To move forward on tax reform, the House, the Senate and the Trump administration must agree on where to set tax rates, how to pay for cuts and whether the final package should add to the deficit or pay for itself. Common ground may be difficult to find in each area. Any reform plan without Democratic support will force Republicans to pass a 2018 budget using the parliamentary process known as reconciliation. Even a new budget agreement poses a daunting task given Republican opposition to the administration’s demands for deep domestic spending cuts. The need to reach an agreement between the House, Senate and White House will likely delay introduction of a tax reform bill, which had been expected in early June.
If tax reform is enacted via reconciliation, it must be revenue neutral over the 10-year budget window or it will automatically sunset, similar to the Bush tax cuts. Achieving revenue neutrality may be difficult. More than two-thirds of every federal dollar is considered “mandatory” spending, including Social Security, Medicare and interest on the national debt, much of which is considered untouchable. Further complicating matters is the national debt itself. Between 2007 and 2016, the national debt, as a percentage of GDP, more than doubled to 77 percent from 35 percent, according to the nonpartisan Committee for a Responsible Federal Budget. This is the highest debt-to-GDP percentage since 1945 when it was 103 percent.
Time may also work against completing any tax reform package before the end of the year. Between June 19 and the August congressional recess, only 22 legislative days are on the House calendar before the five-week recess. Once Congress returns, lawmakers will have to agree by Sept. 30 on how to fund the government for the next fiscal year as well as raise the debt limit; two tasks that could eat up both political capital and time for Republican leaders facing difficult choices. After Oct. 1, only 35 working days remain on the House calendar before they adjourn for the holidays.
Finally, as there is no way to tell how other political distractions will affect Congress’s agenda in the coming weeks and months, if tax reform is deferred too far into 2018, it may prove unpassable as we near midterm elections. If further delayed into 2019, that window for passage may be short as well due to the ever-expanding presidential election period.
While we believe numerous proposals will emerge and be discussed in the coming months, we do not expect to see actual legislation until late in the year at the earliest. Anticipating many public statements and rumors about the nature and direction of reform, we developed our tax reform resource center which focuses on distilling facts and planning opportunities from relevant tax legislation. We also offer the option of subscribing to our tax alerts in the resource center.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.