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Tax Reform: Can the New Administration Really Change the Status Quo?

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Apr 6th 2017
Tax Partner WithumSmith+Brown PC
Columnist
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Leading up to the inauguration of President Donald J. Trump, the dialogue was all about changing the status quo. However, in Washington, DC – as in real life – promises of change are never a sure thing. 

Trump’s campaign had two issues as its cornerstone: repeal of the Affordable Care Act (ACA), referred to as Obamacare, and tax reform. Once perceived as a “slam dunk” by and for the new administration, both initiatives – dismissal of the ACA first, implementation of tax reform second – were the kickoff of an overhaul-filled agenda.

In the aftermath of a stunning ACA repeal failure, the question is: Can the administration have one without the other? The answer: It’s complicated.

There are many prevailing truths and falsehoods – alternative facts, if you will –surrounding the relationship between the collapsed American Health Care Act replacement plan and the on-deck tax reform blueprint. One very important truth is that prioritization of these two issues was no fluke. In fact, the GOP planned to use the budget reconciliation process to advance both priorities by linking them to the 2017 and 2018 budgets, respectively.

A procedural process, reconciliation allows consideration of a budget bill with limited Senate debate and no chance of a filibuster – which is critical because reconciliation requires a simple majority (51 votes). It also dodges the prospect of having the bill obstructed by protracted speaking during the debate phase.

Because reconciliation legislation generally impacts the budget deficit, the Byrd Rule also comes into play. Named after the late Sen. Robert Byrd (D), the rule outlines the provisions for which reconciliation can and cannot be used. The most significant of which prohibits an increase in the deficit beyond 10 years.

ACA Repeal Fails to Alleviate $800 Billion in Taxes
Failure to dismantle the ACA is a bitter pill for the GOP contingent, which had seven years to poke holes in and prep for a successful reversal of healthcare policy. Repealing Obamacare also would have alleviated $880 billion in revenue-neutral taxes, the majority of which falls on the wealthiest 2 percent of the population.

Rolling back the ACA would have jumpstarted tax reform as part of the 2018 budget. With the $880 billion already in place, it would have been a lot easier to render tax reform revenue neutral as well. Can the GOP have one without the other? Yes. Will it be a slam dunk? No, especially because healthcare reform exposed the Republican Party’s great divide. 

Dissenting factions have not only emerged, they’ve been emboldened to disrupt the GOP’s agenda with ease. Republicans, however, do maintain one edge: The party historically agrees on slashing taxes. Seizing healthcare coverage from 24 million people – when midterm elections are slated for 2018 – is not an area of common ground. 

Tax Reform Can Be as Contentious as Health Care
While tax reform bodes much better for Trump and the GOP, under reconciliation there is one rather large elephant in the room: the border-adjustment tax. Designed to right the ship that currently taxes exports heavily and subsidizes imports, the border-adjustment tax will levy an estimated 20 percent tax hike on importers. In turn, it will yield annual revenue totaling $1.2 trillion over the next 10 years – 1.2 trillion revenue-neutral dollars the GOP plans to use to offset tax cuts elsewhere.

In concept, tax reform with a border-adjustment tax should be forgone with a GOP-controlled legislature and executive branch. Not so fast. Odds are the 20 percent tax increase will be passed onto consumers via price increases hitting their pocketbooks during midterm election season.

Furthermore, powerful importers/industry influencers, like Koch Industries, promise an all-out offensive to kill the border tax adjustment. Democrats just have to fan the flame and watch from the sidelines to see if the Republican Party further implodes.  

Can the GOP scrap the border-adjustment tax? Yes. Does it want to? Not really, especially after “losing” $880 billion in tax relief rooted in the failed Obamacare repeal. Even if the Republicans proceed, will they use reconciliation under the 2017 or 2018 budget? This year’s budget is limited and time is running out while the 2018 budget has yet to be passed.

The GOP simply cannot afford to lose on the contentious tax reform front. Should the border-adjustment tax become too controversial, Republicans can always pull the plug or revise its proposals. Either way, the Republican Party must demonstrate they are sticking with their agenda.

In the meantime, the GOP has set its sights on advancing Trump’s Supreme Court nominee, Neil Gorsuch, and rewriting the rules of the Senate to avoid a Democratic filibuster. This would paint a united public front for the administration and party leadership while adding a much-needed plus in the “W” column.

And just when the Republican leadership said they were abandoning any further repeal of Obamacare in the foreseeable future, the White House is mobilizing Vice President Mike Pence to broker talks between moderates and conservatives to revive healthcare reform.

In these times of uncertainty, it is clear the administration isn’t interested in preserving the status quo; it is committed to turning it upside down.

Related article:

House GOP Makes the Case for Border-Adjustment Tax 

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