August 7, 2017 - Weekly Legislative Update

Chaos and Confusion on Capitol Hill

There has been a lot of excitement, to say the least on Capitol Hill.  With so many quick developments and so much coverage of the various issues, we thought it would be helpful to provide our own breakdown of what has happened thus far and what we expect to see going forward. 

 

Are the Republican's ACA Repeal and Replace Efforts Dead?

This is the week's million dollar question. Opinions on whether the Senate should, or is likely to, take another run at an Affordable Care Act (ACA) repeal/replace bill, vary widely depending on who you ask.

 

Here's what we do know -

 

-In the wee hours of the morning, the Senate failed to pass a "skinny repeal" bill that would have put the Senate in a position to begin to hammer out a final ACA repeal/replace plan with the House (which has already passed its own repeal/replace bill).  Because Senate Majority Leader Mitch McConnell (R-KY) was attempting to usher the bill through the Senate as part of the budget reconciliation process (the same way that the House did with its repeal/replace bill) it only needed fifty votes to pass with the assumption that Vice President Pence would break the tie and cast the deciding vote in favor of the bill. The bill failed to get that when three Republican Senators, John McCain (R-AZ), Susan Collins (R-ME) and Lisa Murkowski (R-AK), joined their Democrat and Independent colleagues in voting against the bill.

 

-Some Republicans in both the House and Senate have expressed an interest in working with Democrats to pass bi-partisan fixes to the ACA.   Senator McCain, who is expected to be away from the Senate indefinitely while he undergoes treatment for brain cancer, urged his Senate colleagues to "reset" after the vote and try to work more collaboratively across the aisle.  Senator Collins and Senator Nelson (D-FL) have already brought together a bi-partisan group to begin brainstorming and similar bi-partisan groups have been assembling in the House. However other members, like Senator Ted Cruz (R-TX) and House Freedom Caucus Chair Mark Meadows (R-NC) have vehemently rejected the idea of working across the aisle on health care.

 

-The President's position on the whole situation is unclear.  While he expressed anger about the Senate vote, he tweeted that "[a]s I said from the beginning, let ObamaCare implode, then deal."  The President's recent talk about implosion has insurance companies and others nervous as the Administration has been making not-so-veiled threats to withhold the ACA cost sharing payments to insurers that would typically be made around the third week of August.  This isn't the first time that the White House has suggested it might withhold these payments, though it has yet to do so.  This would be a particularly risky play on the part of the President as withholding the payments has the potential to create big issues for insurance companies and consumers that could backfire.  Cognizant of the potential political firestorm with such a move, members of the President's own party have favored continuing the cost sharing payment to avoid harm to consumers.

 

-Just hours after the failed vote, Republican Senators Lindsey Graham (R-SC), Dean Heller (R-NV) and Bill Cassidy (R-LA) went to the White House to meet with the President about their newest proposal that would keep much of the ACA's tax systems but move towards a block grant system for funding health care at the state level.   While the Senators are said to have been in touch with Congressman Meadows to take the Freedom Caucus' temperature on the bill, it is hard to believe that Senator McConnell will have much of a political stomach to bring such bill to a vote, particularly given the last vote tally and the knowledge that the final hold-out and ultimate decider, Senator McCain, will not be in town for votes for quite some time. 

The Republicans in the Senate could theoretically keep trying to vote on different repeal/replace bills to see if they can finally find one that will pass.  However, what makes this approach completely unrealistic are the time constraints in play.  The 2017 budget that Republicans are relying on as the vehicle to pass a repeal/replace bill by a simple majority will expire on September 30 (the end of federal fiscal year 2017).  That means that if they haven't passed a final reconciled bill out of both chambers by then, their only option would be to use the 2018 reconciliation, which they were reserving for tax reform.  Moreover, before the end of the fiscal year Congress still has to pass a budget and the appropriations bills and address the debt ceiling or they will risk a government shutdown or a default, or both.

 

In short, while we expect to see some members still trying to push towards repeal/replace, unless it becomes abundantly clear that someone has come up with a bill that can pass both chambers, the leadership will be very hesitant to spend more floor time on this, which would require delaying or setting aside other issues, including potentially tax reform. 

