History Suggests Tax Reform Process Is Just Getting Started

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By Laura Davison and Colleen Murphy

Republicans laid out an ambitious agenda at the start of the year to overhaul the tax code by the end of 2017.

But history suggests that there isn’t time for a complete overhaul by December. It took more than two years to pass tax legislation in 1986, which was shepherded through with bipartisan plans and buy-in from the White House. And as June begins, it’s unclear if the GOP has unified around the framework and cost of tax reform.

“At the rate we’re going, we’re going to have like a full proposal, you know, somewhere like 2075 or something like that,” Senate Finance Committee ranking member Ron Wyden (D-Ore.) said at a May 25 hearing. “We really got to get moving.”

House Ways and Means Republicans are still talking through the details of the blueprint they put out last year, and members are split on the controversial border adjustment tax at the center of the plan. Over in the Senate, lawmakers are unified in opposition to the import tax provision, and are currently reviewing previous tax reform plans for ideas.

The White House released a one-page tax plan on April 26. The proposal outlined goals of tax cuts, but didn’t delve into the details of how to pay for those reductions, a necessary step for overhauling the tax system. National Economic Council Director Gary Cohn initially said the administration would release a more thorough plan later this summer, but lawmakers are now signaling that the next release will be unified legislation between the two chambers and the administration—a goal that some doubt can be achieved.

In Hindsight

The effort at this point looks like 1984, a tax lobbyist said, comparing the process to the most recent tax reform push that culminated in 1986.

The Treasury Department released a document—known as Treasury I—in 1984 making the case for tax reform, which received opposition from the business community at the time. In the months following the Treasury plan release, the House Ways and Means Committee, chaired by a Democrat, and the Senate Finance Committee, led by a Republican, held hearings about tax reform and began drafting their own versions of legislation.

In 1985, Treasury and the White House released a second document—Treasury II—that made changes to the first draft and addressed the criticisms that Treasury I would hurt the cost of capital.

House Republicans view the fact that they are the only group with a fleshed-out plan as an advantage. But it could end up hurting the big-picture reform effort because there is no real space for compromise between the House and Senate.

“If you are going to do something bold, you need to come out with a range of ideas and see what members like,” the lobbyist said. “The House blueprint is only one view of the world.”

The tax-writing committees have been working on formulating ideas about tax reform for several years, although efforts have largely failed to gain traction. Former Ways and Means Chairman David Camp (R-Mich.) released a comprehensive tax reform draft in 2014 that was met with resistance from the business community because it eliminated several popular tax provisions while only lowering the corporate rate to 25 percent. Still, many of the Camp provisions are present in the blueprint and more could emerge as lawmakers look to craft legislation.

“I kind of look at Camp as the modern day equivalent of Treasury II,” Mark Prater, chief tax counsel for Republicans on the Senate Finance Committee, said earlier this month at a Federal Bar Association event. “It’s a very big, broad menu of offsets and other changes and reforms.”

Still, House Ways and Means Chairman Kevin Brady (R-Texas) has repeatedly said members are on track with their talks and plan to create a single plan between the chambers and the White House. When pushed on timing, Brady says he isn’t worried about the specific day reform passes, as long as it is this year.

Tax reform is unlikely to follow the same process as in 1986, largely because Republicans control the House, White House and Senate, said Jeffrey Birnbaum, co-author of “Showdown at Gucci Gulch” about the 1986 Tax Reform Act. Instead, they are looking for a unified plan rather than negotiating with members of the other party.

The hope is that there are fewer disagreements than last time, Birnbaum said. But the unwillingness of lawmakers to take votes on legislation that might not pass could make it harder to pull together a plan that has enough support.

“This Congress seems allergic to taking votes, so that’s one of the ways people know what’s working and what’s not, to actually put it to a vote,” he said. “Now, they don’t seem to want to risk that.”

Big Policy Lifts

If Republicans are able to notch a success with tax reform, it won’t be the first time in recent years that one party has hammered out a win on a major initiative. The passage of the Affordable Care Act in 2010 marked the culmination of two years of tumult for Democrats as they worked on what would become President Barack Obama’s signature achievement.

