Congress’ Tax Cut Debate Is No Extension of 2017 GOP Priorities

While today’s congressional tax debate has echoes of the one from 2017—yes, there is a Republican trifecta in the House, Senate, and White House, and yes, there’s a massive tax bill in the queue—it’s being played out in an entirely new arena.

This new arena could pit individual state and local taxpayers against corporate state and local taxpayers, as lawmakers haggle over what provisions in the Tax Cuts and Jobs Act to extend and which ones, if any, should be allowed to expire at the end of this year. The final decision will determine how much taxes are paid by businesses large and small throughout the country.

The biggest differences between the 2017 negotiations and the one currently in the halls of Congress are that:

Congress, not the White House, was driving the tax debate. Congress was the center of gravity for tax policy in 2017. Today, President Donald Trump is the center of political gravity.

Trump is directing lawmakers to make the Tax Cuts and Jobs Act permanent; end taxes on tips, overtime, and Social Security; adjust the state and local tax cap; close the carried interest loophole; and eliminate deductions for sports owners.

There had been several drafts on large tax packages before 2017, including one that proposed distributional neutrality and revenue neutrality for the tax code. Although they never came for a vote, they helped form the next iteration. The effect was cumulative, and there was a substantial body of work on which the Ways and Means Committee could draw.

By comparison, the first Trump White House was largely thematic: Drive middle income tax relief, reduce the corporate tax rate, and end corporate inversions by fixing the international lock out effect. But beyond that, the White House wasn’t overly prescriptive.

Debt wasn’t at the center of the discussion. The 2017 reconciliation vehicle allowed $1.5 trillion in borrowing over the 10-year budget window. Why? Because that was the most Sen. Bob Corker (R-Tenn.) would support in reconciliation, and his vote was necessary to advance the reconciliation bill to the Senate floor.

The debt has since swelled from $20 trillion in 2017 to $36 trillion today with indications to $56 trillion in another 10 years. This, and its rapid rate of increase, has pushed debt to the center of the tax debate.

It has become so significant that Republicans are considering changing the orthodoxy around the budget process, from assuming “current policy” rather than “current law.” A current-policy budget baseline assumes it costs nothing to extend the temporary provisions of TCJA which means less new revenue is necessary. A current-law budget baseline assumes these temporary provisions expire and, to be restored, must be paid for. This requires much more revenue.

These underlying assumptions are foundational because they don’t require the same level of revenue increases or spending cuts, leading to massive implications on tax policy. The challenge for Republicans is that some within the ranks consider them gimmicks and have publicly protested.

There were aspirations, not deadlines. In 2017, Republican policymakers recognized a political opening to make sweeping, pro-growth changes to a cumbersome and indefensible tax code. It was about aspiration. There was no sword of Damocles hanging overhead.

If this Republican majority fails to extend the Tax Cuts and Jobs Act by the end of the year, it will have presided over the biggest tax hike in American history. Some $4.5 trillion in tax hikes will come crashing down on the economy. Members of Congress feel the deadline pressure.

It was one big tax bill. The focus in 2017 was on taxes alone. There was a single reconciliation vehicle, and the only thing it was used for was taxes. Today, the entire Trump legislative agenda is being packaged in a “too-big-to-fail” strategy. It includes the tax strategy along with border, energy, and defense changes and even raising the debt ceiling.

Add this all or nothing strategy, including the debt ceiling, and the end-of-year deadline becomes a pressure cooker.

It’s not your parents’ GOP. There has been a palpable, populist shift within the Republican Party since 2017, allowing some in Congress to abandon the party’s traditional position that tax cuts for top earners and corporations help energize the economy.

Republicans are now debating a proposal to create a 40% tax bracket for those earning $1 million or more to offset the cost of extending the TCJA cuts.

And Ways and Means Chairman Jason Smith said that, when he was whipping votes for the Smith-Wyden bill last year, some House Republicans asked him why he wasn’t raising the corporate tax rate. Today, the corporate SALT debate is alive and well. Such a suggestion was never on the table in 2017.

State and local taxes matter more. The politics around the state and local tax deduction has become more acute for Republican members from high tax states.

Because the $10,000 SALT deduction limitation will expire at the end of the year, those members are confronted with reimposing some version of it anew on their constituents. The issue has gained considerably more attention since 2017, in part, because those very members campaigned on it.

Tariffs are now a reality. There was a free trade congressional consensus in 2017. The current administration’s shift to mercantilism hadn’t manifested. Tax policy was the only fiscal measure being discussed.

Now the “Liberation Day” tariff announcement by the White House has created a massive cross current for tax writers. It is a policy change impacting global markets at an unprecedented level, and tax writers will be forced to quickly adjust their calculations and negotiations based on the fallout.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Peter Roskam is the federal policy team leader at BakerHostetler. He served in Congress from 2007 to 2019 and was one of the chief architects of the Tax Cuts and Jobs Act.

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