The inability of the House of Representatives to repeal and replace the Affordable Care Act is a major setback to the GOP’s agenda and amplifies a split that was largely masked by the party’s success during the November elections. The division between party moderates and members of the House Freedom Caucus will no doubt temper expectations on the administration and the GOP’s ability to pass their legislative priorities, as well as have major implications on tax reform efforts later this year.

Political Fallout

Taking into account the events of last week, it may be tempting for the administration to pivot to infrastructure or other areas of broader agreement between the two parties. Such a move would allow the administration to reach out to moderate Democrats and rely less on the House Freedom Caucus to push its agenda. However, with major votes looming on the budget, the confirmation of a new Supreme Court Justice and tax reform, I would anticipate more straight line party votes in the immediate future.

Implications on Tax Reform

The events of last week certainly complicate matters and significantly lower the baseline for the kind of tax reform legislation that would be able to pass the House and Senate. For starters, the failure of the repeal and replace bill means that none of the ACA’s unpopular taxes (such as the 3.8% tax on passive income or the penalties associated with the individual and employer mandates) will be removed, meaning the $1 trillion reduction in the budget baseline that tax reformers were counting on has now evaporated. Coupling the ACA’s taxes with the controversy over the border adjustment tax (a measure that would generate $1 trillion to offset the House GOP’s proposed cuts to the corporate and marginal tax rates), there could be a fight brewing on tax reform between the party’s leadership (which is seeking revenue-neutral legislation) and the more conservative congressional members.

Where We’re Headed

So what does this mean for tax reform? First off, the push for a budget neutral bill from party leadership means there will be immense pressure on other areas of the tax code to find offsets—and unfortunately, certain pro-business tax provisions will be under pressure to pay for the lowering of marginal and corporate rates.

Secondly, because of the difficulty in building a consensus on offsets, the probability of a budget neutral bill decreases and any legislation we see this year will likely have the effect of increasing the federal deficit.

The main takeaway here is that we have a long way to go with tax reform, and it could be a prolonged process this summer. We at alliantgroup will continue to monitor the situation as it progresses and welcome your thoughts.

Rick LazioAbout Rick
Former Congressman Rick Lazio recently became the Senior Vice President of alliantgroup, a national tax consultancy. A longtime advocate of small to mid-size businesses, Lazio spent his four congressional terms sponsoring pro-business initiatives such as the Small Business Tax Fairness Act of 2000. After his time in Congress, he held several positions in the private sector. He worked as Executive Vice President and later the Managing Director of the Assets Group at JP Morgan. Rick also served as a partner at Jones Walker LLP, a national financial services law firm, and headed the firm’s National Housing Finance Practice group. He serves on the Board of Directors for Enterprise Community Partners and the Bretton Woods Committee. He also has been an active member of the Committee for Economic Development and the Association for a Better New York (ABNY). Lazio is involved in numerous other business, philanthropic and civil organizations.

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