October was the month when Congressional Republicans concluded that they might lose their Congressional majorities in 2018 if they do not pass a major tax relief bill. Fear is a powerful motivator. In Washington, it can be even more powerful than money.
On October 26th the House put aside inter-party disputes over how to pay for tax cuts and passed the all-important Budget Resolution, which clears the way for Congressional approval of tax relief by a simple majority vote. Depending on what is in the package, they just may have the votes for passage.
Ten things you need to know about the coming tax legislation:
- Despite the current momentum, achieving final passage will not be easy. The devil is in the yet-to-be-revealed details, and powerful lobbying groups have only begun to mobilize to protect their pet provisions in the Tax Code.
- It will be tax relief, not tax reform. Although there will be significant changes to the tax code, legislators simply found sweeping tax reform to be too difficult a challenge in the current partisan political environment.
- The changes may not be permanent. Under Congressional budget reconciliation rules that allow legislation to be passed by only 51 votes in the Senate, tax cuts that are not offset by equivalent spending cuts or revenue increases must expire in ten years. Taxpayers, especially large ones, hate the uncertainty, but ten years is an eternity for a politician. And, as we saw with the Bush tax cuts, when the time comes, the pressure to make “temporary” tax cuts permanent is hard to resist. Just ask President Obama. So this is a pretty good escape clause if Republicans are unable to offset their revenue reductions and only have 51 Senate votes for passage.
- The legislation will add to the deficit. As of this writing, almost every creative attempt to include significant revenue-raisers in the bill has been shot down. Not only are there no silver bullets like the border adjustment tax, there are no damp squibs (repeal of state and local tax deductions or reducing deductions for IRA contributions). Sensing that there is little public concern about the deficit, Republicans seem more than willing to sacrifice one of their core principles (“fiscal responsibility”) for a higher political purpose (keeping their Congressional majorities).
- Final passage could well slip into 2018, but the cuts can be made retroactive to January 1st. That is the most important deadline for Republicans—that tax reductions take place in 2018. There are less than 30 legislative working days left this year, but Congress could create many more if they cancel recesses and work weekends. If Republicans do that, you know that they are desperate.
- The legislation must be seen as beneficial to the middle class and not as a giveaway to the “rich.” This is more about optics than it is about numbers, and Republicans are scrambling to find ways of blunting the Democrats’ major talking point against their bill. It is a difficult task, given the Republicans’ aversion to raising taxes on anybody and the fact that those who pay the most taxes are likely to benefit from tax cuts. But politics may outweigh doctrine this time around, hence the Republican trial balloons of a “millionaire’s” tax bracket, only partial repeal of state and local tax deductions, a high-end cap on mortgage deductions, only partial repeal of the estate tax, etc. It will be interesting to see just how far Republicans will go to diffuse charges that they are the pawns of the wealthy.
- Trump and the Republican leadership must find ways to win over their Senate prima donnas or else they will need hard-to-find Democrat votes to pass tax relief. With only a two-seat majority, the leverage of ambitious and/or egotistical Senators is greatly magnified and they will not be shy about using that leverage. Already there are rumors that Senators with whom the President has sparred publicly (McCain, Corker, Paul, Rubio, Cruz and, if elected in December, Moore) are not solidly behind the Republican tax bill. Then there are the Senators such as Flake and Corker who have openly expressed their disdain for the President. Herding all those Senate cats will take all of Majority Leader McConnell’s skills.
- So far, Democrats are united in their opposition, but that could change. If Republicans can find ways to sell their plan as middle-class tax relief and the polls show that there is considerable public support for tax cuts (two big “ifs”), Senate Democrats up for reelection in 2018 in states which Trump won handily—and there are quite a few of them—could have second thoughts about opposing the bill. On the other hand, it will be very tempting to stand together in the hope of handing the Republicans a potentially catastrophic loss. Do you stand together and try to retake control of Congress, or do you look out for yourself? The answer is probably both, meaning that the tax bill will not attract any Democrat votes until it is clear it is going to pass anyway with 51 Republicans. At this point, no Democrat wants to be credited with handing Trump his biggest legislative victory.
- Watching the coming tax debate will be a virtual roller coaster ride. Even discounting media bias, there will be ups and downs and near derailments. Try not to be distracted by the daily machinations of how a bill becomes a law. It is never smooth. Your best measures of progress will be the stock market and the Las Vegas odds.
- Those odds currently favor passage of a major tax relief package in time for 2018 filings, if only because the President and Congressional Republicans have so much riding on the outcome. As of this writing, the odds are 60-40 that the Republicans will some how pull it off, but not necessarily by Christmas.
The next steps: the House Ways and Means Committee will unveil the details of the actual legislation on November 1st. That will be followed by hearings and votes in committee on amendments. The goal is to bring a bill to the House floor by Thanksgiving. The Senate Finance Committee will be working concurrently, but under the Constitution all revenue measures must originate in the House. Getting a bill to the President by the end of the year would be an incredible lift—both literally and figuratively.
While progress on tax relief was the big Washington story of the month, it was almost obscured by the media’s preoccupation with scandal. This was the month we learned: 1) that the notorious “Russian dossier” accusing Trump of collusion was paid for by the Democrats and the Clinton campaign; 2) that it may well have been the motivation for the FBI criminal investigation into the Trump campaign which has now morphed into Special Counselor Mueller’s probe; 3) that the Obama IRS really did target conservative groups for political reasons (the IRS has apologized and paid damages); and 4) that there are serious ethical questions surrounding the Obama Administration’s approval of the sale of US uranium to a quasi-state Russian company. Various Congressional committees have vowed to investigate all of this, ensuring that the charges and counter-charges and conspiracy theories persist well into the 2018 election season.
And while all this was going on, Special Counsel Mueller indicted former Trump Campaign Manager Paul Manafort on charges of violating the Foreign Agent Registration Act, money laundering and several other crimes (there is no mention of Trump or the Trump campaign in the indictment). With the Congressional investigations of collusion and obstruction of justice fizzling, Mueller’s investigation is the last, great hope of those who want Trump removed from office. Unless there are unrelated revelations, such as tax fraud in Trump’s business dealings, the principal impact of Mueller’s investigation will be to keep the opposition supplied with talking points to counter the other scandal investigations. Or perhaps Manafort can use something he knows about Trump and his campaign as leverage for a plea bargain– a revelation of Watergate-sized implications. Don’t hold your breath.
If there is one thing everybody in Washington does agree on, it is that the Russians tried to interfere in the 2016 Presidential election and to undermine confidence in our democracy. They seem to have done a pretty thorough job.
John C. Gore
October 30, 2017
Reprinted by permission. John Gore’s popular Washington Overview is published 16 times a year and is available by subscription. Details can be found at jcgore.com.