Concord Policy Primer, Volume 2

And so it begins… In this edition of the Concord Policy Primer, we will explore the latest developments in the tax reform debate and dive into Congress’ action packed legislative schedule in September and beyond.

Prime Insight. After months of fits and starts on legislative and regulatory priorities of Congress and the Trump Administration, the time has come for attention to turn to tax reform. The commitment among GOP leaders in Washington is real, but immense challenges – from raising the debt ceiling to finding harmony on essential elements of tax reform – will present significant hurdles which must be overcome. Predictions on timing for a tax deal are, and will remain, elusive; we will be forced to follow the breadcrumbs for clues on prospects for ultimate success.

What We’re Hearing. President Trump, after an August largely spent grappling with controversial social issues (Charlottesville) and international threats (North Korea), has begun to make his tax reform sales pitch to the nation, beginning with a speech in Missouri on August 30. In contrast, House Speaker Paul Ryan (R-WI) and Ways and Means Chairman Kevin Brady (R-TX) devoted a good deal of time in August barnstorming the country to gin up public support for reform.

While many have expected the White House to release a more comprehensive tax reform plan, the president and his team have been short on details. Congressional leaders also have avoided specifics until now, but that may be about to change. Speaker Ryan has stated publicly that he believes the House will unveil its comprehensive tax bill in September and begin committee work on it. Similarly, Senate Finance Committee Chairman Orrin Hatch (R-UT) has announced that his committee will hold hearings on comprehensive tax reform in September, followed by a markup “this fall.”

Leadership in the House and Senate, in the wake of failed efforts to repeal the Affordable Care Act, are mindful of the peril of establishing deadlines for action on major legislation. The White House and Congress have been closely coordinating efforts on taxes.  The so-called big 6 (Secretary of Treasury Mnuchin, Gary Cohn, Chairman Brady, Chairman Hatch, Speaker Ryan, and Leader McConnell) or their representatives have been meeting daily.  They are discussing and planning for a rollout of the bill to build the necessary support from the business community and around the country. We expect there to be the release of a high level three to five-page summary of a tax reform plan from this group in September to build momentum.  It is possible that a smaller tax reduction package is all Congress and the White House can gain from this process if they are set on having a bill enacted during this calendar year.

September Agenda. As if herding cats (in the case recalcitrant congressional Republicans, Democratic Senators, the business community, and outside conservative issue groups) on tax reform was not hard enough, the United States Congress will return from the August work period to a crushing list of priorities that must be done before the month is out. Major deals are needed to raise the debt ceiling, pass a budget (which, coincidentally, is needed to set the table tax reform), move spending bills for the upcoming fiscal year, and reauthorize a host of significant federal programs (the Federal Aviation Administration, National Flood Insurance Program, Children’s Health Insurance Program, to name a few).

Complicating matters is the federal government’s desire to respond in a timely and decisive fashion to the devastation wrought by Hurricane Harvey. Estimates suggest the federal tab could be in the billions of dollars (response to Hurricane Sandy was $50 billion), and Congress and the Trump Administration will be spending precious time in September on recovery and emergency funding efforts. Rallying around communities impacted by the disaster may serve to ease passage of legislation that funds the government and raises the debt ceiling.

Budget Reconciliation. Even though the Congressional Budget Act calls upon Congress to adopt a budget resolution by April 15, there are no real consequences for delayed or no action on this task.  This year Congress has an important motivation for passing a fiscal year (FY) 2018 budget resolution; namely, to include budget reconciliation instructions that can be used to pass a major tax bill on a simple majority vote in the Senate. The House Budget Committee reported an FY 2018 budget resolution with reconciliation instructions that can be used for a tax bill and other purposes. On this measure, the House Republican Conference appears to be divided: moderate members think the calls for spending cuts are too high while many conservatives do not think the spending cuts go far enough.

Motivation to get reconciliation instructions for a tax bill should be sufficient for the House to pass the budget resolution in September.  The Senate will likely alter the resolution to get the necessary votes for it, setting up the potential for a House-Senate conference committee to resolve differences between the two measures.  Prospects for the FY 2018 budget resolution are unclear; the outcome of these negotiations will signal the near-term fate of tax reform.

Prospects for Section 179D. As reported last month, bipartisan House legislation was introduced in July that would make permanent Section 179D, and efforts are ongoing to develop similar legislation in the Senate. Members of Congress from both political parties have staked their claims as champions of Section 179D by promoting the widespread benefits of the deduction, and stakeholders seeking the extension of Section 179D remain active and largely coordinated – essential elements to any successful advocacy campaign.

Should tax reform fall short of enactment before the end of the year, options providing for an extension of the deduction may be available. While all efforts currently are focused on including Section 179D in tax reform, a pivot later this year to a less ambitious tax bill may be necessary.

The collective efforts of congressional champions and Section 179D advocates will be necessary – no matter the scenario – to extend the deduction.