While lawmakers neared a bipartisan deal on the ACA, they were never in full agreement and couldn’t bridge the gap, said Chris Condeluci, principal at CC Law & Policy PLLC. Republicans now say they are about 80 percent in alignment with the White House on a tax reform vision.

Condeluci, who was a Republican tax staffer on the Senate Finance Committee who helped develop tax and health portions of the ACA, said Democrats in 2009 ran into a similar “time crunch” as they wanted to pass legislation before 2010. Still, they had some advantages Republicans don’t have now.

“The luxury of the ACA exercise is it was the only item on the agenda for the 2009 year—the only priority,” Condeluci said.

The political atmosphere leading up to the passage of the ACA also played more to Democrats’ favor than the current one, said Sean Morrison, an associate at Miller and Chevalier in Washington. Morrison worked for Sen. Max Baucus (D-Mont.) from 2009 to 2011, while Baucus was chairman of the Finance Committee.

Democrats gained 21 House seats in the 2008 election—when health care was a signature campaign issue—and held a super majority in the Senate. The struggling economy “gave a lot of wind to big, big things,” as well, he said.

“That climate made it possible to do a couple big pieces of legislation,” Morrison said. “There isn’t the same national urgency that we had with enacting massive economic packages.”

Democrats ultimately passed the measure using the filibuster-proof reconciliation method, a strategy Republicans now hope to use to pass tax reform. Reconciliation now means Republicans could pass tax reform through the Senate with just 51 votes—a simple majority.

But while it may seem easy to tally the reasons tax reform won’t end up coming together, such massive legislation is unpredictable. Negotiations may falter, as they did during passage of the ACA, but then lawmakers may be swayed after going back to their districts and seeing the “consequences to inaction,” he said.

“People are going to tell you something is not going to happen up until the second it does,” he said.

Committee Perspective

Several Republican Ways and Means members told Bloomberg BNA that they think the committee has made substantial progress since unveiling the blueprint a year ago. The committee has so far held two two-day policy retreats, two hearings on tax reform-related issues, and countless meetings with business leaders and industry groups. Members’ aides meet with Ways and Means staff several times a week and lawmakers meet almost daily when they are in session. Members have also shared dozens of lunches together in a Capitol meeting room.

When pushed, members also acknowledge that more details need to be hashed out—but there’s dissonance among them about where those details should come from, with some pointing to the Senate and others to the White House.

“We really need the Senate to get engaged, weigh in, rather than let everyone else do it and once it’s done figure out what we’ll do,” said Rep. Patrick Meehan (R-Pa.), a member of the committee. “We need them up front to be part of the discussion.”Meehan said while the group hasn’t “dug into it with the kinds of detail that would ultimately be necessary,” it has “been around the edges of just about every fundamental issue.”

Cooperation Needed

Building out the blueprint is tasked to a few Ways and Means staffers, namely chief tax counsel Barbara Angus. Aides to committee members have privately expressed frustration that there isn’t more information readily available. Key details on provisions with wide-ranging economic impacts such as interest deductibility and expensing haven’t yet been sketched out.

The House plan proposes a radical shift that favors full expensing over interest deductibility. Senators have expressed support for a more conventional plan that would eliminate some tax breaks in order to lower the corporate rate, but not as much as the House has proposed.

Asked if tax reform can pass this year, Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) said, “It could, if we can get everybody to cooperate.”

Ways and Means members have been talking to one another “through the press, through other forms” so far, said Rep. Peter Roskam (R-Ill.). He pointed to committee hearings as a key step in giving members a chance to really dig into ideas.

Impending midterm elections have added pressure to the tax overhaul process, with many members saying it must come this year. Still, tax reform has historically had a way of starting and stopping—it died many deaths before being passed in 1986, many say. More recently, House Republicans declared their health bill to be dead after it was pulled from the floor in late March. The measure passed the chamber May 4.

“I think that a lot of observers have been impatient with the progress of tax reform, but I think they ought to relax a little bit,” Birnbaum said. “There is no way that a politically difficult and complicated piece of legislation such as tax reform can move quickly.”

To contact the reporters on this story: Laura Davison in Washington at lDavison@bna.com; Colleen Murphy in Washington at cmurphy@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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