What It Costs: 2017 Tax Overhaul Edition

How to pay for big tax cuts is a complicated process

House Ways and Means Chairman Kevin Brady and his fellow tax writers are trying to strike a balance on how to pay for their overhaul of the tax code. (Bill Clark/CQ Roll Call)
House Ways and Means Chairman Kevin Brady and his fellow tax writers are trying to strike a balance on how to pay for their overhaul of the tax code. (Bill Clark/CQ Roll Call)
Posted October 5, 2017 at 5:05am

How to pay for policy proposals lawmakers want to enact is an age-old question in Congress that has killed or stalled countless ideas. That question is now a dark cloud hanging over Republicans as they seek to overhaul the tax code.

Tax writers say they plan to offset massive tax rate cuts for individuals and businesses by eliminating scores of deductions and credits that litter the tax code. But they have publicly identified only a few provisions they want to repeal.

Most of the ideas they have floated as revenue raisers have run into resistance.

A House GOP border adjustment tax proposal to tax imports and exempt exports, which would have raised an estimated $1.2 trillion over 10 years, died amid fierce opposition, for instance.

Tax writers are also facing pushback against proposals to repeal the corporate interest expense deduction and the individual state and local tax deduction — so much so that they’re now considering keeping those deductions around in a more limited form.

Other major “pay-fors” that tax writers are considering have yet to be revealed, but some of them will undoubtedly draw opposition.

“Tax reduction is much easier than tax reform,” New Jersey GOP Rep. Tom MacArthur said. “Because in tax reform, it’s always, whose ox are you goring?”

Keeping the pay-fors

If lawmakers continue to drop or water down their pay-for proposals to appease critics, it could sink the entire effort. At a minimum, continuous tweaking would likely delay consideration of the tax bill while leaders try to find the “sweet spot” needed to pass it.

House Ways and Means Committee member Tom Reed, R-N.Y., said the pay-fors will not be revealed until the bill is released, which according to Speaker Paul D. Ryan will probably be in about three weeks.

“And then as we go through the process, too, you may not know until the whole legislative sausage-making takes its course,” Reed said, suggesting components of the bill will change as it moves through Congress.

Without knowing what will be in the bill, members have little option but to trust that tax writers are steering them in the right direction and that the bill will generate enough economic growth to outweigh benefits lost from repealed deductions and credits.

“Right now, without any more details, we have to kind of take it on faith,” Texas GOP Rep. Randy Weber said.

Watch Ryan’s Overview of Tax Plan

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Still, Weber acknowledged that the pay-fors will be the primary pressure points. The House Freedom Caucus member said he’s already worried there may be enough opposition from members who want to keep the state and local tax deduction to bring the bill down.

“We’ll see what their trade-off is,” he said. “They call them loopholes but as I point out, interest on money that you borrow, for example, that’s a legitimate tax deduction.”

Rep. Andy Barr has cautioned tax writers about getting too aggressive in curbing corporate interest deductibility, saying that could unintentionally limit the growth potential of the tax bill.

“There are going to have to be some tough choices here,” the Kentucky Republican said. “And I think there’s opportunity for compromise on a lot of these base broadeners in a way that would mitigate concerns and get people to vote ‘yes’ on the full package and get to 218 votes.”

Costly compromise

Compromise, however, can stand in the way of a top goal of the tax effort: simplicity.

That’s true “to a certain extent,” Barr said, arguing that a few compromises alongside the repeal of most deductions is not really preserving clutter.

“That’s getting the votes for a better, simpler, fairer tax code,” he said.

For example, members have discussed ideas for maintaining some of the state and local tax, or SALT, deduction, a move that seems necessary to keep members from high-tax states such as New York and New Jersey from voting against the larger tax bill.

Proposals include means-testing SALT so middle-income earners can still claim it but high-income earners cannot, allowing filers to claim the deduction for property or income taxes as opposed to both and turning it into a nonrefundable credit.

MacArthur said eliminating the SALT deduction is a “nonstarter” for him because of the economic impact it would have on New Jersey, which already receives far less money from the federal government than its taxpayers put in, especially compared to other states.

“It’s not simplicity at all costs,” he said.

MacArthur’s idea for curbing the SALT deduction is simpler than some of the other proposals. He wants to create a homeowner deduction, which would basically merge the current mortgage interest deduction with the property tax portion of the SALT deduction.

In trying to broker compromises on issues like SALT, tax writers will likely be giving up some of the revenue potential of various pay-fors they’ve been eyeing.

Fully repealing the state and local tax deduction could raise $1.3 trillion over 10 years, according to the nonpartisan Tax Policy Center, while proposals to maintain some access to the deduction would raise less money.

Asked how to make up for lost revenue potential, rank-and-file members said that’s a problem the committees will have to figure out.

Reed said the Ways and Means Committee is up for the challenge.

“Any point in time you turn around, there could be something that’s a major roadblock that you weren’t anticipating,” he said. “Leadership is about getting through that and getting to the endgame, where 80 percent of what you may have started with is still a victory.”

To help avoid potential pitfalls, the Ways and Means Committee is holding a series of listening sessions with members, taking their input on the tax framework the “Big Six” negotiators released last week. (That group is made up of Ryan, Senate Majority Leader Mitch McConnell, House Ways and Means Chairman Kevin Brady, Senate Finance Chairman Orrin G. Hatch,Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn.)

“At the end of the day with an open, inclusive process like that, regular order, members will have a binary choice … a tax code that is measurably, markedly better than the status quo, or the status quo,” Barr said. “Even if you have a criticism here or there … at the end of the day I think it’s going to be an easy choice for a member of Congress to vote ‘yes’ because you can live to fight another day on your particular grievance.”