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Year in Review: Tax Bill Takes a Topsy-Turvy Road to GOP Victory

POSTED ON Dec. 26, 2017

Tax reform in 2017 was supposed to happen — until it wasn’t. But then it did.

When President Trump took office January 20, expectations for a fast-moving domestic legislative agenda were high. Trump’s surprise win in the 2016 presidential election coincided with Republicans keeping their majorities in the House and Senate. At a glance, the newcomers in the White House and the Republican establishment in Congress seemed to have the same major priorities.

In the weeks and months before his inauguration, Trump declared he would repeal the Affordable Care Act on day 1 of his administration, going so far as to suggest he would convene a special session of Congress for that purpose alone. Up next on the first 100-day agenda would be tax reform. Republicans who had seen their priorities stymied by President Obama’s vetoes for eight years appeared primed to coast from one victory to the next.

As it happens, tax reform is hard.

For much of the year, hyperoptimistic predictions from top Republicans about their timeline for passing tax reform took on an almost farcical quality as goal posts and self-imposed deadlines shifted seemingly from one week to the next. Expectations that Republicans would pass a tax reform bill in the spring gave way to promises that legislation would be released by the end of August. As summer approached, the goal shifted to simply unveiling legislative text or at least a detailed plan. When the White House released its own version of a tax reform plan in late April consisting of a one-page outline that looked more like a wish list, few observers could be convinced that any real progress had been made. By late summer, many top Republicans were acknowledging that while they hoped to pass a bill by the end of the year, that goal could slip into 2018.

Challenges Foreshadowed by Healthcare Bill

Republicans got a taste of the challenges of tax reform during the healthcare debate. While it was once simple enough for a conservative lawmaker to declare he or she wanted to repeal Obamacare, once it came time to work out the details — including what to replace it with, if anything — finding the nearly total party consensus needed to pass legislation without Democrats proved elusive. The House sputtered on its way to barely passing a healthcare reform bill, leading to a premature celebration on the White House lawn. And in the Senate, dissent from just three Republicans was enough to sink the bill.

Likewise, while Republicans uniformly support cutting taxes, hashing out the details threatened to derail the process. To tax observers, the failure of healthcare reform would either deepen Republicans’ resolve to come up with a major legislative accomplishment or serve as a foreshadowing of tax reform’s certain doom from infighting and competing interests.

In any case, the healthcare reform effort’s failure reinforced the top-down legislative strategy adopted for tax reform by the “Big Six” Republican leaders — House Speaker Paul D. Ryan of Wisconsin; House Ways and Means Committee Chair Kevin Brady of Texas; Senate Majority Leader Mitch McConnell of Kentucky; Senate Finance Committee Chair Orrin G. Hatch of Utah; Treasury Secretary Steven Mnuchin; and National Economic Council Director Gary Cohn. Tightly guarded negotiations by the six principals and their collective staff were meant to resolve crippling differences among the conservative factions ahead of time, and the secretive nature of the talks was intended to forestall anti-reform coalitions from organizing against the bill.

The Big Six’s efforts first yielded the July 27 joint statement of tax reform principles. Although in the words of Steven M. Rosenthal of the Urban-Brookings Tax Policy Center, it amounted to “a big nothing-burger” in terms of new policy details, it put to rest the embattled destination-based cash flow tax provision, a central feature of House Republicans’ “Better Way” tax reform blueprint. Notably, that provision was estimated to raise over $1 trillion in additional revenue over a decade.

The group’s final effort yielded in September the “unified framework,” an eight-page document that added some detail to the overarching tax reform principles. Like earlier iterations of the tax plans, however, it generally shied away from spelling out the unpopular side of tax reform: base-broadening and anti-base-erosion measures. The White House defended that decision, saying the goal of the framework was simply to set guideposts and leave room for rank-and-file lawmakers to have input on legislation.

From Zero to 60

Cynics could be forgiven for thinking pledges by Ryan and other House GOP leaders to pass a bill in their chamber by Thanksgiving were just another far-fetched promise, given the divides within the Republican conference over how to deal with thorny issues like repeal of the state and local tax deduction. But to the surprise of many, they pulled it off with time to spare.

