Trump’s Tax Exemption Promises Face the Congressional Gauntlet

President Donald Trump’s signature campaign promises to target tax cuts for the working class and big companies must now run through Congress’ byzantine politics and procedure if they have any hope of becoming policy.

Trump came into the office pitching a handful of popular exemptions to income designed to appeal to specific voting blocs. Now, lawmakers on Capitol Hill and in the nascent administration will be eager to make good on those promises.

The vows ranged from slashing the corporate tax rate; exempting income taxes on tipped wages, Social Security benefits, and overtime pay; and making state and local taxes and interest on automobile loans fully deductible.

“It’ll be an interactive process,” Joseph Boddicker, a counsel in Alston & Bird’s federal and international tax group who used to advise senior Senate Republican tax writers on policy. “You’re already starting to see some refinements.”

Republicans are starting to narrow or entirely discard those sweeping promises in a nod to the political and practical realities of passing a sweeping tax package to extend most of the GOP’s 2017 tax law through the narrowly divided House.

That includes the pitch on tax-free tips, a bipartisan and popular idea that would nevertheless have to be carefully defined “so that it is something that is used only as intended,” Senate Finance Committee Chair Mike Crapo (R-Idaho) told reporters this month.

‘Winning Idea’

Tips remain one of Trump’s primary focuses for changes to the tax code, thanks to its salience in swing states.

“We won Nevada because of” the promise to exempt tips from taxation, Trump told supporters at a rally in Washington after his inauguration.

Trump touted his proposal to end tax on tips as a “winning idea” in a meeting with House Speaker Mike Johnson (R-La.) and Senate Majority Leader John Thune (R-S.D.) Tuesday, according to a source familiar with the meeting.

Sen. Ted Cruz (R-Texas) and Rep. Vern Buchanan (R-Fla.) introduced legislation last week updating their proposals that limited eligibility to dining and beauty workers under a defined income threshold and a $25,000 cap on the write-off. A bill from Rep. Don Bacon (R-Neb.) last year similarly imposed a $20,000 limit to the benefit.

“It is about, how do we make sure more of those hardworking families keep money in their pockets and they are not being taken advantage of at the expense of billionaires who are getting all of the benefits,” said Sen. Catherine Cortez Masto (D-Nev.), a member of the Finance Committee and a co-sponsor of Cruz’s bill.

In a different category, congressional support for cutting the corporate rate has been muted. The 2017 bill slashed the rate to 21% from 35%. Further reductions would increase the multi-trillion-dollar extension’s price tag and risk antagonizing party populists who’ve entertained instead increasing it.

A corporate rate cut may also upset the delicate parity between C-corporations and businesses that pass their tax burdens onto their owners. The 20% pass-through deduction from the 2017 law also expires at the end of the year.

Cutting the corporate rate “digs us a deeper hole,” said Sen. Thom Tillis (R-N.C.), a member of the tax-writing Finance Committee.

Playing by the Rules

The budget reconciliation process Republicans plan to use also limits what can be included in exchange for circumventing an expected Senate filibuster and therefore any need to negotiate with Democrats.

Senate precedent known as the Byrd Rule explicitly prevents lawmakers from making changes to Social Security through that expedited process, complicating efforts to save seniors and survivors from paying taxes on their benefits.

“Changes to Social Security can’t be done in reconciliation,” said Rep. Nicole Malliotakis (R-N.Y.), a member of the tax-writing Ways and Means Committee. “But can we provide some extra deduction to offset, to reduce their tax bill? That’s legislation I’m working on right now.”

The cost of some proposals has also given lawmakers and advocates heartburn, notably in the ongoing negotiation over lifting the SALT cap imposed in 2017.

Eliminating the partial income taxation on Social Security benefits alone would increase deficits by at least $1.6 trillion over the next decade, according to the nonpartisan Committee for a Responsible Federal Budget.

To blunt that impact, Sen. Marsha Blackburn’s (R-Tenn.) bill requires offsets for any costs incurred by creating the benefit.

Bacon also reintroduced legislation this week turning a number of Trump’s campaign pitches into legal language, including one that would limit itemized deductions on overtime pay to instances where they make up 20% or less of that taxpayer’s wages, and even then only if they made less than six figures.

“The people made it clear last November that they want something done to alleviate their financial hardship,” Bacon said in a statement. “These bills are a first step in the right direction. I will work with Congress and President Trump to get these across the finish line.”

Rep. Russ Fulcher’s (R-Idaho) bill exempting overtime pay from income taxes avoids payroll dues in order to fund entitlement programs.

That distinction could save about $434 billion over the next decade but would still forfeit about $680 billion in revenue lost in the same time, according to an estimate by the Tax Foundation.

Exemptions on Social Security benefits and overtime pay “are such big things, and I don’t think those get into the package,” said Grover Norquist, president of Americans for Tax Reform that opposes tax hikes. “They’re interesting conversation pieces.”