All eyes are on Congress this week, as its Republican majorities seek to make good on long-standing promises to repeal the Affordable Care Act. They may finally get the job done, using a contentious legislative tool, known as reconciliation—the same tool the Obama administration used to pass elements of the law. Less discussed is the Republican plan to use reconciliation to overhaul the tax code as well, which would allow the party to pass its sweeping tax reforms without a single Democratic vote. Unlike in the health care reform context, however, the move would be unprecedented. It would also produce extreme and unstable tax policy.
Reconciliation allows certain budget-related legislation to circumvent the filibuster, which Democrats, despite their minority, could otherwise use—or threaten to use—in order to exert some control over Republican tax reform measures. Reconciliation was conceived in the Budget Act of 1974 as an obscure device to help balance the budget, but it has since morphed into a powerful political weapon. Republicans are eager to brandish it now that a presidential veto does not stand in their way.
In June, House Republicans released an ambitious tax reform blueprint, which shares many goals with the proposal Donald Trump issued as a candidate. The blueprint includes long-desired priorities for conservative tax reformers: deep rate reductions, broadening the tax base by eliminating special tax benefits, business tax reform, and repeals of the estate tax and the alternative minimum tax. Reconciliation would be a quick means to enact this plan, or something similar, without having to address legitimate objections from across the aisle.
Reconciliation has been used in the past to enact simple changes in the tax code, but it has never been used for complex tax reform. In fact, the past three tax reform acts were passed with wide bipartisan support. During the Nixon years, tax reform drew upon proposals from the prior, Democratic Treasury Department. Ford-era tax reform was a partnership between the Republican administration and a Democratic Congress. And the Tax Reform Act of 1986 occurred during an era of divided government through bipartisan compromise.
Republicans will contend that reconciliation is appropriate in an era of heightened partisanship because it functions as a necessary release valve for the pressure of Senate supermajority requirements. In reality, however, a rare consensus has formed when it comes to tax reform. Both parties agree that corporate tax rates are too high, foreign income too easily escapes taxation, and there are too many special breaks for both individuals and businesses. The parties may be closer on tax issues in 2017 than at any other time in recent memory. A bipartisan bill is not only possible but preferable to produce comprehensive reform.
As it stands, however, the House blueprint contains dangerous positions. The plan awards three-quarters of its tax cuts to earners in the top 1 percent. The repeal of the estate tax and the reduction of rates for the wealthy, in particular, would serve to exacerbate inequality. Even factoring in favorable macroeconomic effects, the plan would also add trillions to the country’s debt, creating an unsustainable fiscal chasm.
One aspect of the plan—the ambitious conversion of the 35 percent corporate income tax into a 20 percent border adjustment tax that would be levied on American imports while exempting exports—holds promise. By taxing a company where its products are consumed—not where its income is earned—a border adjustment tax would remove incentives for companies to shift their operations, and their taxable income, abroad. Trade and lobbying concerns within the GOP may scuttle the border adjustment aspect of the plan, however, leaving only the corporate tax rate reduction, without any measures to protect against abusive gaming of the international tax system. Involving the Democrats in the design of tax reform would protect against such an unbalanced outcome.
Republicans will no doubt cite as precedents for their use of reconciliation the Bush tax cuts and the Affordable Care Act, both of which sailed through Congress via this fast-track process. During the George W. Bush years, Republicans used reconciliation, despite its heritage as a deficit-reducing device, to pass some of the largest tax cuts in the nation’s history. The move was controversial and paved the way for Democrats to counterattack by relying on the process to enact portions of the Affordable Care Act, drawing strong rebukes from Republicans.
But these precedents have little in common with multifaceted tax reform. The Bush-era tax legislation consisted largely of straightforward rate cuts that could be accomplished cleanly, with little substantive input from across the aisle. Those cuts are a far cry from the fundamental reworkings of the code currently contemplated by the Republicans. The Affordable Care Act certainly ushered in a sea change in the health care system, but only a relatively small portion of it could actually be enacted through reconciliation due to the particularities of that process. Its chief policy initiatives were formulated outside reconciliation.
Reconciliation is a poor vehicle for major policy changes and is especially inappropriate when it comes to the complicated demands of an issue like comprehensive tax reform. Reconciliation laws must be completed between the budget resolution, typically passed in the spring, and the start of the coming fiscal year on Oct. 1. By way of comparison, it took two years to draft the Tax Reform Act of 1986. Reconciliation’s truncated timelines curtail deliberation and potentially limit involvement from key sources of tax policy—the Treasury Department, the Joint Committee on Taxation, and the tax-writing committees. If the Republicans pass their reforms using reconciliation, the resulting law will be less reasoned and less substantive.
Republicans should also not forget the epilogue of partisan reconciliation acts. Debate over whether to continue the Bush tax cuts became a focal point in every election cycle since their enactment and, at times, completely overtook the congressional agenda. A two-year extension of the cuts led to the “fiscal cliff” of 2012—roiling government and world markets. Repeal efforts have also continually threatened the Affordable Care Act since its enactment—and now may actually succeed.
Reconciliation destabilizes tax policy in particular because its rules of process bar increases to the deficit beyond the 10-year budget window. Given the enormous costs of the House blueprint, Republicans can sunset the revenue-losing tax cuts before the 10 years are up to get around this rule, a tactic employed to pass the Bush tax cuts and, again, likely to create uncertainty and instability. Republicans may attempt to avoid the sunset problem by relying on dynamic scores, which incorporate an estimated effect on the overall economy—thereby lowering the impact on deficits. This has historically been a controversial practice, as economic feedback is difficult to predict with accuracy. And even under dynamic scoring, the current GOP proposals are so costly that they would still likely require sunset provisions in order to utilize reconciliation.
It is not realistic to expect the tax code to be set in stone. But the pillars of tax reform should be stable enough to form the basis of long-term investment and growth. Radical, partisan tax reform will prove short-lived and ineffective. Reform that gives the lion’s share of its benefits to the wealthy and adds trillions to the debt runs the risk of exacerbating inequality within and between generations, perhaps alienating Trump voters who elevated him to the White House based on his populist rhetoric. Tax reform jammed through using reconciliation may not only fail to achieve Republican policymakers’ goals. It may ultimately leave them without a job.
