Two Tax Reforms Can Be Better Than One

November 16, 2017

For all the talk of differences between the drafts of the House and Senate tax-reform proposals, there are remarkable similarities in their goals and many of their big-ticket items. Let’s run through the list of what both bills do:

Place the principal emphasis on growth and the secondary emphasis on tax simplification: check and check. Give middle-class filers a big tax break by doubling the standard deduction: check. Increase the child tax credit: check. Cut rates for the middle class: check. Cut the corporate rate to 20%: check. End double taxation of foreign profits earned by American companies by moving to a territorial system: check. Provide for the repatriation of foreign profits currently stranded abroad: check. Lower tax rates for pass-through small businesses: check.

Credit for this wide agreement goes to tax reform’s “Gang of Six,” a group that includes four legislators—Speaker Paul Ryan and Majority Leader Mitch McConnell, along with House Ways and Means Chairman Kevin Brady and Senate Finance Chairman Orrin Hatch —and, from the other end of Pennsylvania Avenue, Treasury Secretary Steven Mnuchin and Gary Cohn, the director of the White House National Economic Council.

This bunch began meeting this spring in Mr. McConnell’s Senate office, and they have been speaking regularly ever since. It helps that none of these gentlemen have sharp edges, especially not Messrs. Brady and Hatch, the two charged with drafting the legislation. But the Gang’s closed-door meetings drew predictable criticism. Lesser lights in both chambers wanted seats at the table for their factions, or for the sake of their egos, or perhaps so as to leak to reporters. Wisely, the Gang ignored the hubbub.

The work took on new urgency after the Senate failed in September to repeal and replace ObamaCare. It became clear that if Republicans failed on tax reform, too, 2018 would turn into a GOP rout of epic proportions.

There are some differences between the House and Senate versions, but in some cases this could lead to a better final bill. Take the deduction for state and local taxes. The House eliminates the deduction for state income taxes and sales taxes but provides a deduction for up to $10,000 in property taxes. Consider the impact in New Jersey: There, property taxes are below $10,000 for 90% of filers. And with the bigger standard deduction and lower rates, even many of the 10% of taxpayers with higher property taxes would be better off than today.

The Senate kills the state and local deduction altogether—easy for it to do since there isn’t a single Republican senator from the big high-tax states. When the legislation goes to conference committee, the Senate’s hard line will help limit how generous House leaders need to be in negotiating with GOP holdouts.

But many Republicans from tax-heavy states already recognize what Rep. Tom Reed is saying: The House version of the deduction would help his constituents in Western New York, whereas current law benefits wealthy Manhattanites and subsidizes Albany’s mania for high taxes. The same pattern applies in other blue states. Ironically, Democrats are staunchly defending a tax break that mostly benefits the rich.

Other differences between the two proposals are less significant. The House has just four tax brackets for individual filers, which is simple. The Senate keeps seven brackets, which provides a smoother transition as incomes rise. Either way, both plans have enough simplification built in that 90% or more of Americans could file their returns on a large postcard.

Then there’s the Senate attempt to repeal ObamaCare’s individual mandate. House leaders support this idea but were wary of putting it in their bill, having been burned by the Senate’s earlier ObamaCare failure. Yet the wily Mr. Hatch seems confident he has the votes. If he’s correct, watch the House quickly accept that provision in conference committee.

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Still, passing tax reform will be hard. To fit within the budget reconciliation framework, the bill cannot add more than $1.5 trillion to the deficit over the next decade (equivalent to 3% of federal revenue over the period). So if negotiators change one provision in a way that reduces revenue, they need to change another provision to offset it.

After the measure is signed into law, Americans will see early results on Jan. 1, when their paychecks get bigger as the lower tax rates take effect. But all Republicans, especially the president, must work to persuade voters that the corporate tax reforms are adding jobs, raising paychecks, helping the economy grow, and making America more competitive.

The House will vote Thursday, while the Senate aims to vote the week after Thanksgiving. The Republican majority depends in good measure on their success. So does the country’s prosperity.

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