With President Trump generating new controversies on a daily (sometimes even hourly) basis, it’s easy to lose track of the fact that he’s simultaneously promoting a tax “reform” plan that amounts to giving the rich a huge tax cut. If you get your news directly from the president’s Twitter feed, this process is going swimmingly:
Many actual news outlets agree that there’s a decent chance congressional Republicans will put tax-reform legislation on President Trump’s desk. But what Trump refers to as making “just a few changes” is a complex and precarious process that still result in legislation that is most beneficial to corporations and the wealthy.
Here’s an overview of where things stand in the push to make Republican lawmakers’ dreams of not being yelled at by their donors a reality.
What the Legislation Would Do
In general, the bill offers tax cuts for businesses and rich people; it even contains specific perks for golf-course-owners, private-jet-owners, and people who send their children to private school. The nonpartisan Tax Policy Center estimates:
In 2019, those making less than $25,000 would get an average $50 tax reduction, or 0.3 percent of their after-tax income. Middle-income earners would get average cuts of $850, while people making at least $746,000 would get average cuts of $34,000, or 2.2 percent of income.
The Senate plan cuts the corporate tax rate from 35 to 20 percent, adjusts the rates on individual tax brackets, nearly doubles the standard deduction, eliminates personal exemptions, and mildly increases the child tax credit, while also making it more accessible to rich people.
This would mean that the government would pull in $1.5 trillion less in taxes over the next decade. To help pay for the tax cuts, the Senate bill repeals Obamacare’s individual mandate. The Congressional Budget Office says that would save the government $338 billion over the next decade, but lead to 13 million fewer people having health insurance. The plan would also save $1.3 trillion over the next decade by repealing the state and local tax deduction, which would hit high-tax states like New York, California, and New Jersey particularly hard.
The corporate tax cut would be permanent, but most individual cuts would expire in 2025 to comply with Senate rules banning legislation from increasing the deficit after a decade. If the tax cuts aren’t extended, in 2026 taxes will increase for pretty much everyone.
Where We Are Now
The House passed its tax-overhaul bill on November 16; it had been unveiled two weeks earlier, and no hearings were held on the legislation. The vote was 227 to 205, with opposition from all Democrats and 13 Republicans — most of whom are from New York, New Jersey, or California.
Now Senate Republicans are looking to hold a vote on their version of the bill by the end of the week.
Getting the Bill to the Senate Floor
Republicans may not have the 50 votes they need to pass their tax bill out of the Senate. But before they can even address that issue, they have to get the bill out of committee.
Two Republican senators, Bob Corker and Ron Johnson, added a new hurdle on Monday when they threatened to vote against the bill in the Senate Budget Committee on Tuesday afternoon if their concerns aren’t addressed. There are 12 Republicans and 11 Democrats on the committee, so the GOP can’t afford a single defection.
Fixing the bill may be tricky, as Corker and Johnson have different concerns. Corker, like several other deficit hawks, is now calling for a “backstop” that would have tax rates rise if the cuts fail to spark explosive economic growth to pay for the plan’s $1.5 trillion in deficit spending over the next decade. (Despite what many Republicans claim, independent experts say the tax cuts will not magically pay for themselves.)
Johnson thinks that the bill’s treatment of “pass-through businesses” — companies that pay their taxes through the individual tax code — isn’t generous enough.
“I’m not exactly sure what’s going to happen in committee. We’re working diligently to fix the problem,” Johnson told Wisconsin reporters on Monday. “If we develop a fix prior to committee, I’ll probably support it, but if we don’t, I’ll vote against it.”
Passing the Bill in the Senate
If Corker and Johnson allow the bill to pass out of the Senate Budget Committee, then majority leader Mitch McConnell can bring the bill up on the floor. That kicks off 20 hours of debate and a “vote-a-rama.” This process, which allows any senator to offer amendment on the bill, could drag on for some time. Senate majority whip John Cornyn called it a “dynamic process” and indicated that there will be changes to the bill in the coming days; he said there will be “manager’s amendments at different points along the way.”
During this uncertain process, GOP leaders need to find a way to get almost every Republican senator on board. They can afford to lose only two votes, and nine Republicans have suggested they might not back the bill. These are their demands:
Ron Johnson and Steve Daines: These are the only two senators who officially oppose the tax bill in its current form. Like Johnson, Daines wants a more generous deal for “pass-through” businesses. A Daines aide said he just wants to “ensure Main Street businesses are not put at a competitive disadvantage against large corporations.”
Under both the House and Senate versions of the bill, the corporate tax rate would be cut from 35 to 20 percent. But most privately owned companies are organized as pass-throughs, with the profits going to their owners, who are taxed at the individual rate of up to 39.6 percent. While the House bill cuts the pass-through rate to 25 percent, the Senate version creates a 17.4 percent income-tax deduction instead of establishing any special rate.
As Daily Intelligencer’s Eric Levitz explains, this actually helps “Main Street businesses”:
This change actually makes the Senate bill better for genuinely small businesses than the House version was: Right now, the vast majority of small business owners pay 25 percent or less on their (modest) business income. So, for them, a large tax deduction is worth way more than a ten-point cut in the top rate.
