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After months of secret talks, Republicans are just about ready to provide the critical details of their long-awaited proposal for tax reform.
Republicans have been talking about their desire to cut taxes for so long it’s easy to forget they haven’t actually released legislation to do so.
That will likely change on Thursday, when House leaders plan to unveil a bill they’ve long promised would be the most far-reaching overhaul of the U.S. tax code in more than 30 years. The big reveal was initially pegged for Wednesday but was pushed back as Republicans struggle to put the finishing touches on an exceedingly complex piece of legislation. Its introduction will mark the start of an ambitious legislative timetable: President Trump said Tuesday he wants the House to pass its bill by Thanksgiving and that he wants the legislation on his desk by Christmas.
“There’s never been anything like this in the history of our country,” Trump promised. “It’s cuts and it’s relief and it’s also reform.”
Whether he gets his wish will depend on how lawmakers, industry lobbyists, and the public receive the details of a plan hashed out in secret, many of which will involve politically difficult tradeoffs designed to keep the cost of the GOP plan under $1.5 trillion. What Republicans have publicized about their proposal to this point have been the benefits: a cut in the corporate tax rate to 20 percent from its current 35 percent, collapsing seven income tax brackets for individuals to three or four, doubling the standard deduction, and expanding the child-tax credit.
What comes out on Thursday will be the fine print. And despite the president’s bravado, Republicans on Capitol Hill recognize the steepest climb remains ahead of them. “Make no mistake, all hell’s going to break loose when that House bill becomes public,” Senator John Kennedy of Louisiana told CNN. “It’s taking a big ole piece of cheesecake and putting a bunch of spinach on top and saying, ‘You can’t eat the cheesecake ’til you eat the spinach.’”
The House bill will still have to survive a markup in the Ways and Means Committee next week, and Senate Republicans are working on their own proposal, though it’s expected to be broadly similar. Thursday’s announcement, however, will provide answers to several important questions that have vexed Republican legislators for months.
Here are a few of the big ones:
Who Will Pay More?
Despite the president’s apparent preference for a clean tax cut, the House Republican proposal will be a broader and more complicated shift in who owes what to the government. And that means, as GOP leaders have reluctantly acknowledged, that some people will actually see their taxes go up. “Yes, some Americans probably will” pay more, House Majority Leader Kevin McCarthy conceded on Fox News. “Because you know what we do? We close the loopholes.”
The nitty-gritty revealed in the GOP plan will allow news sites and think tanks to develop calculators that show exactly who wins and who loses. Politically, it could cut two ways. If those analyses show that the wealthier will pay more, the tax bill would become more attractive to some Democratic senators and make it easier for Republicans to pass. But the indications so far are that in some states, it’ll be the middle and upper-middle class that gets hit, either because of proposed changes to 401k retirement plans or the elimination of the federal deduction for state-and-local taxes. And if that’s the case, the GOP plan becomes a much tougher sell.
How Do the Rich Fare?
The treatment of the wealthy has been one of the more interesting subplots of the Republican tax-reform drive, revealing both philosophical and strategic differences within the party. Led by Speaker Paul Ryan and Ways and Means Chairman Kevin Brady, the supply-side conservatives writing the House bill believe in lowering the top marginal tax rate to encourage investment and new hiring, and they reject Democratic arguments that the rich should pay more—no matter how popular they may be—as class warfare.
If Ryan and Brady get their way, the highest income-tax bracket would go back down from 39.6 percent to 35 percent, where it stood during the George W. Bush administration before President Barack Obama demanded that Congress raise it on income above $400,000 a year. But Trump, who ran as a populist, is sensitive to attacks on the GOP plan as a giveaway to the wealthy. At his insistence, Republicans included a possible fourth bracket for the highest earners in the framework they released last month, and Ryan has said that will probably stay in the bill. It’s likely to keep the top rate at 39.6 percent, but possibly only for income above $1 million or a higher threshold than it is currently.
