House GOP Budget Would Tie Tax Reform to Spending Cuts

For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...

By Jonathan Nicholson, Laura Davison, and Colleen Murphy

The planned Republican tax system overhaul would be part of a legislative package that would also include more than $200 billion in spending cuts, under the House GOP budget unveiled July 18.

In the budget outline, the Ways and Means Committee is one of 11 committees tasked with reducing the budget deficit by making changes in programs under their jurisdiction. Ways and Means’ deficit reduction directive calls for at least $52 billion in cuts over 10 years; the total cuts by all 11 committees would be a minimum of $203 billion over those years. The committees’ proposals would be compiled into a single reconciliation bill for floor consideration.

The budget resolution represents the first step for a partisan route to pass tax reform, but its chances of passing Congress are far from certain as both moderate and conservative Republicans have expressed doubts about the approach. Budget reconciliation was also the approach used to move a health care bill through the House—though it is currently dead in the Senate.The House Budget Committee can give so-called reconciliation instructions to committees, but it can’t dictate how the panels meet their numerical targets. However, an overview of the budget resolution says Ways and Means is expected to use its directive to craft “pro-growth tax reform that would boost economic growth and unleash the power of the American entrepreneurial spirit.”

Under the budget, the committees would have until Oct. 6 to send legislative text on its spending cuts to the Budget Committee.

House Budget Chairman Diane Black (R-Tenn.), whose panel is slated to mark up the budget resolution July 19, said she expects it to pass committee, but didn’t comment on its chances of passing the full House. When asked about the strategy to stick with filibuster-proof reconciliation—which hasn’t helped Republicans get a health care bill through the Senate—Black said it is still the best approach.

“We will show the Senate we can do our work, and then we will work with the Senate, because obviously that is the process and that’s what we will do,” she said at a July 18 news conference. “We cannot not do our work dependent on what the other body is doing.”

Internal Resistance

Members of the conservative House Freedom Caucus have said they are inclined to vote against the budget unless there are more details about the tax reform plan. The spending cuts in the resolution are in part to appease more hard-line lawmakers, but Rep. Mark Meadows (R-N.C.), who chairs the Freedom Caucus, said that’s not enough.

The budget “doesn’t matter” until Republicans agree on a detailed plan for tax reform, he said July 17. “That’s the only reason you do a budget. If we get a tax reform plan, we’ll get serious about passing a budget within four or five days.”

Meadows said the bill would likely pass out of committee July 19, but that he was certain it would fail on the House floor, and leadership may decide to not bring it to a floor vote.

Another Freedom Caucus member, Rep. Dave Brat (R-Va.), said he could support the budget resolution if Ways and Means Chairman Kevin Brady (R-Texas) would commit to a 20 percent corporate rate and agree to drop the contentious border adjustment tax provision.

Brady has repeatedly said he thinks border adjustment, which taxes imports and exempts exports, is the best way to stop companies from going offshore, but that he is open to alternative policies. Brady, other Republican congressional leaders, and White House officials are meeting regularly to reach agreement on a unified plan for tax reform.

Members demanding tax reform details before agreeing to vote for the budget “isn’t a fair understanding of the process,” Rep. Kenny Marchant (R-Texas) told reporters July 18. “We really do need to know what’s in the budget and what the effect of the health care bill, whatever it looks like, will have on revenue before we can do a thorough job.”

Rep. David Schweikert (R-Ariz.), a member of the House Freedom Caucus and Ways and Means, said he has been talking caucus members through the complexities of tax reform. Some of the members have good ideas, but “aren’t appreciating the scale” of tax reform, because Ways and Means members want to entirely rewrite the code instead of just lowering rates, he said.

“I’m not sure a lot of the body completely appreciates, I didn’t either until I was on the committee, the complexities that go into tax reform,” he told Bloomberg BNA.

The budget resolution could also raise resistance in the moderate wing of the GOP. A group of 20 centrist Republicans recently sent a letter to House Speaker Paul D. Ryan (R-Wis.) saying they would be “reticent” to vote for a budget resolution until a deal was reached with Democrats on appropriations and the debt limit.

“The budget resolution instructions should be instructed at tax reform, now it is about all these mandatory spending changes,” Rep. Charlie Dent (R-Pa.), a moderate, told Bloomberg BNA. “You might have to do tax reform outside of reconciliation.”

Higher Growth Projected

The budget outline aims to get to a $9 billion surplus in 2027 through substantial cuts in mandatory and discretionary spending and through faster economic growth than assumed by the nonpartisan Congressional Budget Office.

The budget projects $46.333 trillion in spending over the 2018-2027 period and revenue of $41.953 trillion. Budget Committee Republicans assumed another $1.5 trillion in deficit reduction to come from faster economic growth, leaving a cumulative 10-year gap of $2.880 trillion. That would be well below the $10.112 trillion 10-year deficit the CBO projected in late June.

Instead of using the CBO’s economic assumptions issued in January and updated in June, the committee used its own estimates for economic growth, which were more optimistic than the CBO’s. The panel estimated economic growth to average 2.6 percent annually in the budget window, above CBO’s 1.9 percent, because of tax and regulatory changes.

In addition to Ways and Means’ $52 billion deficit reduction target, the other committees and their targets are: Agriculture, $10 billion; Armed Services, $1 billion; Education and the Workforce, $20 billion; Energy and Commerce, $20 billion; Financial Services, $14 billion; Homeland Security, $3 billion; Natural Resources, $5 billion; Judiciary, $45 billion; Oversight and Government Reform, $32 billion; and Veterans, $1 billion.

To contact the reporters on this story: Jonathan Nicholson in Washington at jnicholson@bna.com; 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

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Daily Tax Report