Momentum began to build after both chambers of Congress agreed to a concurrent fiscal 2018 budget resolution in late October that came with reconciliation instructions allowing for a $1.5 trillion tax cut. That resolution solidified the movement toward abandoning revenue-neutral reform and all but guaranteed that Democrats — who listed revenue neutrality as one of their preconditions to cooperating on the reform effort — would oppose the bill.

The legislative process then shifted to the taxwriting committees, which skipped hearings and went straight to markup. The Ways and Means Committee introduced the Tax Cuts and Jobs Act on November 2. After only four days of deliberation, Ways and Means on a party-line vote advanced the bill November 9, and just a week later, the full House followed suit by a comfortable, though party-line, margin. The entire process from introduction of the bill to its passage on the floor lasted just 16 days.

The Senate then did essentially the same thing, churning out a bill from introduction in the Finance Committee on November 9 to floor passage in just 23 days, although not without some hand-wringing from a small cadre of senators worried about deficits. Even under this accelerated timeline, Republicans had little time to lose if they wanted to finish their bill by the end of the year. The House and Senate moved quickly to organize a conference committee, and lawmakers huddled behind closed doors to smooth out the differences on issues ranging from how to provide tax relief to passthroughs, to how to implement a territorial system of taxation, to whether to bump up the corporate tax rate to fund more substantial tax breaks for families.

By December 13, House and Senate GOP leaders were announcing they had reached an agreement in principle and widely suggesting that their remaining work consisted of ironing out minor details. After conferees produced a conference report at the end of that week featuring a 21 percent corporate tax rate and a few minor concessions to win the support of wavering Republican senators, voting on the bill promptly commenced the following week.

With the exception of a minor hiccup when the Senate parliamentarian ruled three provisions out of order, thus forcing the House to vote twice to pass the bill, the votes to send the bill to Trump's desk were surprisingly calm affairs, lacking some of the high political drama of the previous weeks. Republicans had their votes lined up, and with only a few outliers, they uniformly cast them in support of the bill.

Trump signed the bill without ceremony on December 22 a day after a White House gathering with lawmakers. 


Eye of the Beholder

While Trump regularly referred to the tax bill as “the biggest tax cut in history,” many critics bristle at the thought of deeming it true tax reform. GOP lawmakers surprised many tax observers when they abandoned the concept of revenue-neutral tax reform for a static $1.5 trillion deficit-increasing tax cut. And despite a steady stream of assurances that the bills’ tax cuts would pay for themselves with growth, no credible, independent analyses indicated that that would be the case, including those of the traditional congressional scorekeeper, the Joint Committee on Taxation.

Moreover, Democrats repeatedly emphasized that the tax cuts would disproportionately benefit high-income taxpayers — a claim borne out by distributional analyses. That fact, along with the Democrats’ claim that the bills’ higher deficits would later give Republicans an excuse to cut government spending on programs that benefit low- and middle-income taxpayers, yielded a potent anti-reform message that according to polls, broadly resonated with the public. Republicans, meanwhile, argued that the bulk of the benefits of their business tax cuts would be passed on to workers, resulting in higher wages and better job opportunities.

Although the Trump administration tentatively reached out to some Democratic lawmakers, hosting pro-tax-reform rallies in swing states to pressure moderate members, that effort was in vain. Democrats decried the bill’s sticker price, the fact that they were cut out of the talks that shaped the bill, and the sense that tax reform was being rushed.

Unlike the last major tax reform effort, in 1986, which took nearly three years to complete after President Reagan issued his call for it and involved dozens of congressional hearings with testimony from hundreds of individuals, GOP leaders chose instead to draw on other experiences. Leaning on the grab bag of provisions found in the 2014 tax reform draft by former Ways and Means Chair Dave Camp and lessons learned from hearings and working groups in recent years, they adopted a loose definition of regular order to bypass lengthy hearings and rapidly advance their legislation.

Regardless of the merits of the bill, the conversation about it will not end with its enactment. Tax lawyers and accountants will have new tax planning strategies to develop, Treasury will issue rules and regulations for the indefinite future as it works to administer the complicated new tax regime, and lawmakers will tweak the law before revisiting its expiring provisions. Reform or not, the 2017 Republican tax bill will prove consequential for years to come.