President Donald Trump and Senate Majority Leader Mitch McConnell say they intend to pass sweeping tax reform in the coming months. The effort is moving forward, but there are still difficulties ahead, and both say reform may end up slipping into 2018.
In the Senate, for example, lawmakers still need to pass a 2018 budget resolution, which they could then use to advance a comprehensive tax reform plan. Some key senators, including Republicans Susan Collins of Maine and Lisa Murkowski of Alaska, say they’re leaning toward voting “yes” on the budget. Still, there are key differences between the budget passed by the House and the one being considered by the Senate. The House version aims to be “revenue neutral,” and so would require cuts in other places to offset the tax cuts. The Senate version would allow lawmakers to trim taxes by $1.5 billion over a decade without requiring offsets.
Passing a budget resolution with reconciliation instructions allows the GOP to pass a tax bill with only 50 votes, bypassing the usual 60-vote requirement to avoid a filibuster in the Senate. This gives Republicans additional leverage over Democrats.
However, since there aren’t any Democrats who are expected to vote for reform, McConnell can only afford to lose two votes. That may not be easy. For example, Sen. Bob Corker, a Republican from Tennessee who will retire at the end of next year, says he wants lawmakers to reduce tax credits and deductions to offset the lower rates. “I want to make sure this doesn’t add one penny to the deficit,” he told CNN.
After they agree on a budget resolution, plenty of reform details are still to be worked out. The framework released last month by the White House and congressional Republicans proposes a 20 percent top rate for corporations, and creates a new tax regime for pass-through businesses (those structured as partnerships and S corporations) with a 25 percent top rate. A report from the president’s Council of Economic Advisers says the lower rates would boost growth and “increase average household income in the United States by, very conservatively, $4,000 annually.”
One key question lawmakers will be dealing with is how to make up for the revenue that would be lost if taxes are cut. They are considering eliminating many tax incentives and deductions to increase revenue.
While some deductions may be questionable, others are important parts of the tax code, put there deliberately to support industries such as commercial real estate that require long-term investment. NAIOP representatives meet regularly with policymakers to explain the importance of certain aspects of the code, such as depreciation, 1031 exchanges and carried interest for real estate developers.
Then there’s the issue of expensing. The framework would allow immediate expensing for capital investments except structures. This presents an opportunity to craft better policy. Lawmakers could trim the current depreciation schedule for non-residential buildings from 39 years to 20 years. While that would reduce tax income over the next decade, it would end up boosting the economy overall. The Tax Foundation writes that, “because this option would increase the total present value of deductions for investments in structures, it would make it less expensive to purchase additional buildings in the United States. This would lead to an increase in the U.S. capital stock, and therefore the overall economy.” NAIOP representatives and our allies on the Hill are making the case for the two-decade depreciation schedule.
Even though they control the White House and both houses of Congress, Republicans failed to repeal President Barack Obama’s Affordable Care Act. Many see tax reform as the final chance Republicans have to enact reform this year, and some senators are warning that failure to pass tax reform could cost the GOP its majority. “If tax reform crashes and burns, if [on] Obamacare, nothing happens, we could face a bloodbath,” Sen. Ted Cruz said. He is up for re-election in 2018.
“Failure is a starting process, in my opinion, to losing the House, which will manifest in 2018 if we don’t get this done,” Sen. Tim Scott of South Carolina added. “And frankly, I think it destabilizes the Senate, we lose the Senate as well.” The pressure is on.