Following Donald Trump’s election and the retention of Republican control in both houses of Congress, suddenly the prospects for tax reform in 2017 went from doubtful to fairly likely.

The House tax reform blueprint from June 2016 was dusted off as a starting point for serious tax reform discussions. Trump had some tax proposals from the presidential campaign, but most were not well-developed and others were modified during the campaign to more closely match the House blueprint, so the blueprint still looked like a good starting point.

Then, Republican leaders decided it would be best to get health care repeal and replacement out of the way early. One plus of that approach was that health care replacement would provide revenue to offset the repeal of the Affordable Care Act taxes as well as some additional revenue to help support tax cuts in the tax reform plan. President Trump basically adopted the health care repeal and replacement bill developed by the House and made it his own. Of course, we all know now that that effort has at least initially failed in the House. Some are still trying to revive it while others in Congress have decided to move on to tax reform.

So how are those tax reform efforts looking at this point?

The House Blueprint

The House is still working with the tax reform blueprint promulgated last June. However, perhaps reflecting criticism that they were not open to amending the health care replacement legislation until too late, congressional leaders are indicating a willingness to compromise on the blueprint details.

Probably the No. 1 goal of tax reform is the reduction of corporate tax rates. How to pay for that remains the problem. The border adjustment tax in the House blueprint appears unlikely to survive in its proposed form of a 20 percent tax on imports. A 5 percent tax on imports is being talked about as the most that is likely to survive. That means that the corporate rate reduction to 20 percent might also have to be compromised unless the House abandons its effort at a revenue-neutral bill.

Republicans are discussing abandoning revenue neutrality to avoid lengthy fights over how to pay for tax cuts. This would probably also mean a temporary bill that would only go out 10 years but that could be passed under the budget reconciliation rules of the Senate, requiring only a majority vote. Some Republicans remain concerned that a temporary bill would not provide the economic growth potential that they are hoping to achieve with tax reform and that also might help pay for the legislation under a dynamic scoring model.

In addition to lowering the rate of the border adjustment tax, carve-outs are also being discussed for certain industries that would be the most adversely impacted by a tax on imports. However, carve-outs might make a border adjustment tax even more subject to a World Trade Organization challenge that it amounts to an illegal trade subsidy.

The research credit still appears to be the most likely business credit to survive. Others are pushing to maintain alternative energy credits, but their future is not so certain. Eliminating the interest deduction remains a part of the plan at this point to try to achieve more equality between debt and equity financing, but there will be significant business interests in the financial sector lobbying to preserve that deduction.

Some Republicans are advocating addressing the repeal of the Affordable Care Act taxes as part of tax reform, since they have not been able to do that separately so far, but leadership appears to still prefer to address those separately in further health care reform efforts.

Meawhile, at the White House …

President Trump, perhaps concerned that he relied too much on letting the House take the lead on health care reform, has announced that the administration will put out its own tax reform plan — with a rough draft coming possibly as early as this week. (See Trump’s tax plan coming soon.) That intent was first announced in early February, even before health care reform failed, but the promised early March date for that plan has now passed, no new date is being promised, and the indications of what the plan will include are starting to sound more like the campaign proposals — some general thoughts without a lot of details.

Treasury Secretary Steven Mnuchin has indicated that the plan will focus on middle-income tax cuts, with the wealthy being left in pretty much the same tax position overall — lower rates but loss of tax breaks. This is not what Trump’s campaign tax proposals looked like, with most of the benefit there going to the wealthy, but again those campaign proposals were not too specific on the details, especially the pay-fors. The campaign proposals did not appear to be trying to achieve revenue neutrality, and Trump in general has not appeared to be too concerned about adding to the deficit to achieve his promised goals.

Another problem the administration is facing in putting a tax reform proposal together is that their team remains a little light on tax experts. While Treasury Secretary Mnuchin is in place, the key Treasury tax policy positions remain to be filled.

National Economic Council Director Gary Cohn will also play a role in putting together the plan, but the council is light on tax experts as well. Mnuchin had been talking about tax reform in August at the earliest, but at press time had begun to suggest that the administration was looking more toward the end of the year for its tax reform efforts. Outside observers are starting to move back their predictions to 2018.

Summary

If the administration and the House Republicans are working on separate tax reform proposals, that is likely to slow up the tax reform process. They may end up coming together on a bill, but the administration appears likely to take a more active role than was the case in drafting health care reform.

Since it is Congress that passes legislation anyway, and since revenue provisions must originate in the House, it still appears likely that the House blueprint will be the starting point.

Indications are that the Senate is starting to go back to taking a look at a tax reform proposal introduced when Representative Dave Camp was Ways Means Chair. We have yet to see if Senate Republicans can come up with a tax reform bill that can pass with a majority vote composed of 50 of the 52 Republican senators (plus Vice President Pence as the tie breaker), assuming the bill proceeds under budget reconciliation. Otherwise, there may need to be some reach out to Senate Democrats, further complicating the process. In short, tax reform, even if simplified to just pass something with a “tax reform” label on it this year, and even if temporary and not fully paid for, may be no easier than health care reform to get through Congress.

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