House Republican leaders could breathe a sigh of relief Thursday morning. After fiddling with dozens of “dials” through the nights this week, they released a tax reform bill that did not prompt immediate, open revolt.
Unlike the debut of the House’s first health care bill in March, most GOP members, representing a variety of constituencies and interests, seemed to agree that the plan was a half-decent start. And if a bill loaded with uncomfortable trade-offs isn’t killed on its first day, it qualifies as a good rollout.
But it hardly means the Tax Cut and Jobs Act is on a glide path to enactment.
There was a point on Wednesday night when it appeared the whole project could be sinking. Ways and Means Committee Chairman Kevin Brady had told reporters that the committee could not find a way to make one of the bill’s central goals—a reduction in the corporate tax rate from 35 to 20 percent—permanent. People can disagree about the extent to which permanent corporate tax cuts would trickle wealth down to the masses. Everyone can agree, though, that a temporary sugar rush to corporate balance sheets wouldn’t spur much investment at all. Achieving that permanent cut to 20 percent was one of the White House’s red lines, too.
“No member of the committee was quite comfortable with” the temporary corporate tax cuts, Texas Rep. Kenny Marchant, a Ways and Means Committee member, told me Thursday, “because we knew it was going to impact the growth. So we just stayed in there and said, ‘We’ve got to figure out a way to not do it that way.’ ”
Marchant said that in order to offset the cost of the permanent cut, members chose to sunset “two or three” of the bill’s benefits after five years. Among those he mentioned were full expensing for businesses and new $300 tax credits for filers and nonchild dependents.
Did I mention that the bill—which repeals personal exemptions—eliminates the closest thing they have to a replacement, the $300 tax credits, after five years? Brady, in a briefing with reporters Thursday morning before the text was released, failed to mention that critical five-year part. Those credits will expire just as when full repeal of the estate tax is phasing in.
It’s ugly little details like those, tucked in a lengthy bill, that will be exposed and litigated publicly in the coming days. That will mark an end to the warm feelings on Capitol Hill, as the public discovers that deductions for, say, interest payments on student loans and major medical expenses will be tossed. The adoption tax credit will be eliminated, a move sure to anger religious conservatives. You will no longer be able to deduct your moving expenses or your tax preparation costs. The divorcees’ lobby will be furious to discover that alimony payments will no longer be deductible. And those are just a few items on the individual side; the elimination of business deductions is a whole other issue.
And then there are the big fault lines.
While the bill will allow filers to deduct up to $10,000 in property taxes, it eliminates the state and local income tax deduction, the chief concern for members from high-tax states such as New York, New Jersey, Illinois, and California. Americans Against Double Taxation, a coalition of groups defending the state and local tax deduction, made it known that it would “continue to oppose any plan that does not fully preserve the state and local tax deduction and the sovereignty of state and local tax decisions.” The bill’s surprise inclusion of a lowered cap on the mortgage interest tax deduction—once considered a third rail—only inflamed the group further. Leaders will likely lose many of the votes they can afford to lose here.
Two Ways and Means members representing high-tax states, New York Rep. Tom Reed and Illinois Rep. Peter Roskam, spent Thursday arguing that their taxpayers would still come out on top with the bill’s other changes.
“We’re getting there,” Reed said Thursday morning, of his efforts to convince fellow New Yorkers. “Now [members] can read the text and run the numbers in the total package, because you’ve got the repeal of the alternative minimum tax, the rates coming down, you know where the brackets are.”
I asked Reed a question that will make a lot of members sweat until they see official scoring estimates: Will everyone in the middle class get a tax cut? The answer was not exactly “yes.”
“I’m very confident that that’s going to be delivered, for what you’re defining and saying is the middle class, those hard-working people, they’re going to see they’ll be able to be rewarded for their work and keep their money,” Reed said.
The bill’s treatment of “pass-through” income, which business owners pay on their personal tax returns, will also remain a tricky consideration for leaders. The bill introduces a new top 25 percent rate—lower than the top individual tax bracket—but it places complicated new rules on who can take advantage of the rate—to prevent, say, all rich people organizing themselves as businesses to get lower tax bills. Some members, like moderate Pennsylvania Rep. Charlie Dent, weren’t so sure on Thursday that the text was strict enough to prevent abuse. At the opposite end of the spectrum, North Carolina Rep. Mark Meadows, chairman of the conservative Freedom Caucus, wanted to see much laxer rules.
“I want to make sure the pass-through rate for small businesses is actually a pass-through rate for all businesses,” Meadows said. “I’m hearing that may not be the case, and that is a problem.” The National Federation of Independent Business agrees.
And yet, consider where Meadows was on the day the House health care bill was released eight months ago. He, along with other members of the Freedom Caucus, held a press conference outside the Capitol calling the first draft of the American Health Care Act hot garbage. He wasn’t doing that Thursday.
“Today is a good day for the American people,” Meadows tweeted Thursday afternoon. “Tax Reform is headed in the right direction. Time to finish the job and get our economy going.”