Paul Ryan’s moment: Tax talk is over, and tax legislating begins

alliantgroup’s Dean Zerbe Quoted in the Washington Examiner

The takeoff may have been rocky, but the Republican tax reform is off the ground.
Nine months into President Trump’s tenure, House Republicans have finally introduced legislation to try to put tax reform on his desk. Now, they aim to ram it through Congress in just two months, a near-impossible task that could define the legacies of House Speaker Paul Ryan, Ways and Means Committee Chairman Kevin Brady, and perhaps Trump himself.

In the days and then hours before finalizing the bill, House Republicans negotiated among themselves, rewrote the bill, bargained among themselves, and rewrote it again. In considering last-minute changes to taxes that will reshape entire sectors of the economy, House Republicans provided a preview of the hard choices, horse-trading, bargaining, and sacrifices that the party will have to make in advancing the bill through the House and Senate in a form that Trump will sign.

Brady was forced to delay the bill’s unveiling to incorporate last-minute changes to maintain support from rank-and-file members of the conference. In particular, the tax writers had to scramble to put together a compromise on the planned elimination of the state and local tax deduction to appease lawmakers from high-tax states worried that their constituents’ tax bills could rise.

Members of the committee were holed up in the Capitol until late on Wednesday night ahead of the Thursday morning release, going through the bill section by section to make the numbers add up as Brady’s hometown Houston Astros advanced toward a World Series championship. They only finished around the 8th inning, near 11 p.m.

Yet they finished, and produced a 400-page bill Thursday morning that would accomplish some of the top goals shared by Trump, Ryan, and almost all Republicans.

“This plan is for the middle-class families in this country who deserve a break,” Ryan said, touting a consolidation of income tax brackets. The existing seven income brackets would be winnowed and lowered to just four: 12 percent, 25 percent, 35 percent and 39.6 percent. The 12 percent bracket goes up to $90,000 in income. The 25 percent bracket goes from $90,000 to $260,000, and the 35 percent starts there and goes up to $1 million.

The bill would lower the corporate tax rate to 20 percent, create a new special 25 percent top tax rate for noncorporate businesses such as partnerships, and include a raft of tax breaks for individuals. It would eliminate the estate tax.

Asked on CNN after the bill’s unveiling if it is realistic that the bill could reach Trump’s desk by the end of the year, Brady responded, “I believe it is. We’ve worked six years toward this moment.”

Although the bill will need major changes to make it viable in the Senate, it was written as though the House was thinking ahead to the politics and parliamentary rules of the Senate, said Dean Zerbe, alliantgroup’s national managing director and a former tax counsel on the Senate Finance Committee. “There’s too much in here that looks like … the Senate were writing this,” Zerbe said.

Ready for Opposition

That’s the good news. The bad news is that producing actual legislation means that Democrats and special interest groups and their lobbyists can read it. The tax increases used to finance the tax rate reductions and individual tax breaks have been brought out into the light.

In the coming days, Democratic Leader Nancy Pelosi and her allies are sure to highlight any provisions in the bill that could be interpreted as bad or risky for the middle class.

Meanwhile, industry groups that stand to lose out in tax reform will fight to stop it. The real estate industry is already mobilizing to stop or change the House Republican bill. The housing sector rose up in opposition as soon as Brady introduced the bill. Realtors and homebuilders want the bill revamped because it would crimp the deduction for state and local property taxes. Also, by doubling the standard deduction, it would lead far fewer people to instead itemize specific deductions, including the mortgage interest deduction. The few who did claim the mortgage deduction would be allowed to write off interest on only $500,000 in home loans, down from $1 million today. As a result, the fear is, housing could take a hit.

Even industries that do not outright oppose the bill will pressure Congress to retain their own preferred tax breaks and loopholes. Bit by bit, lobbyists will try to put carve-outs back into the bill. To the extent they are successful, Republicans will have to compromise in other areas. That could include settling for higher tax rates.

Republicans have limited flexibility because they can only allow $1.5 trillion in tax cuts over the 10-year budget window. That is a constraint put in place by Sen. Bob Corker, R-Tenn. Corker, a member of the Senate Budget Committee, was part of a deal to write the $1.5 trillion deficit limit into the fiscal 2018 budget reconciliation instructions that the GOP aims to use to pass the tax bill. Reconciliation allows certain bills to pass with only a simple majority in the Senate. Republicans plan to use that maneuver in order to defuse the threat of a Democratic filibuster of their tax bill.

As a result, Republicans must limit the net tax cut to $1.5 trillion, measured with a “static” score — that is, not allowing for the possibility that the tax changes will spur economic growth and thus bring new revenues into the Treasury.

In an interview before the House released its legislation, Corker predicted that neither his party nor lobbyists realized how difficult it would be to limit the tax cut to that amount and still achieve Trump’s goals, and how many loopholes would have to be closed and how many deductions and credits taken away. “I don’t think that’s dawned on the business community yet,” he said, later adding that “Over the next two weeks … they’re going to realize that this is the biggest tax code rewrite since 1986 and it’s gonna affect everyone.”

Thursday’s bill introduction lent weight to Corker’s words.

