WASHINGTON — Turnover in tax committees and in Congress as an entire has created a way on Capitol Hill and off it that nothing is off the table in negotiations leading as much as next 12 months's tax deadline, including provisions made everlasting by the 2017 tax law.
The impact of this variation will likely be felt much more strongly in a Republican victory or a divided government next 12 months, as turnover on the Republican side has been more dramatic. The personnel changes present two major challenges for those searching for to increase the 2017 law: the necessity to educate recent members on the policies and compromises contained within the law and to adapt to shifting political winds which can be less friendly to wealthy individuals and enormous corporations.
“The political dynamics are different today than they were in 2017,” said Michael D. Crapo, R-Idaho, rating member of the Senate Finance Committee. “There are different approaches and philosophies on tax policy that may be stronger or weaker today than they were then. And I think that makes it all the more important that we understand exactly what we did and why and how it worked.”
Lower tax rates for people, relief from the choice minimum tax, treatment of cash earned by U.S. firms abroad, deductions for small businesses and other provisions introduced by a 2017 law will expire or develop into less generous at the tip of next 12 months.
Eighty percent of Republicans on the House Budget Committee and just over half on the Finance Committee joined the committee after the 2017 bill passed. As of that time, only five Republicans on the Budget Committee and 6 on the Senate Finance Committee remain on those committees.
Republicans on each committees have begun educating their members with issue-specific working groups.
There has been less turnover amongst Democrats in House and Senate committees since 2017, and significantly less since 2021, after they worked on bills that eventually became the 2022 Health Care and Clean Energy Budget Act. That budget bill is a better fit for Democrats heading into next 12 months than the tax bill passed by Republicans.
Peter Roskam, a partner at BakerHostetler and a former Budget Committee member who helped draft the 2017 bill, said that given this momentum, stakeholders should start engaging lawmakers now somewhat than waiting until after the November election.
“Everything is on the table. And I think it's a real strategic error to assume that everything is OK. We're fine. Nobody is going to touch this,” the Illinois Republican said. “I just don't think that's true in this environment, and that some of the decisions that members will have to make are going to end up being very uncomfortable.”
Changed policy
The move has brought with it a political shift, including a growing populist streak inside each party. The shift has left K Street gearing as much as defend pro-business tax breaks, particularly the 21 percent corporate tax rate that the law made everlasting, unlike other household perks.
President Joe Biden has said he would really like to lift the tax rate to twenty-eight percent. Jason Smith, Republican chairman of the House Budget Committee, said members of his party have asked why the tax rate, which was 35 percent before the 2017 law was enacted, is so low. In the wake of those comments, some Republicans, including former President Donald Trump, have suggested further cutting the speed.
“This is an earthquake,” Roskam said of Smith's comments. “It shakes up long-held assumptions, which means clients really have to articulate their actions from the perspective of the 'forgotten man.' What impact does this have on people who are far away from Washington and whose economic interests are not necessarily articulated in the editorial pages of the Wall Street Journal?”
Some Republicans are also increasingly hostile toward corporations because they see them spreading socially progressive political messages, Roskam added.
“I think some members are looking at this and saying, 'This is an opportunity for me to impose a price on companies that promote a value system that I don't agree with – 'woke Wall Street,'” he said.
Aharon Friedman, director and senior tax adviser on the Federal Policy Group, dismissed the concept that there might be a significant shift amongst Republicans on the company tax rate, but said trade policy has modified significantly since 2017.
“Most Republicans believe that cutting the corporate tax rate stimulated tremendous economic growth,” said Friedman, who was chief tax counsel for Ways and Means Republicans within the run-up to the 2017 law. “Today, the Republican Party definitely has different views on trade policy than it did 10 years ago.”
Trump has proposed 10 percent tariffs on all imported goods if he wins the election in November. These might be seen as a solution to offset the tax cuts, but some analysts say such extensive tariffs would weaken economic growth a lot that the revenue gains can be worn out.
Some tax rules that can be less generous at the tip of next 12 months affect the cash U.S. firms earn abroad, including from intangible assets equivalent to patents and trademarks.
Aruna Kalyanam, an associate in EY's sustainable tax practice, said that given the policy changes, inheritance tax is also a goal. The 2017 law almost doubled the tax-free amount of inheritances.
“This provision is incredibly important for people whose constituencies own a lot of land and things like that that they may not consider liquid,” Kalyanam said. “It's far less important for districts where large portions of their constituencies live below the poverty line.”
Understanding compromises
Kalyanam, who has served for Democrats on the Ways and Means Committee for 20 years, said educating members must include understanding the compromises enshrined within the 2017 law.
“You can think of it this way: If you touch that, that's one more thing you have to touch,” she said, citing as examples the changes made by the 2017 law to the private allowances, the usual deduction and the kid tax credit.
The 2017 law suspended the appliance of private exemptions that might be used to scale back a taxpayer's tax liability based on the dimensions of the household, including spouses or dependent children. The nearly doubling of the usual deduction and the rise within the child tax credit should offset the suspension of the private exemptions, Kalyanam said. The three provisions expire next 12 months.
“You can’t look at these measures in isolation when it comes to maintaining distribution, social justice and the like,” she said.
George Callas, executive vp of public finance at Arnold Ventures, said member turnover results in these trade-offs being neglected, especially when lawmakers are examining each provision individually. Callas worked on Capitol Hill for 15 years, including as senior fiscal counsel within the House for the Budget Committee and former Speaker Paul D. Ryan, R-Wis.
“The danger with the change in legislation is that Congress will not understand how the pieces fit together and will view it as just a series of individual cases cobbled together into a law,” he said at a Tax Foundation event last month.
“These members and their staffs, I think, look at all of these provisions in isolation,” Callas said. “'Oh, they increased the child tax credit. Do we think that's good or bad? Oh, they eliminated personal tax credits. Do we think that's good or bad?' And they don't realize there's a trade-off here.”
Another compromise was to impose a $10,000 cap on state and native tax deductions and roll back the choice minimum tax, which the Tax Policy Center estimates now affects just 0.1 percent of households, mostly those with incomes above $500,000. Both changes expire at the tip of next 12 months.
The so-called SALT cap is incredibly unpopular with lawmakers from high-tax states, but the choice minimum tax, which eliminates some tax exemptions for wealthier taxpayers, including SALT deductions, can be complex and unpopular, Callas said.
“So do we want to eliminate the SALT cap but almost eliminate the AMT?” Callas said, referring to the choice minimum tax. “Because that would allow an even more generous SALT deduction than anyone has ever had.”
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