Tax Reform: The Week Ahead — October 23rd

RealClearPolitics will host a conversation with Kevin Brady (R-TX), Chair of the House Ways & Means Committee, on Tuesday (10/24) at the W Hotel in Washington, D.C. Tickets can be found here.

Last Week: The Senate passed their FY-2018 budget resolution this past Thursday, allowing the tax reform drumbeat to continue. It passed 51–49 with Kentucky Senator Rand Paul as the lone GOP opposition vote. The fiscal hawk expressed concerns about not pairing the tax cuts with reductions to spending on entitlements such as Medicare and Medicaid. Thad Cochran, the Senior GOP Senator from Mississippi, did make the vote despite his ongoing health concerns.

End of October: The House will likely vote this week on the Senate FY-2018 budget resolution. This is a new development as the two budgets had substantial differences; the House pushing a revenue-neutral target, while the Senate allowing for a $1.5 trillion deficit over the next decade. Changes were made late Thursday to the Senate resolution to increase the Pentagon’s budget, getting House defense hawks on board. This compromise means there will be no need for a conference committee, enabling both chambers to focus more of their remaining 2017 days on finalizing tax reform.

On Sunday, POTUS joined a House GOP conference call to plead the case for adopting the Senate budget. Speaker Ryan, VPOTUS, and POTUS all pressed any skeptical GOP members, arguing that failure or a slow process would harm not just the chances for tax reform, but also their 2018 midterm re-election chances. House Budget Chairwoman Diane Black (R-Tenn), a staunch advocate of the House revenue-neutral budget, agreed to support the Senate version if it meant a greater chance of success by end of year.

Mick Mulvaney, Director of OMB, discussed on Fox News Sunday how the House and Senate budget compromise would be a major win for the 2017 timeline. “We may save as many as 10 or 12 legislative days, which is a big deal. It sounds like it’s not much, when you’re only here in the end of October, but in the congressional calendars, that’s a long time”

With a House passage of the Senate budget resolution, the GOP would remain on this strict timeline. The plan continues to be a finalized budget by 10/31, with tax reform mark-ups beginning in early November.

What to Watch This Week

401(K) In Danger?

In an effort to generate additional revenue for individual tax cuts, some Republicans are rumored to be pushing for caps to 401(K) deductions at $2,400 a year. This would be a dramatic change for individuals retirement strategies, as the current caps are set at $18,000 for individuals under 50 and $24,000 for 50+. There are serious concerns about dis-incentivizing retirement savings from the broad public, the finance industry, and politicians from both sides of the aisle. Minority Leader Schumer slammed the idea stating, “The GOP’s total devotion to millionaires and billionaires comes at the expense of every family using a 401(k) to save for a decent retirement.”

POTUS himself came out against the 401(K) caps early Monday morning. "There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!"

At this point, the added revenue would not be worth the public opinion nightmare for the GOP. Don’t expect the 401(K) cap to gain any traction at all, especially with President Trump’s stance against it.

A 4th Income Bracket

Speaker Paul Ryan told “CBS: This Morning” that there will be a fourth income bracket when the final tax reform bill is released from the House Ways and Means Committee. Initially, the GOP was pressing for three brackets under their unified tax framework released in September. Current high-income earners pay a rate of 39.6%, a rate that may now be staying put. The GOP framework has the other three brackets at 12%, 25%, and 35%. Ryan on CBS stated, “That’s why we’re introducing the fourth bracket, so that high-income earners do not see a big rate cut and that those resources go to the middle class. Once we get that budget resolution that tells us how our numbers will work, then we’ll introduce the bill which will have that fourth bracket.

SALT

 A repeal of the State and Local Tax Deductions (SALT) continues to roll forward. On Thursday, Republicans shot down a Democrat budget amendment 52–47 that prevented the Senate from considering any bill that repeals or limits the deduction as part of a planned tax overhaul. Despite the failure, Democrats have continued to fight back; pivoting to attacking the GOP for allowing corporations to continue to have SALT deductions as a business expense. Republicans from blue states such as California, New York, and New Jersey will continue to push for a partial repeal of SALT deductions. A repeal that only eliminates deductions from those earning more than $400,000 per year, a compromise championed by Peter King (R-NY), would only add about a quarter of the revenue Republican leadership is hoping for. Because of this, it’s hard to imagine a compromise that would set the ceiling that high. We could see the GOP reach consensus around a $250,000 cut-off salary. 

 Keep an eye on blue state House Republicans this week. Will they continue to publicly advocate for a compromise?

Mortgage Interest Deduction

 The Mortgage Interest Deduction (MID) will continue to be one of the more contentious battles as we inch closer to a final tax reform bill. The housing industry is avidly against any measures that they see as dis-incentivizing home purchases. On the flip side — those in favor of repeal the MID say that the main reason people don’t purchase homes is because of down-payments rather than tax purposes. They claim there’s little evidence that MID repeal will have a strong impact on housing purchases. We will continue to monitor for MID updates.