February 17, 2017
I have been fielding quite a few questions about the timing and scope of impending tax reform legislation. As to the proposals, this Tax Foundation link (https://taxfoundation.org/details-and-analysis-2016-house-republican-tax-reform-plan ) has a pretty good summery of the Republican proposals. As to timing, moving a large tax bill through Congress is one of the more challenging legislative acts simply due to its impact on the economy and complexity of the legislative activity. What follows are my thoughts on the path to US Tax Reform, and as you will see, timing is a critical component.
I start with health care. Over the past few weeks there appears to be strong consensus forming that the repeal / replacement of the Affordable Care Act will be the first major piece of legislation to move. Over the past few days we’ve seen Speaker Paul Ryan, and Ways & Means Chairman Tom Brady affirm President Trump’s intention that the ACA legislation proceed any tax legislation. Republicans want some Democratic support for this activity, but as of this writing I am hard pressed to name anyone in the Minority Party lining up to repeal or replace President Obama’s signature legislative achievement.
If the health care debate cannot attract Democratic support, Republicans face the choice of pushing repeal / replace legislation through the 51 vote budget reconciliation process or simply letting the law stand. I would think that the reconciliation process is the likely outcome. If that is the case, Tax Reform is now outside the reconciliation process (because Health Care Reform was FIRST). This means we now need 60 votes in the Senate or yet another overturn of filibuster rules to pass tax reform legislation. Importantly this pushes tax legislation out into the late summer time frame.
A word on the Border Adjustment Tax. Quite simply without a revenue raiser in the law, how do you pay for tax reform? Goldman Sachs analysts see just a 20% chance that the Border Adjustment Tax passes. Add this to the chorus of people claiming the tax would be WTO non-compliant. Without the revenue raiser, the deficit hawks in the republican party may join with Democrats in opposing reform. This makes the wrangling over tax legislation a much more drawn out process. Republicans also know that if they get beyond 2017, mid-term elections begin to loom on a horizon. An anti-tax reform coalition may simply endeavor to run out the clock in hopes that the Republicans loose one house of congress.
Therefore, time is of the essence. Will Congress pass Border Adjustment in 2017 knowing a WTO loss is eminent (say 2018)? Does a VAT get passed subsequent to the WTO loss (and the mid-term elections) to plug the budget hole? https://www.wsj.com/articles/should-the-u-s-adopt-a-value-added-tax-1456715703 There is plenty of consensus that the US tax system is uncompetitive, especially in the international arena. Can that consensus carry the day to tax reform?
If we don’t see tax reform by the time the leaves turn next year, it’s odds diminish each day until after the mid-term elections.
As I said to a distraught family member after the November election – try to relax – after all you get to vote again in 24 months.