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October 27, 2017

Congress Passes Budget Setting the Stage for Tax Reform (article)

On October 26, Congress set the stage for tax reform by approving a budget that will substantially increase the federal deficit over the next 10 years.

CBIZ monitors the tax reform debate.The House set aside its own budget resolution, which it passed on October 5, in order to adopt the Senate resolution which cleared that chamber last week. The Senate version passed with the minimum number of votes (51) necessary (without the Vice President voting) and in the House it received 216 votes, one over the minimum. These close votes reflect some of the hurdles that Congress must overcome to pass a tax reform package. In the Senate, Republican opposition came from Rand Paul, who sought more spending cuts and more middle class tax cuts. While in the House opposition arose from two camps of Republicans, those who sought spending cuts and those who opposed the elimination of the state and local tax deduction. The 216 votes received in the House was actually three fewer than the House’s budget received at the beginning of the month, signaling that as prized tax breaks and spending items are slated for reductions or elimination their defenders will spring into action. As expected, no Democrats voted for the measure in either chamber.

The budget resolution provides the keys to restart the budget reconciliation vehicle by providing reconciliation instructions that allow for a $1.5 trillion dollar increase to the deficit over 10 years. This figure was measured on a "static" scoring basis, but the cost may be reduced if "dynamic" scoring is used. It is that increase that could create opposition from Senators and Representatives who oppose deficit increases, though many members of that group voted for this budget resolution. This resolution was necessary to reopen the reconciliation process as the previous budget resolution expired September 30 after Republicans unsuccessfully sought to repeal and replace the Affordable Care Act. The resolution is nonbinding and does not have to be signed by President Trump in order to start the reconciliation process. However, it sheds light on the views of a majority of the Republicans concerning tax cuts, spending cuts, and, in the case of defense spending, increases that Congress envisions for the current fiscal year.

A Closer Look at the Budget

Among the items in the budget are increases in military spending, and cuts to discretionary domestic spending for non-military items. Specifically this includes $473 million in cuts to Medicare’s baseline spending and another $1 trillion in cuts to Medicaid spending. The Medicaid cuts mirror those that were included in many of the attempts to repeal and replace the ACA, while the cuts to Medicare are a new part of the health care debate. It is important to note that none of these cuts or increases can be implemented without further legislation, which is where the debate is likely to heat up. As Senator Bob Corker (R-TN) put it, "this is the biggest hoax cast upon the American people ever that this budget process even exists. The only thing about this that matters is in preparation for tax reform.”

What’s Next for Tax Reform

The next step is to begin the tax reform, or more likely tax cut, debate. Leadership in the House has promised that a bill will be introduced in the Ways and Means Committee on November 1, while the budget resolution calls for the Senate to release its version November 13. Both chambers and the President have stated that the goal for passage is before this Christmas, though that appears to be optimistic.

Among the items to be hotly contested as a part of the tax reform process are the elimination of the state and local tax deduction, changes to the contribution limits for retirement accounts, the proposed capital expensing provisions, limits on the deduction of interest for both individuals (home mortgage) and businesses, and generally how to pay for the tax cuts. The budget reconciliation process does not allow for deficit increases to extend past the 10-year window, and it has already been reported that a 20 percent corporate tax rate could only be sustained for two years before violating this rule.

Also, although there was not enough specificity in the Framework released by the Big Six to allow scoring by the Congressional Budget Office or the Joint Committee on Taxation, the nonpartisan Committee for a Responsible Federal Budget indicated the cost would be $2.2 trillion, which is $700 billion more than the new budget allows in deficit increases.  So Congressional Deficit Hawks will be looking for “pay-fors” to eliminate further deficit increases, and each new proposal will undoubtedly have its own vocal detractors.  Thus, while providing a vehicle for tax reform, the budget resolution also crystallizes the difficulties that legislators face as they move forward.

For more on the status of tax reform legislation, follow the CBIZ MHM National Tax Office’s Eye on Washington series or contact your local CBIZ tax professional.

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CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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