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Looking Smart About Tax Reform

Answers to four questions your clients keep asking.

It all comes down to some combination of Who, What, When, How and Why.

Whether it’s "CSI: Miami" or "Tax Reform: Washington, D.C.," these questions are at the heart of every big drama.

Last week’s joint statement on tax reform by the White House, Senate and House leaders (known as “Team 6”) was a blockbuster, more for what it excluded from tax reform rather than what it included. The biggest news was that Speaker Paul Ryan’s (R-WI) controversial $1trillion revenue raiser—the border adjustable tax  (BAT)—was off the table. 

Now, it’s little surprise that the business community was opposing a $1 trillion revenue raiser aimed at their own. But this one also drew fire from plenty of consumer groups that made the argument that increasing taxes on imports that make their way to Walmart shelves was anti middle class. That fire was sufficient icing on that spinach cake for the White House to tank it.

The other remarkable point about the joint statement on tax reform was how fuzzy it was—640 words and not a single number. This is tax reform, folks, and that means numbers. 

Back in July 2016, Ryan and House Republican leadership proposed a detailed House blueprint that numbered 30+ pages with lots of numbers.

And in April of this year, the White House released a much-maligned one-pager on its tax-reform principles that counted out at 225 words, but at least had seven numbers. Some have wondered aloud whether the intervening four months of almost weekly meetings of Team 6 was productive or whether those meetings caused backsliding. 

Hard to know, but, on balance, the demise of the oxygen-sucking BAT was perhaps the most productive decision to be made at this juncture. Simply because it hits the reset button on tax reform. 

With that as a backdrop, let’s get to those questions and answers: 

Who: Key People

1. With so much noise coming out of Washington, who are the key people to focus on? 

Beyond Team 6—Treasury Secretary Steve Mnuchin, National Economic Council head Gary Cohn, Senate Majority Leader Mitch McConnell (R-KY), Senate Finance Chair Orrin Hatch (R-UT), House Speaker Paul Ryan (R-WI), and House Ways and Means Chairman Kevin Brady (R-TX)—there’s a small handful of lawmakers who have outsized influence. Top among these is Rep. Mark Meadows (R-NC), who chairs the House Freedom Caucus, whose members are the most conservative in the House. 

This Caucus numbers at around 40 members, and they’re a tight voting bloc. Back in the spring, they brought down the first House health care bill and voted to support the second bill only after their changes were incorporated. The bill passed 217-213 with little wiggle room. Now the Caucus has turned its sights on tax reform, and one has to assume that with all the Meadows sightings at the White House security gates, his star is quickly rising simply because he can deliver a big bloc of votes for tax reform. 

Why: Health Care Failure  

2. What’s the practical impact of the health care failure on tax reform?

The failure impacts timing and influence. 

So last week, the Senate tried and failed a few times to repeal/replace the Affordable Care Act. The big question is whether the Senate stays on health care, as the president is urging, or pivots to tax reform, as lawmakers are urging. The longer that decision hangs out there, the less time there is for tax reform. Time is ticking and tax reform isn’t a cake walk. 

As for influence, Trump and his team understand taxes. Probably better than any other issue, given their personal and professional backgrounds. What they see before them is a Congress that can’t deliver on a seven-year promise to repeal the Affordable Care Act. So the president and his team have declared that tax reform will be done their way, which means settling on one plan of action with the White House at the table. Not a separate House plan and Senate plan with some White House input. Yes, there’s a new sheriff (and deputies) in town.

When: Timing          

3. When will we see details about what Congress and the White House are considering in tax reform?

September or October at the earliest.

Last week’s announcement on tax reform by Team 6 was initially billed as a multi-page framework. Something we could sink our teeth into. Instead, it was a fuzzy joint statement. The buzz in D.C. is that congressional and White House staffs are spending the August recess hammering out a framework that could be proposed as early as September, but probably more like October. For that framework to be meaningful to bill drafters, at a minimum it will need to have specifics around tax rates, how much of the tax cuts must be offset with revenue raisers, and how tax deductions and credit will fare.

How: Bipartisanship

4. How will tax reform come together, bipartisan or not?

Conventional wisdom is that Democrats will try to block any version of tax reform, thereby denying the president and his party a win. But do Democrats really want to potentially miss out on the biggest economic game-changer in decades? 

Earlier this week, the House Majority PAC, a super-PAC allied with House Democrats, released a new poll of working-class white voters in swing districts. In other words, the exact voters the Democrats need to win over in 2018 to regain their footing. The news was startling. When it comes to which party will “improve the economy and create jobs,” Republicans have a 35-point edge and a 15-point edge on delivering a middle-class tax cut. Based on that poll, Democrats may not want to sit out tax reform. 

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