Tax Reform: The Week Ahead — October 30th

Last Week: The House of Representatives last Thursday approved the Senate budget (FY-18) by a close vote of 216–212, setting the stage for the crafting of initial tax plans. The twenty Republican nay votes is a concern and a very slim margin for the GOP.  Support from previously reliable constituencies is no longer assured.  Eleven of the twenty nay votes came from New York and New Jersey, two historically blue states which gain great advantage from the State & Local Tax Deduction (commonly referred to as SALT). New Jersey and New York combine for a total of fourteen GOP House Representatives, with most of the yes votes coming from Western and Upstate New York members, such as Chris Collins and Tom Reed.  The House Freedom Caucus was also unable to lock down their entire constituency. Mark Sanford (SC), Jeff Duncan (SC), and Justin Amash (MI) all voted against the budget last week, citing concerns over lack of fiscal responsibility and growing debt. It’s important to watch how Republicans who voted against the budget, both House & Senate, approach the tax reform bill. Some outspoken budget critics, such as Senator Rand Paul (KY), have confirmed that they will vote in favor of the tax reform bill.

This Week:

We will finally get a first-look at a tax bill this Wednesday. Rep. Kevin Brady (TX) and House Republicans will release a plan which is much more extensive than the previous outlines we’ve seen throughout 2017 from GOP and the White House. It will be a dense document, and will understandably take some time for stakeholders to fully analyze the implications.

The House Ways & Means Committee, led by Brady, will then begin their mark-up process next week. While this is slated to be a one week mark-up, contentious issues are likely to arise and could extend this into a multi-week effort.  With so many controversial provisions still un-resolved, tax policy experts are skeptical that the entire mark-up process can be finalized in a single week.

November — December: The House of Representatives is hoping to pass their tax reform bill by Thanksgiving recess, and then 'pass the baton' to Senator Orrin Hatch (R-UT) and the Senate Finance Committee. So far so good for the GOP timetable of getting a bill to POTUS’ desk by end of 2017, but the most difficult and contentious moments are yet to come.

What to Watch This Week

The Housing Industry Opposition: Key housing industry associations, National Association of Home Builders and the National Association of Realtors, have both come out against the House tax plan. Their concern relates to the doubling of the standard deduction. They fear that many would no longer need to itemize mortgage interest deductions . Jerry Howard, NAHB CEO, is concerned that the plan as-is will dis-incentivize first-time home buyers. He will not support the plan unless a new tax credit is included. This will be an important show-down to watch. By stating that there is support for the credit, Howard believes GOP leadership can still be swayed. However, without a credit addition, expect NAR and NAHB to throw their full might against passage of the bill. NAR continues to be one of the most influential trade associations in Washington, D.C., ranking only behind the U.S. Chamber of Commerce for 2017 spending.

A Tax Cut Phase-In?: Markets corrected Monday after news broke about a potential phase-in of the 20% corporate tax rate. Rather than an immediate cut from 35% to 20%, the new proposal would reduce the rate by 3% per annum, reaching 20% by 2022.

The Administration spoke out against the phase-in. Sarah Huckabee Sanders said the following during the Monday White House Press briefing: “The president laid out his principles and it doesn’t include the phasing in, so we’re still committed to that moving forward. I don’t have any reason to believe we have changes on that front at this point.”

The argument in favor of the yearly phase-in is simply cost minimization. A phase-in would achieve the goal of eventual corporate tax cuts while curbing deficit growth of the next few years. Opposition to phase-in argues that due to dynamic scoring, there will be no cost savings.

The Estate Tax: The Estate Tax repeal is under attack from Republican Senator Susan Collins of Maine. In an interview with Bloomberg, Collins stated that a repeal of the Estate Tax, a 40% tax on estates in excess of $5.5 million, “concerns her”.

401(K) $2,400 Cap: The 401(K) cap, despite the POTUS tweets last week, is still under consideration for inclusion in the GOP tax plan. The 401(K) may be one of the more unpredictable provisions in the tax plan, as leadership has been relatively tight-lipped about it over the weekend. It’s quite possible that the plan to cap 401(K)s is eliminated, or the proposed $2,400 limit is raised. This issue impacts more Americans than many of the other tax changes, and has elevated the debate to include a broad swath of the public. It will be a hot-button topic if it does indeed remain in Wednesday’s outline.