 

What Does All This Mean for Tax Reform?

The failure of the Senate to advance a repeal/replace bill means that leadership is now in a situation where they really need to choose between health care and tax reform.  Speaker of the House Paul Ryan (R-WI) has made it clear that, while he would encourage the Senate to continue its efforts on health care, he will now be moving his chamber on to tax reform, and the White House announced that the President hopes to have a tax reform package pass the House in October and the Senate in November.

Even before the failed repeal/replace vote, attentions had begun to turn towards tax reform. A week ago, the White House and Congressional Republican leadership issued a joint statement setting forth the key principles that they have agreed upon for tax reform.  The big news from this release is that they have agreed not to pursue the introduction of a border adjustment tax (BAT).  This is a big shift in position, particularly for Speaker Ryan who, over the last year, despite push back from inside his own party and from a number of very big businesses and interest groups, had remained a proponent of the BAT.

 

The BAT was estimated to raise $1 trillion in new revenue.  Accordingly, it means that Republicans will now need to make some tough choices.  In short, without the BAT the Republicans seem to have only three options on how to proceed:

1) They could find some other revenue raiser to offset the cost of tax cuts.  However, it is unclear what that could be and Ways and Means Committee Chair Kevin Brady has made it clear that he sees no low hanging fruit that could be plucked to generate significant revenue.  The lack of other good revenue raising options is, after all, the reason that Speaker Ryan continued to back it for so long despite the controversy. Interestingly, the joint statement said nothing about White House strategist Steven Bannon's proposal to create a new 44% top rate for individuals making over $5 million annually (which would raise some revenue).  While Bannon appears to be trying to find a way to continue to appeal to the President's populist base, Speaker Ryan and Chairman Brady have both rejected the idea of any tax increases.  As we have mentioned before, absent a major new source of tax revenue, the only alternative to make the bill anywhere close to tax neutral is to chip away at tax credits and deductions that are important to a number of taxpayers who won't take kindly to seeing them taken away. 

2) They could settle for much smaller tax cuts than originally hoped for.  According to third party estimates, under the current tax reform proposal but without the revenue raised by the BAT, the lowest the corporate rate could go while keeping things revenue neutral would be somewhere between twenty-six and twenty-eight percent (the House's latest proposal calls for a 20% corporate rate, while the President's calls for 15%).

3) Proceed with bigger cuts that aren't offset and recognize that those cuts won't be permanent.  Because the Republicans are trying to pass tax reform through reconciliation, any tax cuts must be offset in order to be permanent.  If provisions increase the budget deficit they will sunset at the end of the budget window, which is currently 10 years.  There has been some talk about the option of extending the budget window (which could be done as part of the reconciliation process).  However, this would be an unusual move and still wouldn't change the fact that the provisions would ultimately sunset. 

Despite the apparently ambitious timeline for pursuing tax reform, discussions continue to be held at a high level without much detail being given to fellow legislators, Representatives of the Administration and Congressional Leadership have stated that, because there is more agreement on key issues among the membership, they expect tax reform to be easier to pass than health care.  However, this will really depend on the nature of the bill itself and some members have already expressed concerns that, as they did with health care, the leadership is hammering out the details behind closed doors and not sufficiently involving the membership at large.  That said, even with the schisms in the Republican Party, it still seems probable that, at a minimum, we will see some significant tax cuts.

 

What We've Been Up To

On July 16, TIA answered Senate Finance Committee Chairman Orrin Hatch's call for input on tax reform from stakeholders and tax professional by submitting comments to the Committee.  The Comments, among other things, (i) urged Congress to pursue greater parity in the tax rates for pass-through entities and C corporations while avoiding providing an opening for complex rules and systems, (ii) advocated for the preservation of the business interest deduction, (iii) stated support for immediate expensing, (iv) encouraged Congress to maintain the step-up in basis while repealing the estate tax and (v) pushed for the preservation of the deductions for health insurance premiums and retirement plan contributions.