Why the prospects for tax reform in 2017 are dimming

More than ever, it looks like Congress will settle for a big tax cut and abandon reform. 

Yuya Shino/Reuters/File
A group of people discuss corporate tax reform at a coffee shop in Tokyo. The US government may consider reforming the corporate tax system.

It  seems that every day, the prospects for tax reform dim a bit more.

This is what’s happened in just the past few days:

Last Friday, President Trump sent what were at best mixed signals about the issue of border adjustability, the linchpin of the House Republican tax reform plan.

On Tuesday, the Senate Finance Committee, normally a relatively safe haven from the toxic partisanship of Congress, blew up over the nominations of Steven Mnuchin to be Treasury Secretary and Representative Tom Price (R-GA) to head the Department of Health and Human Services. Democrats walked out. Panel chairman Orrin Hatch (R-UT) called them “idiots.” And, on Wednesday, with no Democrats in the room, Republicans on the panel voted to send both names to the Senate for confirmation.

Also on Wednesday, Hatch and the Senate’s #2 Republican, John Cornyn of Texas, sent their own negative signals over border adjustability. Hatch, who said his committee may not wait for a House bill before drafting its own version, continued to raise questions about a destination-based tax regime. Cornyn, who may be feeling pressure from home state interests such as oil companies, warned that the Senate would not “rubber stamp” a House measure.

Over the past week, the business community split even more deeply over the issue. Big US-based multinationals, such as General Electric and Dow Chemical, are bankrolling lobbying coalitions to back the border adjustment plan. But big retailers and shopping center developers have announced a big push against the idea.  

Then there is the ever-present, but seemingly growing, capacity issue. Trump invited Democratic and Republican leaders of the Finance and Ways & Means committees to the White House this morning…to talk about trade. Republicans continue to be deeply divided over health reform and under the gun from both Trump and the insurance industry to act quickly on at least some elements of replacing the Affordable Care Act.  Both trade and health will take an enormous amount of time and effort and distract from tax reform.

Where does this leave reformers?

To start, it is inconceivable that Congress would enact broad-based reform-- with the winners and losers such a measure would create-- without the enthusiastic backing of the White House. That may be especially true since the president seemingly has the ability to dominate every conversation. And for now, Trump seems anything but enthusiastic about key House tax changes.

It seems increasingly likely that Ways & Means and Finance will head in radically different directions, at least when it comes to business taxes. That’s not necessarily a deal-breaker, but working out such extreme differences will take time and willingness to compromise.

If not border-adjustability, what? There are the policy issues of course: Will Congress push a business cash-flow tax or stay old-school and stick with a traditional corporate income tax? But perhaps the bigger issue is one of money. Many congressional Republicans vow that a tax reform would not add to the deficit. But big rate cuts would require significant revenues from elsewhere to avoid boosting the deficit. The Tax Policy Center estimates that border adjustability would raise $1.2 trillion over the next decade. Without it, lawmakers have no obvious way to pay for big business tax rate reductions.

Wither the Democrats? Just as broad-based tax reform needs strong White House support, it also needs at least a gloss of bipartisanship. Otherwise, those who lose tax benefits in any reform would blame only Republicans, much as Democrats took all the blame for the downsides to the ACA. Yet, bipartisanship is in short supply these days. At best, it will take time for the Finance panel to repair the damage done in  recent confirmation battles. At worst, the damage will last.

At the same time, even those Democrats who might be willing to work with the GOP on reform will be under growing pressure from their base to join what is increasingly being called “the resistance.”  In such an environment, Democratic lawmaker will have a tough time backing any bill that slashes taxes for US-based multinationals. And it will be especially tough to imagine them supporting a destination-based tax that critics charge would raise consumer prices for imported goods.

So where does this leave tax reform, even business tax reform? It is far too soon to declare it dead. But the events of the past week have hardly advanced the cause. More than ever, it looks like Congress will settle for a big tax cut and abandon reform.   

This story originally appeared on TaxVox.

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