Take the Hard Route on Tax Reform

4 Values for Tax ReformTake the Hard Route on Tax ReformMitch McConnell should take up Democrats on their offer to work together toward reforming the tax code.

Budget & Tax  | Quick Take
Aug 3, 2017  | By  | 8 min read | Print Article

In the wake of the Senate’s failure to repeal and replace the Affordable Care Act, aka Obamacare, many eyes in Washington have turned to tax reform.

Tax reform has been at the top of the agenda for this presidency and Congress – and it’s hard to argue with the idea. I’ve written manymany times about the critical need to reform the nation’s outdated, inefficient and arcane tax code. And as I’ve said before, the need to reform the tax code is just about the only thing everyone in Washington agrees on.

But what are the prospects for actually reforming the tax code in this Congress?

First, a quick check of how things work. There are two ways to do business in Washington: regular order, which allows an open amendment process and requires 60 votes in the Senate to pass, and the reconciliation process, which can send a bill to the president’s desk with only 51 votes in the Senate. With that in mind, we can better understand what various players have said about tax reform in the last week:

  • The Trump administration announced its intention to push for tax reform within this calendar year. While the details of the administration’s reform proposal are sparse, they have indicated a willingness to increase projected budget deficits to achieve the level of cuts they want.
  • Last week, House Speaker Paul Ryan and House Ways and Means Chairman Kevin Brady announced that they were abandoning their effort to include a border adjustment tax in their proposals for comprehensive tax reform.
  • Senate Majority Leader Mitch McConnell indicated that he expected to pursue passage of a tax reform package with only Republican votes using the budget reconciliation process, the same process the majority tried to use on health care. Senate Finance Committee Chairman Orrin Hatch, however, has indicated he is willing to hold hearings and follow regular order.
  • 45 of the 48 Democratic senators sent a letter to President Donald Trump, McConnell and Hatch offering to work towards bipartisan reform on three conditions: that tax reform be considered and taken up through regular order; that it not be deficit-financed; and that it provide relief to the middle class without providing breaks to the wealthiest Americans.

There are a few key things to remember about the difference between using regular order versus budget reconciliation as the vehicle for tax reform. Congress can only pass legislation that is related to spending, taxes and the debt ceiling through budget reconciliation, and there is no opportunity for the minority to filibuster – a good thing if there is agreement within the majority party but not with the minority party. Importantly, any legislation passed through reconciliation must not increase the deficit within the 10-year budget window, as scored by the Congressional Budget Office. (Take note, this is one reason that there has been so much ire focused on that office recently.)
Now let’s look at the politics of the position both parties are taking. For McConnell and Republicans, promising fast action may help assuage those in his party who are frustrated by the failure of the health care effort. Also, it is a practical recognition of the real substantive differences between the parties: finding agreement or common ground across the political spectrum would be very hard work. For Democrats, making these demands allows them to look reasonable without having to prove their willingness to compromise. So both parties win with their core supporters.

Tax Extenders are Ruining the GOP Tax Plan

So what are the possible paths forward? There are at least two ways to meet the restrictions of the reconciliation process. The first is to develop a revenue-neutral reform proposal, which would mean that some people and companies would likely pay more taxes and others would pay less. The second is to make many of the provisions of the legislation “temporary,” expiring at the end of the 10-year budget window. So no matter how much the deficit explodes at the end of 10 years, the proposal would satisfy the rules of Congress and be able to move to the president’s desk after it received a simple majority vote.And of course the third option is for McConnell to follow Hatch’s lead: Take the Democrats up on their offer and start to hold hearings on comprehensive tax reform. It will come as no surprise to those who have read my columns before that I believe this is the right approach. This is not because I side with either side substantively – we take our nonpartisanship very seriously at Taxpayers for Common Sense – but because I strongly believe tax reform must be bipartisan. How we pay for the government, how much each of us contributes to our common defense and welfare, should not be determined by the slimmest of legislative majorities. It is simply too important of an element of our system of governance for us not to agree on widely.

On a more pragmatic note, I truly believe that bipartisan tax reform is likely to yield a better result for more taxpayers. Tax legislation that is “temporary” masks the costs. Tax extenders – that laundry list of special interest tax cuts that has been renewed year after year – receives a score that assumes the provision will only have a one- or two-year impact on the deficit. For example, the two rounds of tax cuts passed during President George W. Bush’s administration were billed as temporary, 10-year tax cuts and resulted in the fiscal cliff a few years back, when the tax cuts were set to expire at the same time sequestration might have taken effect. However, when push came to shove and Congress was forced to either allow the tax breaks to expire or make them permanent, more than 80 percent of those tax cuts were made permanent. So in that famous fiscal cliff deal, which included just enough spending cuts to avoid the dreaded automatic cuts of sequestration, the negative impacts of the tax cuts on the deficit exceeded the positive impacts of the spending cuts.

Doing the right thing is never easy, or fun. Bipartisan tax reform is doing the right thing – unsexy, unfun, hard choices. It will also be transparent and move the needle towards lasting, positive policy for the ages. Democracy demands nothing less, and we, the people, are worth the fight.

Originally published on August 3, 2017 in U.S. News & World Report