By Alexander Bolton - 11-22-16 06:00 AM EST
Republican lawmakers are divided over one of their biggest priorities, overhauling the tax code.
Some Republicans, including Senate Majority Leader Mitch McConnell (Ky.), want to lower individual and corporate tax rates at the same time. They say focusing on corporate rates alone would leave out smaller businesses that are taxed under the individual code.
McConnell told reporters after the election that he would prefer a comprehensive approach that "doesn't just lower taxes for the corporations who are having a hard time competing with the rest of the world" but does so for "most American businesses which are not corporations."
But rewriting the entire tax code - something that hasn't been done since 1986 - would be a massive and risky undertaking, even with unified Republican control of Washington. Limiting the effort to the corporate code would have much higher odds of success.
"I have talked with a number of my colleagues about this so I'm aware that there are some who believe we can do just the corporate. If we do just the corporate then we will create a tax disparity between different types of business organizations that I think would be harmful," said Sen. Mike Crapo (R-Idaho), a senior member of the Senate Finance Committee, which has jurisdiction over tax reform.
Crapo estimates that 70 to 80 percent of the business entities in the United States file taxes under the individual rates, as so-called pass-through entities.
Still, he acknowledged that it would be simpler to tackle corporate tax reform alone.
"It's easier to do," he said. "The solution is easier to achieve, it's not as complex."
And most of the increased economic activity generated by tax reform is likely to come from businesses that file as corporations, not as individuals, Crapo noted.
The work of rewriting the tax code would mostly be done on the House Ways and Means Committee, led by Rep. Kevin Brady (R-Texas), and the Senate Finance Committee, which is chaired by Sen. Orrin Hatch (R-Utah).
Members of the Finance Committee met Thursday afternoon, before leaving for the Thanksgiving break, to discuss their future priorities.
Sen. Pat Roberts (R-Kan.), a senior member of the Finance Committee, argued it might make more sense to concentrate on corporate tax reform, which is more likely to pass next year.
"Everybody knows the business tax rate is the highest in the world and we've got to lower it. Why not do what we know what we can do? It isn't really absolutely necessary that we do total comprehensive tax reform," he said.
One of the key figures in the tax reform debate is Speaker Paul Ryan (R-Wis.), who argued at the start of the 114th Congress in 2015 that corporate tax reform could be pursued on its own.
Ryan voiced worries that waiting for Washington to agree on individual and corporate reform - which would require controversial trade-offs - might take too much time. He said a lengthy process could further erode the U.S. tax base, with corporations heading overseas to more hospitable business environments.
The Speaker was in talks earlier this year with Sen. Charles Schumer (N.Y.), who has since been elected Senate Democratic leader, on a tax plan narrowly focused on overseas corporate earnings.
Those talks didn't get far, as Ryan was busy adapting to his new job as Speaker and election-year politics quashed most policy negotiations on Capitol Hill.
But it's hard to predict what priorities Ryan will set next year.
In June, Ryan unveiled a broad tax reform plan as part of his Better Way agenda that would condense the current seven individual tax brackets into three and lower the top individual rate from 39.6 percent to 33 percent.
It would also consolidate the five basic family tax deductions and credits into two, simplify tax benefits for higher education and preserve the popular mortgage-interest deduction, as well as tax incentives for charitable giving.
On the business side, the House GOP plan would cap the tax rate that applies to small businesses and pass-through entities at 25 percent and lower the corporate tax rate to a flat rate of 25 percent.
Sen. Rob Portman (R-Ohio), another member of the Finance panel, said he would like to overhaul both the individual and the corporate rates, but he emphasized the need to lower corporate rates is "urgent" and could be done separately.
"I'm in the camp of comprehensive and getting everything done that we can, but I also think the international piece, which is not all of corporate, is urgent," he said.
He believes there is strong interest among Democrats to lower the tax rate for corporate profits earned overseas, which would give CEOs incentive to bring an estimated $2.1 trillion in profits stashed overseas back to the United States.
The wildcard is President-elect Donald Trump. If Trump pushes Republican leaders to tackle individual and corporate reform simultaneously, there will be strong pressure to do so.
A Republican aide said Ryan and McConnell are still working with Trump's transition team on the legislative agenda for next year.
The Speaker might have more say than McConnell, as revenue bills must originate in the House. The higher hurdle to enacting law, however, will be in the Senate, where Republicans have a slim majority and Democrats can filibuster legislation, requiring 60 votes for passage.
Republicans could pass a major tax package through the Senate under special budgetary protection known as reconciliation, which would require only 50 votes - assuming Vice President-elect Mike Pence would cast the tie-breaking vote in favor - as they did to enact the 2001 and 2003 tax cuts under President George W. Bush.
But any tax package passed under reconciliation would have to sunset after 10 years, under the budget rules - a disincentive to taking that path.
Portman said moving a narrowly tailored overseas corporate tax reform bill could muster 60 votes on the Senate floor, avoid the partisan tactic of using reconciliation to circumvent Democrats.
"It could be done outside of reconciliation because there's enough of a consensus around that, and I think it ought to be viewed as a step toward a broader reform that includes individuals and businesses," he said.
Portman said the likelihood of passing a comprehensive package, however, depends on "what Democrats are willing to work with us on."
Democrats say whether they work with Republicans on tax reform will depend on the details. If the focus of the effort is to close loopholes and simplify the code, Democrats will participate, but if the motive is to slash taxes for wealthy income earners and "special interests," they will try to block it, said a senior Senate Democratic aide.
"What does tax reform mean? Does it mean closing special-interest loopholes as Donald Trump talks about on the campaign trail or does it mean massive tax cuts for corporations and the wealthy, as he also talked about on the campaign trail," the aide said.
"If it's the former, that's something we'd be interested in pursuing. If it's the latter, that's not something Democrats will be party to."
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