President Trump promised the largest tax cut in history, but as he hit the road Wednesday to promote the plan, Republicans in Congress were quietly discussing scaling back key provisions in an effort to deliver the top White House priority.
There’s already talk that the cornerstone of the GOP proposal — a dramatically reduced 20% corporate tax rate that Trump has called a “red line” — may slip to 22% or 23%, those familiar with negotiations said.
Trump had originally promised a 15% rate for corporations. But Republicans are running into resistance from lawmakers and lobbyists who want to preserve deductions and loopholes that were targeted for elimination under the White House plan to offset the massive corporate cut from the current 35% rate.
Some Republicans are also pushing back against other parts of the president’s plan, such as scrapping the estate tax for the rich and eliminating deductions for state and local taxes, which would hurt residents in high-tax states like California and New York.
At an evening rally in Harrisburg, Pa., Trump said the corporate rate would be “no more than 20%.” But earlier this week, he acknowledged that changes may lie ahead. “We'll be adjusting a little bit over the next few weeks to make it even stronger,” he said.
Negotiators say changes will be needed if Republicans, who can afford to lose only two votes in the Senate and about 20 in the House if no Democrats join in support, hope to avoid another embarrassing defeat like the collapse of their Obamacare repeal plan.
Fiscally conservative Republicans will be the hardest to win over because the GOP tax plan has been estimated by some outside groups to add more than $2 trillion to the deficit over 10 years.
Republicans are racing to pass their tax overhaul by the end of the year, hoping to give the economy a boost and quiet complaints that they have accomplished little with the party’s hold on the White House and Congress.
Yet even as Trump and top Republicans, including House Speaker Paul D. Ryan (R-Wis.) and Vice President Mike Pence, talk up the tax plan in whistle-stop tours across the nation, it remains in flux, more of a concept than a proposal. Actual legislation remains weeks away.
“Everything is fluid right now,” said one business lobbyist, granted anonymity to discuss the private talks, adding that there are “realistic tensions” over the details.
Republicans are finding that their desire for lowering corporate and individual rates is running into the fiscal challenge of how to pay for the reductions without exacerbating the nation’s debt load.
They argue that tax cuts, even if deficit-financed, will spur economic growth and provide new revenue. But many economists question that theory, saying it hasn’t worked that way in the past.
In addition, Republicans — in order to take advantage of special budget rules that will allow them to pass the tax plan in the Senate with a simple majority — must find ways to offset some of the costs.
Every percentage-point reduction in the corporate rate reduces federal tax revenue by about $100 billion over 10 years. Slashing the corporate rate to 20% would cost about $1.5 trillion.
With lobbyists and lawmakers lining up to protect deductions and loopholes, tax bill drafters are having a tough time finding ways to cover the costs.
One main revenue source, the elimination of state and local tax deductions, could generate as much as $1.3 trillion over the decade. But talk of killing the deduction set off an outcry among high-tax state lawmakers in New York, New Jersey and California. Talks are now underway to restructure that proposal.
“As the swamp kicks in, they’re going to argue to keep all their special loopholes and deductions, and the more they get to keep, the less you can reduce the tax rate,” said Rep. Dave Brat (R-Va.). “There’s going to be tremendous pressure, but that’s why we have to hold the line on that.”
Corporate tax rates have been the focus throughout the process, as lawmakers try to bring the U.S. on par with the 35 developed nations in the Organization for Economic Cooperation and Development, which have an average rate of 22.5%. Many U.S. corporations, however, pay much less than 35% thanks to loopholes.
Lowering corporate rates has been a top priority for businesses. The Koch brothers-aligned Freedom Partners Chamber of Commerce released new ads Wednesday warning lawmakers against protecting favorite deductions.
In Harrisburg, Trump argued that corporate tax changes would benefit ordinary Americans, delivering as much as $4,000 per household. “You’re going to have so much money to spend,” he told the crowd.
The White House said changing the way foreign earnings are taxed — along with a one-time incentive to bring back some of the estimated $2.5 trillion U.S. companies have parked abroad — would result in $4,000 more for American workers over an eight-year period.
But experts doubted such a windfall would flow to workers and said the GOP’s planned changes to individual income tax rates would largely benefit the wealthiest Americans.
Mark Mazur, director of the Tax Policy Center, said he was “incredibly skeptical” of the White House’s $4,000 estimate, explaining that there are many reasons why wages have not kept up with the growth of corporate profits. He cited less powerful labor unions and competition from lower-wage workers abroad.
On Wednesday, Ryan outlined the schedule ahead during a closed-door meeting that left lawmakers expecting a House vote on a tax bill by Thanksgiving.
The Senate would follow if it clears a preliminary budget hurdle next week. Sen. Rand Paul (R-Ky.) has panned the tax proposal as benefiting the wealthy. And Trump’s recent personal attacks on Sen. Bob Corker (R-Tenn.) certainly won’t help win his vote. Even before Trump mocked him, Corker was concerned the tax plan would increase the deficit.