The Nickel Report

Now that the “Big Six”[1] have announced that they will release an agreed-upon tax reform plan the week of September 25, the question becomes: Can they actually get it done? Is there enough time, motivation and a clear path forward to get permanent tax reform done in 2017? The answer is yes, it could happen. Politics will be the driving force, and the budget reconciliation process will provide the opportunity.

Republican political reputations are on the line. Republican members must look ahead not only to the 2018 general election, but also to the 2018 primaries, some of which begin as early as March. Without a major piece of legislation enacted in a year where Republicans controlled the House, Senate and the White House, primary opponents would have a ready-made campaign message. It is important to members of Congress that they be able to run on a positive message of accomplishment rather than a defensive message of explanations.

Skeptics will argue that there simply is not enough time for major tax legislation this year. However, Congress has been working on tax-reform legislation for several years and can draw upon previous work to move forward quickly. What Congress has lacked is a clear consensus among House, Senate and administration leaders of what the total reform package should contain. With agreement on that issue expected at the end of this month, the House and Senate will have six legislative weeks before the Thanksgiving recess to work through the necessary parts of the legislative process. They will also have the benefit of a president aggressively pushing forward on a popular issue that he understands and on which he is very comfortable speaking.

The first hurdle to overcome in the process is passage of the 2018 budget resolution, which is expected to contain instructions for the budget reconciliation process. The reconciliation process conforms the financial inflow and outflow consequences of federal legislation (in the modern era usually a deficit) with the budget Congress has adopted for the year. Adopting the budget will be the biggest and most important hurdle. Right now, most observers believe the House does not have the votes to pass a budget. The conservative Freedom Caucus wants to see steep cuts to mandatory spending, such as welfare reform, in the budget resolution before giving their support. Permanent tax reform will be difficult to achieve without their backing.

Using the budget reconciliation process to pass tax reform allows the Senate to pass tax reform with 51 votes rather than 60, as would be required under regular order. However, in using this process, under Senate rules, the tax reforms that Congress passes cannot be permanent unless the bill is “scored” as revenue neutral. If it is not scored revenue neutral, the tax cuts will expire after ten years. Having the tax cuts be permanent is important to the economy because it gives businesses and financial markets certainty, which will facilitate robust long-term growth.

The Joint Committee on Taxaction (JCT) determines if the tax-reform bill is revenue neutral. This Committee is made up of six Republicans and four Democrats from the House and Senate. It would be almost impossible for Congress to find a “pay for” for every tax dollar it cuts through tax reform by cutting an equal dollar from the existing budget or rescinding an equal number of tax credits. Scoring a bill that way is called “static” scoring.

For the level of tax cuts Republicans would like to enact, Congress likely would need to use a system of scoring called “dynamic” scoring. Dynamic scoring will allow the JCT to take into consideration the future expected growth in the economy resulting from the corporate and individual tax cuts and apply the increased tax revenue resulting from that growth as a “pay for” for the tax cuts. In order to accomplish this, the 2018 budget resolution must contain language that directs the JCT to use dynamic scoring rather than static scoring.

With the budget resolution passed, reconciliation instructions given to the committees of jurisdiction, and scoring instructions given to the JCT, Congress can enact a  permanent tax reform bill by the end of the year.

[1] Senate Majority Leader Mitch McConnell (R-KY), Senate Finance Committee Chairman Orrin Hatch (R-UT), Speaker of the House Paul Ryan (R-WI), House Ways & Means Committee Chairman Kevin Brady (R-TX), Secretary of the Treasury Steve Mnuchin, and National Economic Council Director Gary Cohn.