different from the opposition of King and MacArthur. It’s not entirely clear if those members oppose any tax increases on anyone or if they’re just opposed to tax increases that fall disproportionately on their constituents.)
Paul is in effect saying this plan needs to have more tax cuts for the middle class, since that is one of the groups facing increases in the draft proposal. Sens. Marco Rubio and Mike Lee have specifically said the draft plan does not cut taxes enough for middle-class families.
It’s not clear if Lee, Paul or Rubio have tax increases they favor to make up for the additional tax cuts they want. So this stance is likely to make this proposal even worse in terms of deficit reduction, cutting against the goals of Corker (deficit neutrality as a policy ideal) and Brady and Ryan (permanent tax cuts).
I’m not doing a whip count of which members are likely to vote for this proposal, in part because Republicans in Congress are still writing it and its contours could change dramatically, in ways that address some of these tensions.
But even more so than on health care, Republicans are trying to write a bill that reconciles a bunch of competing goals from their members.
I’m not saying it will be harder for Republicans to pass some kind of tax policy than repealing Obamacare. The GOP always has the option of shifting to a tax policy that cuts taxes for almost everyone, doesn’t raise them on anyone, increases the deficit and isn’t permanent, the approach George W. Bush took in 2001. This might irritate Corker, but I suspect the coalition of congressional Republicans who will vote against a tax policy that increases taxes on millions of middle-class people is larger than the group that will oppose a policy because it increases the deficit too much.
Right now, though, Republicans have a tax policy that increases taxes on the middle class and also increases the deficit. That is going to be very hard to pass.