Health care is a big red flag signaling trouble ahead for President Trump’s hope of passing a major tax reform package.
If President Trump and the Republicans in Congress are having to work this hard to approve legislation to repeal and replace Obamacare — an article of faith that they’ve reaffirmed at least once a day eight years running — then the odds of major changes in tax law are uncertain.
That’s because the policy is no less complicated, nor the politics less complex. Indeed, they’re more so.
The ink was barely dry on the one-page tax reform blueprint handed out by the White House when congressional Republicans started undermining the proposal. Eliminating the federal deduction for state and local taxes, for instance, is probably dead on arrival. And that’s just for starters.
House Republicans have been working on their own plan.
A crucial element, altering how imports and exports are taxed that would generate an estimated $1 trillion to pay for tax reform, was not included in Trump’s proposal. That’s sure to make Senate Republicans happy; most oppose the idea of a “border adjustment” tax.
But House Republicans aren’t giving up just yet, adding another layer of volatility to the GOP’s effort to overhaul the federal tax code for the first time in three decades.
That’s why, especially after progress on health care with House passage of the American Health Care Act, there’s an episode that might better reveal the political briar patch Republicans and the administration are about to dive into: “Plan B.”
Lesson of 2012
Rewind to December 2012, when the Bush-era tax cuts were set to expire and the country tottered on a “fiscal cliff.” If Congress didn’t approve some sort of tax deal by New Year’s Eve, virtually every American would get stuck with the bill.
House Republicans were scrambling to avoid getting run over by Obama, freshly re-elected and, for a moment, politically strengthened.
He wanted to preserve tax cuts for the middle class enacted by President George W. Bush in 2001, but let tax rates rise to where they used to be for higher income people — “millionaires and billionaires,” as he put it.
John Boehner, then the House speaker, first sought an expansive deal with Obama to preserve most of the Bush tax cuts, linking that provision to substantial entitlement reform (about $1 trillion) and authority to raise the debt ceiling. When that fell apart, Boehner pivoted to “Plan B.”
The Ohio Republican told his conference that they had one chance to turn the tables on Obama and protect 99% of Americans from a tax hike: Offer a deal that took the President’s 2012 campaign promise literally, to raise taxes on “millionaires” and above, but preserve existing rates for everyone else.
House Republicans demurred. And not just conservative rebels; some of Boehner’s own lieutenants rejected the strategy. Politically, letting taxes rise for everyone was deemed preferable to taking a tough, compromise vote that would have saved tens of millions of Americans from a writing a bigger check to the IRS.
“The policy outcome was worse because Republicans couldn’t do something that was tactically smart but politically difficult,” recalled GOP operative Michael Steel, then a senior Boehner adviser.
(Obama ultimately struck a deal with Senate Republicans, then in the minority, to maintain the Bush-era rates for individuals and married couples earning less than $400,000 and $450,000, respectively — well below the $1 million threshold Boehner tried to engineer.)
Fast-forward to 2017.
This won’t be easy
Trump is proposing to strip the tax code of scores of cherished deductions as part of an overhaul that would cut rates on corporations and small businesses by a whopping 20 percentage points and, theoretically, reduce the burden on individuals and married filers.
Only the mortgage interest and charitable giving deductions would survive. Rather than relying on spending reductions to cover lost tax revenue, Trump’s cuts would be paid for by the economic growth they generate, senior administration officials say.
Now: Explain how a party that couldn’t even muster one tough vote on taxes not too long ago is going to withstand aggressive opposition from industry and political advocacy groups with their flush advertising budgets, and, oh, voters, and accomplish tax reform?
And, that’s before Trump’s ambitious, albeit for now light-on-details plan battles with projections that it might lead to Trump Tower-sized deficits. As I reported late last month in the Washington Examiner, Republicans aren’t buying it.
“It’s not a plan, it’s phony,” a veteran House Republican who is usually supportive of the President told me, on condition of anonymity in order to speak candidly. “They’re going to lower the rate to 15 percent but it’s going to be revenue neutral? It’s not going to work. That’s not even well thought out.”
Yet the prospects for tax reform have brightened somewhat with House approval of the American Health Care Act.
Sure, the Obamacare repeal package cleared the House with only two votes to spare, and faces an uncertain future in the Senate. Republicans in that chamber think so highly of it, they’ve decided to throw it in the trash and write their own bill.
But success in the House nonetheless proved that Trump and congressional Republicans might have the chops to govern, injecting fresh optimism into the party’s tax reform push.
“This has brought the Republican Party together,” Trump said during a public event to celebrate the House vote. “We’re going to get this finished and then we’re going, as you know, we put our tax plan in, it’s a massive tax cut. The biggest tax cut in the history of our country.”
The President might want to wait before he sends a braggadocios tweet.
Joe Lawler, my colleague at the Examiner, reports that House Republicans are sticking with their original plan for a permanent, self-financing tax reform plan, despite indications from the Trump administration that its preferences differ (that is, they favor some form of border adjustability).
That means tax reform that is revenue neutral.
In other words, contra Trump, House Republicans oppose reform that would send more money back to the people in tax cuts than it would generate in taxes paid. And, don’t forget those pesky, beloved tax deductions that could be near impossible to find the votes in Congress to get rid of.
Politicians on both sides of the aisle like to say that health care is complicated because it involves one sixth of the economy. Well, tax policy is the economy. This is the breadth of the challenge that waits.