Sen. Finance Tax Reform Hearing (Sep. 15)

Update 204 — Sen. Finance Tax Reform Hearing:

Hatching Bipartisan Possibilities or Pipe Dreams?

Today’s Senate Finance Committee hearing on individual income taxes marked the first indication that we may be witnessing an administration-directed, or influenced, shift from partisanship to triangulation, this time on tax reform.  The  tectonic shift under the ground of American partisan politics was discernible at the hearing.

At a Christian Science Monitor breakfast on Tuesday, President Trump’s legislative director expressed Trump’s disappointment in the GOP after the failure to repeal Obamacare.  He said:

“We don’t feel like we can assume that we can get tax reform done strictly on a partisan basis…so it is wise for us, not just from a policy perspective but from a vote-counting perspective, to try to reach out and earn the support of Democrats as well.”

The witnesses’ testimony, the opening statement by the Chair and the Q&A that followed called into question the hitherto presumed GOP legislative strategy to force tax changes through the reconciliation process.  Is it possible Republicans may seek to forge bipartisan consensus and abjure reconciliation?  More below.

Best,

Dana

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Senate Finance Chair Orrin Hatch dismissed the notion there is a secret cabal of tax planners seeking to re-write the code behind closed doors. He insisted his Committee would write legislation in a bipartisan way, he said, and that the GOP Secret Six that has met over the last few months would not write the new tax rules.

•  One Percent Factor

Democratic members and all but one panelist recommended that the top one percent not benefit from any tax changes.  The administration has weighed in from every direction on this issue over the course of the year.  Treasury Secretary Mnuchin articulated the rule named after him in his confirmation hearing promising that there will be no absolute tax cut for the wealthy.  Earlier this summer, he said that he had walked that conviction back.  Just yesterday, Trump walked it forward again out of nowhere.

In today’s hearing, Sen. Casey said he was sure Republicans differed with him and his Democratic colleagues on this front.  Chairman Hatch interrupted, saying there was no difference on the top one percent.  This would be a signal change.

•  Revenue Neutrality

A key point of concern for nearly every Democrat at today’s hearing was revenue neutrality.  Democrats are right to worry that massive tax cuts for the rich will likely be financed (either in the short term or down the road) through cuts to the entitlements that low and middle income earners depend on.  The GOP, usually happy to pay lip service to revenue neutrality without proposing it.  Today’s flawed but plausible feints toward neutrality from the GOP came in two identifiable proposals. Both got pushback.

Remaining revenue ideas discussed today  include eliminating or reducing the mortgage interest deduction and eliminating the deductibility of interest on business expenses.

•  The Standard Deduction

Hatch and Wyden found themselves in agreement and expected the same from their parties in terms of doubling the standard deduction. This method would lead to a simpler and more fair tax code. This could be a bipartisan feat for the committee moving forward as the elimination of State and Local Deductions ignites disagreement.

•  Mortgage Interest Deduction

Witness Iona Harrison of the National Association of Realtors highlighted in her testimony the importance of maintaining the Mortgage Interest Deduction.  Harrison called for the simplification, and not the elimination, of particular elements of the tax code.  The housing market is a primary tool for wealth attainment for a large portion of the population and therefore, is an undeniable influencer in the cycle of the economy.  As such, interests advocating for the mortgage interest deduction have a seat at the table.

•  Child Tax Credit (CTC)

Republicans have previously rejected the Democrats efforts to establish federal leave for parents, but with Ivanka’s agenda of improving support for working parents, they may end up compromising with the Democrats and with the President by increasing the Child Tax Credit from $1,000 per child up to $2,500 per child.

The Child Tax Credit has historically been something that some more conservative Republicans—like Paul Ryan—have affirmed, as it appeals to the down-home traditional family values crowd (who might also reject using birth control or having both parents working). Marco Rubio’s recent discussion of expanding the EITC included the CTC, and the Committee today discussed it at great length with surprising bipartisan agreement on the benefits of expanding the CTC.

Chairman Hatch, Senator Wyden, and countless other members on the committee pressed constantly on the issue of using this moment in tax reform for good and relieving the tax burden of the middle and working classes. Senator Cantwell asked witness Batchelder for the best methods of boosting middle-class incomes. Her response was to increase the Earned Income Tax Credit.

The EITC is a bipartisan issue that was pursued by Obama and Paul Ryan just over a year ago and has the potential of protecting low-income workers who are being “taxed into poverty” in Batchelder’s opinion. The benefits of this plan may be expensive to achieve when coupled with high expectations of increased Child Tax Credits.

•  Pass-Through Provision

After his claim that there will be no tax breaks for the rich yesterday, the President’s policies for working class came under fire multiple times throughout the hearing.  Ranking Member Wyden and Prof. Batchelder criticized the administration’s tax policy agenda for its false attempt to put the masses at ease. The Pass-Through Business Income tax introduces a large loophole for corporations to use in order to dodge taxes.  With 95 percent of businesses qualifying as “pass-throughs”, businesses could see cuts from a 35 to 15 percent tax rate easily with proper taxation intel on hand.

•  State and Local Deduction

Throughout the hearing, Democrats and witnesses severely criticized the elimination of the State and Local deduction as a partisan proposal placing a disproportionate burden on taxpayers from blue states. The biggest concern voiced was elimination at the risk of double taxation. Senators Wyden and Cardin cried out in the name of protecting constituents’ incomes from excessive taxation at the federal level as the committee may consider throwing out State and Local deduction in the tax reform.

•  Retirement Security and “Rothification”

The panel of witnesses were weary of the idea of switching to a Roth, or after-tax, model that may impact savings and bring tax revenues into a 10-year budget window. Democratic members of the committee like Senator Brown found the switch from a pre-tax to an after-tax model unattractive. This was especially true when coupled with the probable cuts to entitlement programs and increased age qualification for Social Security.

Senator Wyden used a substantial part of his opening statement to make an appeal to bipartisanship, even going as far as to make Reagan-style tax reform a central motif in his appeal for sensible tax reform. Unsurprisingly, Wyden gave no indication that he is any more privy to the Secret Six’s policy details than the rest of us.

Wyden and other Democrats did make a coherent set of policy preferences quite clear including:

•  proceeding by regular order with negotiations, i.e. not via reconciliation

•  revenue neutrality

•  a commitment not to benefit disproportionately the one percent, as has generally been the practice over the last several decades.

Today’s consensus on the Child Tax Credit, the Earned Income Tax Credit, and vocal agreement on the trio of principles (regular order, revenue neutrality, and no changes for the top one percent) gives one pause.  Is Chairman Hatch preserving the possibility of legislating a tax plan through regular order?  That would be a tall order.

If Republicans surprise the town and open the process to Democratic input, rate reductions will not be as extreme as many thought.  To win any Democratic votes, the final package would — it is now apparent — have to include extensions of the Child Tax Credit, the Earned Income Tax Credit, and more policies benefitting the middle class.  Whether the GOP seeks to and can attract a few isolated Ds to get to reconciliation or the several more needed to get past a filibuster is actually a matter of national fiscal consequence.