Making tax policy predictions for 2017 is especially perilous, given the uncertainties surrounding the incoming Trump administration’s fiscal agenda. But since there is a good chance Congress will enact a major tax bill this year, here are ten key issues to watch:
Tax cuts or tax reform. President-elect Trump and congressional GOP leaders insist they will reform the US tax code in 2017. But real reforms such as eliminating tax preferences in return for rate reductions or shifting to a business cash flow tax will be extremely controversial. Will lawmakers make those tough choices or just pass a big tax cut?
Timing. Trump aides and Hill leaders boldly predict that Congress will pass not one, but two, major tax bills by April. But making tax policy is notoriously complex and time-consuming. In addition, lawmakers and their staffs could well spend much of February and March bogged down in controversial Trump nominations and the Affordable Care Act repeal.
Tax cuts for the rich. Trump’s nominee for Treasury Secretary, Steven Mnuchin, insists that high-income households won’t get an “absolute” tax cut. But the Tax Policy Center estimates that Trump’s most recent plan would cut millionaires’ taxes by an average of $317,000 in 2017. Will Congress pass a fundamentally different plan, or is Mnuchin wrong?
How much new debt will Republicans tolerate? This could prove to be the crucial question in 2017. Trump would add $7 trillion to the debt over a decade, even after accounting for economic effects, according to TPC. The House GOP blueprint would add $3 trillion. What is the upper bound that congressional Republicans, especially Senate deficit hawks, will tolerate?
How will the bill be scored? Congressional Republicans will rely on dynamic scoring to measure the cost of their tax bill. But even including economic effects, tax cuts such as those offered by Trump and the House Republicans won’t generate as much growth as backers hope. Indeed, TPC and the Penn-Wharton Budget Model found the Trump plan’s burgeoning debt would slow economic growth by 2025. Congress could try to solve this scoring problem by instructing the Joint Committee on Taxation to assume annual growth of, say, 4 percent when it models the cost of any tax bill. Such a projection would be worthless on the merits and damage JCT, but it could allow Trump and Congress to claim that their tax cut adds less to the deficit than it likely would.
How will business respond to Trumponomics? During the campaign, Trump repeatedly vowed to restore US-based manufacturing jobs. But his tax plan is likely to boost deficits and interest rates, which would raise costs to businesses. Similarly, a stronger dollar would make US exports less competitive as would tariff-induced broken supply chains. Will big tax cuts be sufficient to offset those effects, or will Trumponomics perversely slow US business investment and hiring?
How will Congress treat specific tax preferences? Even a big tax cut is likely to target some existing tax breaks for businesses and individuals. But which ones, and by how much? Trump proposed a cap on individual deductions and promised to eliminate some unidentified business breaks. The House GOP has been largely silent on what preferences it would target. Most of the tax lobbying battles in 2017 will focus on these choices.
Will the tax cut attract Democratic support? Congressional Republicans blasted President Obama for cutting them out of the Affordable Care Act debate. The GOP is now faced with its own choice: Will it try to make any tax bill bipartisan by reaching out to Democrats? Will Democrats be willing to respond—and at what price?
How will Congress pay for health insurance subsidies? Congress seems likely to quickly repeal the many taxes that accompanied the ACA. Yet when lawmakers get around to designing a replacement for the health law, they will need some form of subsidy to help low- and middle-income households pay for insurance. But, having repealed the ACA taxes, where will they get the money to pay for these costly new tax subsidies?
Tariffs. What will become of Trump’s threat to impose heavy tariffs on China and Mexico? Trump aides have dropped contradictory hints in the past weeks. Hill Republicans, many of whom are committed free-traders, have carefully sidestepped the issue, seemingly wishing it will go away. Will it?
As 2016 ends, Trump economic policy remains a muddle of unspecified details and contradictory proposals. But we’ll know soon enough what President Trump really wants to do.
This story originally appeared on TaxVox.