Republican Election Sweep Emboldens Trump’s Tax Cut Dreams (1)

The Republican sweep of the presidency and Congress has transformed what could have been a struggle to merely renew Donald Trump’s tax cuts into a multi-pronged campaign to slash levies in new and bigger ways.

The incoming Republican majorities in the House and Senate mean Trump can enact a tax bill without making concessions to Democrats. Republicans will only be constrained by how much deficit spending the party’s lawmakers and global financial markets can tolerate.

“That is the several trillion-dollar question,” said Rohit Kumar, co-leader of PwC’s national tax office and a former tax policy adviser to Senate Republican leader Mitch McConnell.

Donald Trump holds up a tax-overhaul bill after singing it into law in 2017.

Photographer: Mike Theiler/UPI/Bloomberg

Owners of closely held companies and high-net worth families stand to benefit with Congress now more likely to renew expiring provisions in the 2017 law providing a 20% deduction on pass-through business income and an elevated estate tax exemption, said Gordon Gray, a former Republican Senate Budget Committee aide and now executive director of the Pinpoint Policy Institute.

Many Democrats campaigned on a tax-the-rich agenda and advocated paying for other tax cuts by targeting those provisions, as well as rolling back the law’s tax cuts for corporations and individuals making more than $400,000 per year.

Republicans’ election success not only bolsters the 2017 tax cuts but opens the way for consideration of ideas such as further cutting the corporate tax rate and exempting tips from federal income taxes, said Grover Norquist, an influential voice in Republican tax policy debates and president of the conservative group Americans for Tax Reform.

Donald Trump during a campaign event in Las Vegas.

Photographer: Ian Maule/Getty Images

Trump enthusiastically promoted both the corporate-rate reduction and the break for tipped income during the presidential campaign and also promised myriad other tax breaks.

The first thing Republicans will have to negotiate is how large the tax-cut package will be and how much they’re willing to increase a federal deficit that reached $1.83 trillion in the fiscal year that ended Sept 30. Just extending the expiring tax cuts would drive up deficits by $4.6 trillion over 10 years, and all of Trump’s campaign plans would add much as $7.75 trillion, according to estimates by the Committee for a Responsible Federal Budget, a nonpartisan fiscal watchdog group.

Stephen Moore, a senior fellow at the Heritage Foundation and informal Trump adviser, said the tax cuts will stimulate economic growth and Republicans can also cancel spending approved under President Joe Biden to help offset the cost of the cuts. Still, the bill is likely to have some level of deficit financing, he said.

That sets up a clash within the GOP between deficit hawks and lawmakers who don’t think revenue losses from tax cuts need to be offset, said Sage Eastman, a Republican strategist and former aide to the House Ways and Means Committee, which has jurisdiction over tax legislation.

Republican Senator Mike Crapo of Idaho, who is in line to chair the Senate Finance Committee, has said “pro-growth” tax policies don’t need to be paid for. The 2017 tax cuts did produce some positive economic effects, but they were far more modest than the Trump administration and some Republicans forecast, said Kyle Pomerleau, a senior fellow with the American Enterprise Institute.

“It will be important to watch to see if markets start to panic if enough deficit spending is being contemplated, or if they’ll decide to look through it,” said Martha Gimbel, executive director of The Budget Lab at Yale and a former White House economist under Biden.

Trump has vowed to impose a tariff of 10% to 20% on all imported goods plus 60% on Chinese products and promoted that as an offset for tax cuts. But lawmakers will have to decide whether to enact those tariffs in the tax bill so the revenue can be officially counted — a difficult vote for Republicans, especially those who want free trade. They could also just assume revenue would continue from presidentially imposed duties, even though Trump might later strike a trade deal that drops them.

“There’s always a way to make things work,” said Dave Camp a senior policy advisor at PwC and a former Republican chairman of the House Ways and Means Committee.

The Peterson Institute for International Economics estimates the tariffs could raise only about $225 billion a year. Kimberly Clausing, a former Treasury Department official in the Biden administration and a UCLA professor of tax law, said the GOP will probably overestimate the revenue from tariffs and ignore the negative economic impact of the duties.

Republicans have said they want to enact a tax bill within the first 100 days of Trump’s second term, though it’ll probably take longer to negotiate the details, Kumar said.

House Speaker Mike Johnson joined by Republican congressmen Richard Hudson, from left, Tom Emmer, and Steve Scalise outside the US Capitol.

Photographer: Chip Somodevilla/Getty Images

The narrow GOP margin in the House gives small bands of Republican lawmakers leverage to demand specific tax breaks, and the Democratic strategy will be to focus on vulnerable Republican members in swing districts to push them to support or oppose individual provisions, said Scott Mulhauser, a Democratic strategist and veteran of legislative policy battles.

“Any small coalition within the Republican Party can have a disproportionate influence on any sort of tax bill,” Eastman said.

The Republican “trifecta” also sets up a lobbying free-for-all among business groups to persuade lawmakers and the White House to create new tax breaks to boost their industries. That intensifies the internecine struggle among Republicans over what to include in the package and how to contain the cost.

Skeptics said they doubt all of the tax cuts Trump proposed during the campaign - which grew so numerous that even some of his advisers are unclear about which proposals he’s most committed to — would be enacted because of the cost and difficulty of instituting the entire list.

Trump promised he would restore the full value of the state and local tax deduction, or SALT, a popular break in high-tax states including New York, New Jersey and California. Trump’s signature tax law capped the value of that deduction at $10,000, regardless of marital status.

While some changes to SALT such as raising the cap or doubling the deduction for married couples filing jointly are possible, eliminating the limit entirely isn’t likely because of the revenue loss: $1.2 trillion over 10 years, according to the Committee for a Responsible Federal Budget.

(Updates with Sage Eastman quote in 18th paragraph.)

To contact the reporters on this story:
Mark Niquette in Columbus at mniquette@bloomberg.net;
Enda Curran in Washington at ecurran8@bloomberg.net

To contact the editors responsible for this story:
Megan Scully at mscully32@bloomberg.net

Mike Dorning, Laura Davison

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