Other tax breaks benefiting the rich are likely to provoke intra-party squabbles. Trump, Ryan, and most conservatives have pledged to repeal the estate tax, or “death tax,” as they call it, which only hits inheritances valued at more than $5 million. But a few GOP senators, including moderate Susan Collins of Maine, have balked at the idea, and a compromise could be in the works.
Hold the SALT?
As I wrote last month, the biggest political land mine for Republicans is their proposal to prohibit people from deducting their state-and-local taxes, or SALT, from their federal bill. The GOP needs the $1.2 trillion in revenue it could generate to pay for its cuts to the corporate and individual income rates, but ending the tax break would punish Americans in higher tax states like New York, New Jersey, Illinois, and California. The provision nearly took down the GOP plan already, when lawmakers from New York and New Jersey rebelled against the party budget.
Their protests forced a compromise, but it’s unclear whether it’ll be enough to satisfy the concerns of enough members to ensure passage. Brady said in a radio interview on Tuesday that the tax bill would preserve a deduction for local property taxes but not for state-and-local income taxes. That solution has already cost Republicans the support of trade associations representing realtors and home builders, powerful industry lobbies who say the combined changes in the bill would depress home values.
Whither 401k Plans?
The most surprising proposal to leak out of the generally secretive GOP deliberations was the idea of taxing contributions to 401k retirement plans up-front rather than when people withdraw their funds later in life. Like the SALT proposal, this was about Republicans needing to raise revenue somewhere to pay for tax cuts elsewhere. The popular 401k plans were a curious target since they are used by middle-class as well as wealthier people, and the idea appeared to die a quick death once Trump rejected it in a tweet.
But Brady soon made clear that changes to 401k plans remained under consideration—an example of minor congressional rebellion that, more than anything, underscored how desperate Republicans are to find offsets for their tax cuts. One possibility is that the bill unveiled this week will increase the cap on annual 401k contributions, which is currently $18,000, but lower the amount that people can set aside without paying taxes on it. Democrats are likely to hammer the proposal either way, and to set up a clear contrast with Republicans, they announced their own measure to expand—rather than limit—the tax break for retirement savings. As GOP aides quickly pointed out, however, the benefits of the Democratic plan would actually accrue mostly to wealthy people who could afford to contribute more than $18,000 a year to retirement accounts.
How Much Is a Child Worth?
Republicans have already said they’ll include a proposal championed by Ivanka Trump to increase the child-tax credit, which currently stands at $1,000 per kid for lower- and middle-income families. What we don’t know is how high it’ll go. Some in the party want to double it to $2,000, but at a cost of $640 billion over 10 years, that could be too expensive for a plan that’s at risk of busting the budget as it is. The GOP could also choose to make a slightly smaller credit available to more people by expanding the income threshold for families.
Their decision will be instructive. Expanding the child-tax credit is one of the few ideas in the GOP plan likely to draw broad bipartisan support, and its supporters in both parties see it as a clear, targeted benefit to the middle class. Many conservatives, however, would like to see the money that might go to the child-tax credit instead directed to lowering rates. Where House leaders come down will be a clear indication of which side won out in the debate, and it could make the difference between an overall tax cut or increase for some families.
Is This Forever?
All along, Republican lawmakers have wanted to make their tax overhaul permanent. It’s better for businesses making long-term investments, advocates say, and it’s a bigger legacy for the party. But the Senate’s budget-reconciliation rules allowing Republicans to skirt a Democratic filibuster forbid legislation from adding to the deficit beyond the first decade after its enactment. That gives the GOP two realistic choices. One, it can raise enough revenue to offset the tax cuts over the long term, but that would require costly tradeoffs that could blow up politically. Or it could set the tax cuts to expire after 10 years, saving Republicans from having to make politically painful choices but sacrificing permanence.
The likelihood is that the GOP plan will be a mix of temporary and permanent provisions, in the interests of making the numbers work. Some tax cuts would expire and force a future Congress and a future president to decide whether to let them go up down the road, just like Obama had to do with the Bush-era tax cuts. This is another decision that pits Trump, who is term-limited and wants the deepest and most immediate tax cut possible, against Republicans in Congress, many of who will outlast him in office and won’t want to return to the issue again.