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Tax reform battle could be worse than health-care brawl

  • The recent congressional wrangling over Obamacare may turn out to be tame compared with the looming fight over your taxes.
  • Any change will produce winners and losers, most of whom will apply political pressure to any line in the law that hurts.
  • With Democrats unwilling to cross the aisle and Republicans divided between moderates and staunch conservatives, the divisions created by the health-care battle are already complicating the tax reform debate.

The recent congressional wrangling over Obamacare may turn out to be tame compared with the looming fight over your taxes.

Despite widespread, bipartisan agreement that U.S. tax rules need to be rewritten, there's little consensus on how to go about it. That's one reason it's been three decades since the last major overhaul, when President Ronald Reagan fulfilled a campaign promise that helped him win a landslide victory in 49 states.

"He sent [his tax reform bill] to the Hill and said, 'This is what the American people sent me here to do,'" recalled Douglas Holtz-Eakin, a Republican economist in the George H.W. Bush administration. "And it still died twice on the way to getting passed. So, that proves you need a lot of political tail winds to get it done, and I don't think anything suggests we're in that kind of environment."

With the GOP health reform effort on life support, many Republicans are eager to move on to another major campaign pledge to cut taxes on corporations and individuals to help spur profit growth and raise wages. But the wide support for those goals has done little to close the political fault lines opened up by the fractious health-care debate.

Even without a heightened partisan backdrop, there's a long list of critical, often conflicting issues confronting proponents of tax reform. The ultimate goal, most agree, is to provide balanced tax relief across upper-, middle- and lower-income households and lower the tax rates on corporations to spur hiring and investment, all while making changes that are "revenue neutral" and don't add to the government's budget deficit.

But any change will produce winners and losers, most of whom will apply political pressure to any line in the law that hurts.

That pressure was brought to bear, for example, on the so-called border adjustment tax, designed to tax some imports and promote use of American-made goods and materials. Retailers, which would bear much of the added cost, were quick to point out that the tax could raise the prices of consumer goods.

"I think most people that have looked at this have concluded that it's not the right way to go," said Matthew Shay, CEO of the National Retail Federation, which has lobbied against the measure. "It's very clear there's no appetite for this at all in the Senate. There's no champion for this anywhere."

But the money raised from that tax, as much as $1 trillion, was supposed to help offset tax cuts for individuals and companies. So was the anticipated savings of another trillion dollars or so from the GOP health-care reform plan, which proposed deep cuts in Medicaid and subsidies to help lower-income households buy insurance.

"We're $2 trillion short," said Rep. David Brat, R-Va. "So we've got to get those big trillion pieces in order and then move. If we get tax relief through, that's the prize. Everyone is happy with that one."

"You can be the most wonderful negotiator in the world but you can't make one plus one equal three." -James Pethokoukis, American Enterprise Institute

The loss of those revenues means the scope of the tax reform package will likely be smaller than the sweeping cuts Trump and the GOP campaigned on last fall. Deeper tax cuts – without corresponding deep cuts in spending – will likely draw strong opposition from GOP fiscal conservatives opposed to any increases in the budget deficit.

"It's really going to be very difficult," said James Pethokoukis, a columnist at the American Enterprise Institute. "They're trying to do big tax cuts at the same time they've made all these promises about balancing the budget. You can be the most wonderful negotiator in the world but you can't make one plus one equal three."

The White House this week signaled that it may soften its proposed tax corporate tax cuts, from the 15 percent rate proposed in April to a somewhat higher rate. The current top rate is 35 percent.

One alternative could involve a large, but temporary, tax cut that lets Republicans declare victory without imposing permanent budget gaps, much like the Bush tax cuts of 2001. When they finally expired at the end of 2012, Congress had to scramble to avoid the so-called fiscal cliff created by abrupt tax hikes and spending cuts that threatened to produce a huge drag on the economy.

"The problem with these temporary tax cuts is that they're unstable; they add to the problems of the tax system, they don't subtract from it," said Jason Furman, an economist at the Peterson Institute for International Economics. "They'll get reversed in the future and, in the meantime, they'll add to the deficit."

Though details of the White House plan are being closely guarded, the Trump administration is planning a big push after Congress returns from its August recess, according to Gary Cohn, director of the National Economic Council.

"We were going to get to tax reform if [health-care reform] passes or it doesn't pass," Cohn said late last month. "We are on a tax reform agenda when we come back in September, when the August recess is over. We will be 100 percent engaged in tax reform."

That puts the debate over tax reform on a collision course with two other politically contentious battles, one over the proposed budget for next year and the other over the debt ceiling, which the Treasury expects to hit by mid-October.

With Democrats unwilling to cross the aisle and Republicans divided between moderates and staunch conservatives, the divisions created by the health-care battle are already complicating debate over those issues.

"We've got lots of other things coming up where this basic governing problem is going to manifest itself," said Peter Orszag, former budget director in the Obama administration.