The Senate bill is less advantageous for wealthy pass-through business owners such as Senator Johnson, who owns part of a plastics company structured as a pass-through business.
Some have suggested raising the tax deduction for pass-throughs from 17.4 to 20 percent to appease the senators, and Johnson floated another idea on Monday: not allowing corporations to deduct state and local taxes, which he estimated would raise between $100 billion and $200 billion.
“Let’s treat all businesses equal when it comes to state and local tax deductions. We’re disallowing it for individuals, we’re disallowing for pass-throughs, we should disallow it for C corps,” Johnson said.
Bob Corker, Jeff Flake, James Lankford, and John McCain: The GOP can’t deliver its tax cut to wealthy people and corporations without driving up the deficit. But a handful of Republican senators remember that their party spent the past eight years complaining about the national debt, and they’re rightly worried that Congress will extend the pricey cuts set to expire after 2025, rather than raising everyone’s taxes.
“The savings, the score — it just isn’t valid because you know that they’re not going to follow through,” said Senator Flake. “You can’t assume that we’ll grow a backbone later. If we can’t do it now, then it’s tough to do it later.”
The deficit hawks may be the hardest group to placate, since their qualms get at the heart of the GOP’s lies about who the bill benefits and how it’s being paid for. They may be willing to accept Lankford’s proposal to insert a “backstop” to raise taxes if the cuts don’t produce the economic growth that’s been promised, though it doesn’t make any sense in the real world. The Tax Policy Center estimates that economic growth from the tax cuts will generate $169 billion in additional revenue — not over a trillion, as has been claimed — and it’s hard to imagine Congress having the “backbone” to raise taxes when the next recession hits.
Susan Collins and Jerry Moran: Both senators have voiced opposition to a number of items in the tax bill, most notably the repeal of the Obamacare mandate. Moran said he “encouraged the leadership” to separate health care from taxes, and Collins — one of three GOP senators who killed Obamacare “skinny repeal” — said she’s worried about skyrocketing health-care costs.
“The fact is that if you do pull this piece of the Affordable Care Act out, for some middle-income families the increased premium is going to cancel out the tax cut that they would get,” she said.
It looks like the Obamacare-mandate repeal is staying in the bill, but GOP leaders are hoping they can offer Collins something else: reducing the impact of scrapping the state and local tax deduction. The property tax deduction was put back into the House bill, and Collins would like to see the same thing in the Senate bill. This could potentially be funded by taking state and local tax deductions from corporations, as Johnson suggested.
It’s unclear what it will take to win Moran’s vote. He’s also voiced concerns about increasing the deficit and the tax burden on graduate students. “I will do everything I can to make sure that provision is not in there,” he said over the weekend. “Then I’ll make a decision about the overall tax bill, whether it’s a good thing or a bad thing.”
Lisa Murkowski: Though Murkowski stopped the Obamacare repeal effort this summer, she announced last week that she’s fine with ending the individual mandate. She still hasn’t committed to supporting the tax bill, but GOP leaders are hoping they can win her over by combining the tax plan with a bill to open up Alaska’s Arctic National Wildlife Refuge to oil and gas drilling.
In simpler terms:
What Happens If the Senate Bill Passes This Week
If the Senate GOP manages to get all of its members in line in the next few days, they’ll hand President Trump his first major legislative victory — but the process won’t be over.
The House and Senate tax bills differ in many ways. Most significantly, the House bill does not include a repeal of the Obamacare mandate. While House Republicans would face pressure to pass the Senate version of the bill, Senator Rob Portman said he “fully expects” that there will be a conference to resolve differences between the legislation. However, on Monday, White House officials said they hope that the differences can be addressed informally, without going to a potentially lengthy conference.
When asked, following a lunch with Trump on Monday, if he thought the tax bill could be on the president’s desk by Christmas, Senate Finance Committee chairman Orrin Hatch said, “I hope so.”
What Happens If the Senate Bill Doesn’t Pass
Technically, Republicans could spend months working on their tax-reform plan, but they don’t feel they have that kind of time: Next week they have to turn their attention to avoiding a government shutdown and a number of other issues they pushed off until the end of the year. Plus, next Tuesday’s special election in Alabama could narrow the GOP Senate margin by one, no matter who wins. Republican Roy Moore has wacky ideas about taxes and isn’t looking to do McConnell any favors.
Republicans see this week’s vote as do-or-die, as they’ve been telling themselves for months that passing it is key to their success in the midterms (though polls show Americans don’t like the plan and don’t consider tax reform a top priority).
“I think all of us realize that if we fail on taxes, that’s the end of the Republican Party’s governing majority in 2018,” Senator Lindsey Graham said on “The Brian Kilmeade Show” in October. Graham predicted that if the legislation failed, his party would lose the House, take a hit in the Senate, and Trump would face impeachment.
“So it’s important that we pass tax reform in a meaningful way,” he said. “If we don’t, that’s probably the end of the Republican Party as we know it.”