The baffling assumption in Washington and in the markets these days is the persistent optimism that major tax reform or a big tax cut will be enacted this year or next. Why should anyone think this is realistic? First, let’s talk about tax reform and then tax cuts. It’s important to note the distinction.
House Speaker Paul Ryan and many other GOP members are committed to passing meaningful tax reform. For Ryan, this has long been a “tombstone issue,” an achievement he wants chiseled on his grave marker. By contrast, President Trump campaigned on huge tax cuts, preferably the biggest in history.
The landmark Tax Reform Act of 1986 was the last time that Congress successfully grappled with country’s jerry-built revenue system. It was introduced by Ways and Means Committee Chairman Dan Rostenkowski and traced its origins to a plan pushed by Sen. Bill Bradley and Rep. Dick Gephardt. Other key players included Treasury Secretary James Baker, Sen. Lloyd Bentsen, Vice President George H.W. Bush, Senate Majority Leader Robert Dole, ranking Senate Finance Committee member Russell Long, and Senate Finance Committee Chairman Bob Packwood. It was a centrist, bipartisan piece of legislation, with a political all-star team behind it. It had detractors from both the Left and Right, but not enough to derail it.
Flash forward 31 years. Does the party in power have large majorities? No. If not large, is the majority cohesive enough to get something big and consequential passed? No. If not, is there a cooperative minority party willing to help? No. Do the current leaders have as much influence as the 1986 heavyweights? No. Is the president strong enough to ram something through on his own, or does he have close enough ties with members to persuade them to back a major reform? No.
Add to these negatives the parochial question of how many Republicans in states like New York and California would be willing to vote for a bill that ends the deductibility of state and local taxes, which are among the highest in the nation in their states. Keeping in mind that almost a dozen GOP House members there are already facing competitive races, the answer would be very few.
So why are proponents so upbeat? My theory is that advocates see failure as unfathomable. On Wall Street and in corporate headquarters around the country, proponents have talked themselves (or their clients) into believing that tax reform is possible even though Congress has not passed a significant piece of legislation this year.
The truth is that reforming, streamlining, or simplifying the tax code is incredibly difficult under the best of circumstances, and circumstances today are worse than usual. Even passing a big tax cut, which sounds easy (who turns down free candy?), is problematic because it either drives up the deficit or shifts the tax burden to other payers.
An increase in the budget deficit runs the risk of dividing the Republican Party even more than it already is. The only way to square the circle would be through aggressive dynamic scoring, which in a previous era was known as “voodoo economics” (see Bush, George H.W.). In any event, the Congressional Budget Office is highly unlikely to calculate that new revenue from economic growth will be enough to keep the deficit level. As for shifting the tax burden, that means an increase in levies on some Americans. And raising taxes on anyone requires more intestinal fortitude than is evident on Capitol Hill today.
A few months ago I asked a senior House Republican about tax reform and his response was simple. “We have to do it.” I asked how, given the failure to repeal and replace Obamacare, pass a big infrastructure package, or build a border wall. “We have to,” he repeated.
After announcing that he would not be seeking reelection in Tennessee, Sen. Bob Corker told ABC News last week, “Tax reform is going to make health care look like a piece of cake,” then added, “but I think we’re going to get it done.” On NBC’s Meet the Press, Corker told Chuck Todd that he would oppose any proposal that adds “one penny to the deficit,” although he kept open the possibility that “dynamic scoring” on economic growth theoretically could make tax reform possible.
When I asked the aforementioned senior House Republican about the consequences of the GOP going 0-for-4 on big-ticket legislation, he said the party needed to pass a lot of other measures and make the case that it still got a lot done that was important.
My bet is that if any kind of tax bill is passed, either reform or a cut, it will be fairly modest, leaving Republicans with the challenge of having to pass lots of small things and convincing the electorate next year that they actually did something big.