Reports: White House Back to Square One on Tax Reform?

Posted: Apr 11, 2017 10:45 AM

Following the very public failure of Congressional Republicans' Obamacare replacement push last month, speculation was rampant inside the Beltway: Would the GOP effectively abandon healthcare and shift their gaze to tax reform? That appeared to be President Trump's initial preference, but within days, his administration was once again intimately involved in efforts to revive the American Health Care Act (AHCA) -- the fate of which remains unclear. Back on the tax reform front, the Associated Press and Fox News reported Monday that the Trump White House is not committing to any particular policy proposal just yet. This news was framed as Trump more or less starting from scratch on the issue, which the administration pushed back on in subsequent reports. Nevertheless, there is no Trump-backed tax package on the table at this stage, with key challenges still being ironed out:

President Trump has gone back to the drawing board on tax reform as he looks for wide-ranging Republican support behind legislation to overhaul the tax system. A White House official told Fox Business Network that all options are still on the table. However, a detailed tax plan is still weeks away. A complete tax overhaul will likely miss the August deadline set by Treasury Secretary Mnuchin. The White House is trying to learn from the failure of enacting a new health care law to replace ObamaCare and take a more active role in getting legislation passed. White House aides told The Associated Press Monday that the goal is to cut tax rates sharply enough to improve the economic picture in rural and industrial areas of the U.S. However, the administration so far has swatted down alternative ways for raising revenues, such as a carbon tax, to offset lower rates. Trump has not said which trade-offs he might accept and had remained noncommittal on the leading blueprint for reform from Rep. Kevin Brady, R-Texas, the chairman of the Ways and Means Committee. Brady has proposed a border adjustment system, which would eliminate corporate deductions on imports, to raise $1 trillion over 10 years that could fund lower corporate tax rates.

The story goes on to note that revenue-related solutions beyond the House's controversial border adjustment tax are also in the picture:

Another option being floated around on Capitol Hill would change the House GOP plan to eliminate much of the payroll tax and cut corporate tax rates and possibly requiring a new dedicated funding source for Social Security. The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform Brady's plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $12 trillion over 10 years, according to budget estimates. Those additional revenues could then enable the end of the 12.4 percent payroll tax, split evenly between employers and employees, that funds Social Security, while keeping the health insurance payroll tax in place. This approach would give a worker earning $60,000 a year an additional $3,720 in take-home pay, a possible win that lawmakers could highlight back in their districts even though it would involve changing the funding mechanism for Social Security, according to the lobbyist.
The report also says the White House is not considering a VAT-style consumption tax (anathema to many conservatives) "as of now," and quotes Republican Senator Rob Portman dismissing various trial balloons as unrepresentative of the actual work being done. In other words, big policy questions are totally up in the air right now, and how this plays out is anyone's guess. But on America's Newsroom, I made the point that Republicans' renewed focus on healthcare is a really important factor in gaming out the future of tax reform:

If Obamacare is repealed and replaced, the budget baseline for tax reform becomes much more attractive -- roughly $1 trillion more attractive -- due to changes to spending and taxation levels under the current (and still deteriorating) health law. And thanks to the nature of 2017's unique reconciliation opportunities, the strongly preferable sequencing would be to end Obamacare first, then get to tax reform. That would make more sense on a logistical, political and policy level. I also mentioned in the segment that tax reform is not necessarily likely to be the lighter lift for the GOP; all Congressional Republicans were united in their opposition to Obamacare, yet they've struggled mightily to form a consensus on what to do about it. A large tax code overhaul includes many moving parts, including some of the tensions referenced in the Fox report we quoted above. A true soup-to-nuts reform, which the markets are obviously rooting for, has not been achieved since Ronald Reagan's landmark accomplishment more than three decades ago. That notwithstanding, Ted Cruz says he believes this feat will be easier to pull off than resolving the Obamacare question:

Skepticism is warranted, especially with the healthcare ball still very much in play, and in light of the vastly different tax proposals still floating around, with the White House standing on the sidelines for now. Stay tuned.