Brady and the tax writers were forced to conduct a legislative shake-down of several industries and groups in order to make the numbers add up.

In the days before the bill’s release, representatives from New York and New Jersey, high-tax states, convinced the committee that totally repealing the deduction for state and local taxes would harm their constituents, and imperil their votes.

Brady offered them a deal, which eventually made it into the legislation. The compromise was to limit the deduction for property taxes to $10,000, while still eliminating deductions for income and sales taxes.

That deal succeeded in bringing some blue-state representatives along. But it reduced revenues by some as-yet-undisclosed amount, forcing the taxwriters to scramble at the last minute to find offsets elsewhere in the bill.

As late as Wednesday evening, one idea they considered was phasing in the 20 percent corporate tax rate, or requiring it to rise back up toward today’s 35 percent.

At the last minute, though, they decided to make other concessions in the bill. They shortened the period of time for which businesses would be allowed to immediately write off all new investments, Rep. Tom Reed of New York explained. And they decided to end the new $300 credit for parents after five years, Texas Rep. Kenny Marchant said.

Political strategy factored into those last-minute changes. Republicans bet that future Congresses will renew the tax break for business investment, because business lobbyists will fight to keep them. The same goes for the expiring parent tax credit. Even a Democratic-controlled Congress would likely find it hard to tell families they were losing $600 a year in tax credits.

That doesn’t mean, though, that Democrats won’t seize on the temporary nature of the family credit to attack Republicans.

“The corporate tax breaks in the Republican plan are permanent — written in ink, set in stone, locked in place with the key thrown away. But families have to settle for temporary tax cuts,” said Oregon Sen. Ron Wyden, the top Democrat on the Senate Finance Committee.

Racing to the finish

If Ryan can get members to ignore the flak from Democrats and the threats from lobbyists, however, they stand a chance of getting legislation to Trump’s desk.

“I think the biggest pitfall actually is right when the bill is released. What is the reaction?” said Marc Gerson, chair of the law firm Miller & Chevalier and a former Ways and Means tax counsel.

If they can survive the first few days, Republicans will be in better shape to move tax reform on an expedited track.

For months, the “Big Six” Republicans negotiated a broad tax reform framework in order to have a common basis for action in the House and Senate. That group included Ryan, Brady, Senate Majority Leader Mitch McConnell, Senate Finance Committee Chairman Orrin Hatch, Treasury Secretary Steven Mnuchin, and National Economic Council Director Gary Cohn.

Now, the upper chamber will try to move its own legislation on a staggered basis with the House. Hatch said he would introduce legislation when Brady finished marking up the House bill, which he hopes is next week. Then, after the House bill advances to the floor, the plan would be for the Senate to move its bill to committee. In the ideal scenario, the House would have passed its bill before Thanksgiving, allowing the Senate to catch up that week. Then, the two chambers could reconcile their bills in December, allowing Trump to place his signature on the final product before the end of the year.

And the bill does meet the White House’s specifications. It “is a bill that the president can support,” said Trump economic adviser Gary Cohn, speaking Thursday at an event in Washington. The bill met Trump’s aggressive supply-side rhetoric, including the 20 percent corporate tax rate. It also provides Republicans with talking points consistent with Trump’s populist tone. They are planning to pay for the corporate tax rate cut, in part, by raising taxes on corporate executives.

The process in which the House, Senate, and White House work together could save months compared to the healthcare effort, in which the Senate picked up only its own, ultimately doomed, legislative effort after the House passed a totally different bill.

That’s not to say that neither chamber will face difficulties. In fact, both surely will.

Furthermore, several Republican senators, including Hatch, have expressed a desire not to rush legislation, despite the year-end target date. “We have to also proceed slowly and surely,” Hatch said. “It’s always a difficult bill. There’s always all kinds of amendments, there’s always all kinds of differences.”

But there is a possible path in place for a relatively swift passage, if everything goes perfectly.

Of course, the biggest motivator for Republicans is failure — not just the fear of failing on the tax bill, but the pent-up frustration from falling short on healthcare and, so far, being unable to gain significant victories on items such as spending levels or Trump’s border wall.

“The political will is strong,” Ryan said.

Asked if the Republican majority depended on the bill passing, Ryan simply pledged to get it done. “We’re going to get this done, you know why? Because the American people are counting on it.”

alliantgroup is a leading tax consultancy that assists U.S. businesses and their CPAs in properly identifying and claiming all available federal and state tax incentives. To date, alliantgroup has helped more than 20,000 businesses claim over $5 billion in government-sponsored tax credits and incentives. alliantgroup’s headquarters is in Houston and the firm has offices in New York, Chicago, Boston, Sacramento, Irvine, Orlando, Indianapolis and Washington, D.C. For more information on alliantgroup and our R&D tax credit services, please visit alliantgroup on LinkedIn, Facebook and Twitter.

 
sb-d-zerbe[1]Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington, D.C. office. Prior to joining alliantgroup, Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman of the Finance Committee, Senator Charles Grassley, on tax legislation. During his tenure on the Finance Committee, Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law, including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform) and the Pension Protection Act. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill.