Mapping the Effort to Do Tax Reform

Even a good faith bipartisan tax reform effort would run into the problem that federal taxation policy has an impact on state and local tax policy, and making changes in deductions will hurt some states while benefitting others. The home mortgage deduction and the deduction for state and local taxes benefit states with high taxes and high home values. Those tend to be traditionally blue states, especially in the Mid-Atlantic region of the country. It’s true that the primary beneficiaries tend to be wealthy. They make enough money to make it worth their while to itemize their tax returns, they own real property, and their state and local taxes are more than a pittance. But not every one who pays a mortgage is a fat cat, obviously, and the SALT deduction makes it less painful for state and local legislators to impose taxes, raise revenue, and provide services that lower income people need.

It can be argued that the Mid-Atlantic states (as well as states like Illinois, California and Texas) get a sweet deal on these deductions, and it effectively amounts to lower-tax, lower property value states subsidizing their taxes. On the merits, it might not be wrong to eliminate or cap the home mortgage and SALT deductions. But, as a political matter, it’s not something too many New York or Pennsylvania or New Jersey Republicans will vote for. Here’s just two examples:

“I intend to fight it with everything I know how,” said Rep. Tom MacArthur (R-N.J.), who represents a district where 43 percent of tax filers claim SALT deductions and signed a bipartisan letter to Treasury Secretary Steven Mnuchin urging him to preserve the break. “It’s a big deal for states like ours.”

…Rep. Peter T. King (R-N.Y.), who represents a middle-class Long Island district, said he could never vote for a tax bill that eliminated the deduction, especially for property taxes.

“These people have 60-by-100 [foot] plots, they’re paying about $15,000 a year in property taxes, high state income taxes, not into Wall Street, not into stocks and bonds,” he said. “It would be devastating. These are Trump voters. They didn’t vote for him to take away the deduction on their main asset.”

Paul Ryan has discussed some possible ways to lesson the blow, perhaps by doubling the standard deduction, for example, but I’m not really concerned about what constitutes fair or sensible tax policy in this piece. I’m focused on what is politically possible.

There are a bunch of constraints facing the effort to do tax reform. The Republicans want to avoid a Senate filibuster, but that means they have to make the bill budget neutral (or better) after ten years or the whole bill will fail a parliamentary challenge. They could let the bill sunset after ten years, but that’s a fallback position. If these reforms are to be more permanent, they need to pay for the cuts. Without taking money from home owners and SALT itemizers, they won’t be able to accomplish that. They also need to keep almost all their senators on board, because if even three of them won’t vote for the bill, it won’t pass even at the lower filibuster-proof 50-vote threshold. Over in the House, the Republicans still have a healthy majority, but they also have a lot of members from states that will get pretty badly dinged by these proposals. I wouldn’t assume that every member from Texas would go for these changes, but they definitely will lose votes in states like Pennsylvania, Illinois and California, as well as New York and New Jersey. It’s not a sure thing that the House could pass that kind of bill.

We saw on health care, that a division over Medicaid expansion just wasn’t bridgeable. Any tax reform will have many more chasms to span. The reporting should reflect this.

If the Republicans are going to use the budget reconciliation process to avoid a filibuster on tax reform, they’re probably not going to be able to pass anything that can survive the budget-neutral test. That means that the reforms will have to sunset or the rules will have to be waived somehow. My guess is that the real reporting job right now is to figure out what the Republicans will do when faced with that choice. What kind of support or resistance will there be to waiving the rules? If they’re willing to waive the rules, how will that change how they think about raising new revenue to offset cuts?

There are two other options, of course. One is a likely failure that looks like the first two efforts to repeal Obamacare. The other is that the Trump administration makes a cool, rational assessment of the odds against success and concludes that tax reform is better pursued as a bipartisan exercise, knowing of course that this will mean the death of many conservatives’ fondest ambitions.

In any case, the media’s coverage should go deep and look a few steps ahead. There will be no straight line from here to a big tax reform bill. What people need to know is where the detours and exits lie, and whether the rules and norms will be busted or respected. That’s the kind of reporting we need.

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