Tough Tax Calls Up to Congress After Big Six Tax Plan Release

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By Laura Davison, Kaustuv Basu, and Colleen Murphy

The Big Six tax framework relegates most of the difficult decisions to the congressional tax-writing committees, a sign that the most contentious tax reform fights are yet to come.

The plan—which calls for a 20 percent corporate rate, a 25 percent passthrough rate, and a 35 percent top individual rate—leaves it up to the House Ways and Means and Senate Finance committees to find revenue raisers. The plan also says lawmakers may consider a higher top rate on the wealthiest taxpayers. That is likely to be a politically sensitive decision that could face criticism from Democrats, who oppose lowering taxes on rich individuals.

The framework is the most detailed plan yet from the group of White House officials and Republican leaders who have been meeting for months about a tax bill. The leaders agree to eliminate the state and local tax deduction, but that alone won’t pay for the steep tax rate cuts. The committees will have to identify other tax breaks to eliminate and determine whether the changes will be temporary or permanent, which will rouse resistance from lobbyists and industry groups.

(Read Bloomberg BNA’s special report on the Republican tax framework)

“Today might be a bit of a sugar high,” Isaac Boltansky, senior vice president and policy analyst at Compass Point Research and Trading LLC, told Bloomberg BNA. “Everyone is so excited to see any degree of detail, but this doesn’t answer any of the big questions. How are we going to pay for this? Will there be any budgetary offsets?”

Final Decisions

Making provisions permanent or phasing them in and out will be a decision for the tax committees in the coming weeks, Ways and Means Chairman Kevin Brady (R-Texas) said Sept. 27. His comments signal a recognition that it may not be possible to pay for a completely permanent plan.

Republicans are still “wrestling with” details of the framework—such as the level of interest deductibility, a plan to classify wages versus business profits for passthroughs, and parity for treatment of passthroughs and corporation—Rep. Vern Buchanan (R-Fla.) told Bloomberg BNA. The Republican conference will divide into several working groups to further discuss the areas, he said.

Members also questioned the framework’s individual tax brackets, specifically the decision to set the lowest rate at 12 percent instead of 10 percent, during a five-hour retreat for Republican members on Sept. 27, Buchanan said. There were questions about a fourth individual income tax bracket for the wealthy, which the framework said was a possibility.

It was unclear how much support there is in the Republican conference to have a fourth bracket. When Rep. Peter Roskam (R-Ill.), chairman of the Tax Policy Subcommittee, was asked whether he supported one, he said, “I think a fourth bracket is likely.” When asked again if he supported the idea, he didn’t answer the question but said again that a “fourth bracket is likely.”

When Brady was asked about the fourth bracket, he said he was confident that a tax bill “would provide relief for all Americans.”

Goals Achieved?

Rohit Kumar, a former top staffer to Senate Majority Leader Mitch McConnell (R-Ky.), said the next step is to see if both chambers can pass a budget resolution. “One the primary purposes of this document was to facilitate that outcome. So if it helps make that possible, then the document will have succeeded in one of its major goals,” he said in an email.

The House Freedom Caucus on Sept. 27 formally backed the tax framework and a budget resolution, the vehicle that contains instructions to pass tax reform with a simple majority in the Senate. The step is an important one, because tax reform can’t proceed on a fast track without the fiscal year 2018 budget resolution. The Senate Budget Committee plans to mark up a budget resolution the week of Oct. 2, and the House is to vote on its version that week as well.

There are bound to be questions about how the document advances the cause of tax reform, given that many crucial questions on pay-fors remain unanswered. One GOP aide expressed frustration that the plan didn’t go much beyond the House Republican tax blueprint from 2016. The lack of details means that there hasn’t been much progress made in months, the aide said, speaking anonymously in order to express views candidly.

Some are already gearing for epic battles over how to pay for the cuts proposed in the framework.

Jonathan Traub, a former top Republican staffer on Ways and Means, said there are lots of details to be filled in. “The level of offsets necessary to cover the implied cost of the large rate reductions in here will set up epic fights going forward,” Traub, now with Deloitte Tax LLP, said in an email.

Agreeing to offsets and writing transition rules for elements such as the shift to a territorial tax system will be the “biggest lift” for the tax-writing committees, Sean Morrison, an associate in the tax department at Miller and Chevalier Chartered, told Bloomberg BNA Sept. 27.

The most public disagreement among members will likely come in the debate over pay-fors, rather than in the transition rules or effective dates, he said. For every provision, “you can imagine some constituency that’s upset by it,” he said. The absence of tax brackets, for example, gives the committees leeway to adjust them if they need to find more revenue.

Won’t Stop

Andrew Roth, vice president for government affairs at Club for Growth, said the club is “fully prepared to push” for another tax plan next year to attack additional areas like retirement savings if they aren’t fully addressed this go-round.

“The Republican Party has a duty to continually attack the tax code every year,” Roth told Bloomberg BNA. “What we’re looking at now is just the start.”

The framework seemed to be straddling a fine line between keeping the interests of the two tax-writing committees alive, with nods to the House GOP tax blueprint and a corporate integration plan.

“The committees also may consider methods to reduce the double taxation of corporate earnings,” the framework said.

The statement is a nod to the dividends-paid corporate integration plan that Finance Committee Chairman Orrin G. Hatch (R-Utah) has pushed to remove the double layer of corporate taxation. Recently, Hatch’s tax staff has floated the idea of a partial dividends-paid corporate integration plan as a way to get the effective corporate tax rate down to somewhere around 15 percent.

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

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

For More Information

The Big Six tax framework is at http://src.bna.com/sS3.

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