On April 26, the Trump Administration released a one-page proposal outlining its high-level principles for tax reform. A linchpin of the plan is to reduce the corporate tax rate from 35 to 15 percent, consistent with proposals President Trump made during the campaign.
Other corporate tax proposals include a territorial tax system to “level the playing field” for American companies, a one-time repatriation tax on trillions of dollars held overseas and the elimination of tax breaks for unspecified “special interests.” The Administration also proposes making significant changes to the individual side of the tax code, including a doubling of the standard deduction that prompted immediate criticism from the real estate industry.
The Administration’s plan does not mention the Housing Credit or Housing Bonds, and it is unclear how many tax credits and deductions will be targeted for repeal under the proposal to “eliminate tax breaks for special interests.” A recent poll from Harvard’s Center for American Political Studies (CAPS) and Harris Insights & Analytics shows that 74 percent of voters are in favor of keeping the Housing Credit in tax reform, giving it the most support of any corporate tax deduction or credit among those polled.
Democrats in Congress have criticized the plan and appear unlikely to work with the Administration on tax reform, suggesting that the likeliest path for tax reform is through the budget reconciliation process. Budget reconciliation allows legislation to pass the Senate on a partisan basis with only a simple majority instead of 60 votes. However, the budget reconciliation process is governed by rules that may preclude it as a vehicle for the Administration’s tax plan in its current form. Anything passed through budget reconciliation cannot raise deficits outside of a ten-year budget window, and while the cost of the Administration’s plan is not yet known, estimates range between $3 trillion and $7 trillion over ten years.
Republicans on the Hill generally supported the President’s goal of cutting taxes and simplifying the tax code but also voiced a variety of concerns. Unlike the House plan, which offsets $1 trillion in lost revenue through its controversial border adjustment proposal, the Trump proposal does not include major revenue offsets. Even using dynamic scoring, which considers future economic growth in the scoring process, it would be very difficult, if not impossible, to fit the current proposal into the confines of budget reconciliation, or to gain sufficient political support among fiscally conservative Republicans.
While the release of the President’s tax reform proposal serves as an “opening bid” for what the Administration would like to see in tax reforms, the timeline for tax reform is still likely to take many months and is highly unlikely to emerge in accordance with the Administration plan. In addition, the one-page plan leaves many details unaddressed. Treasury Secretary Steven Mnuchin recently suggested that the timeline for the President signing tax reform will take longer than the initially ambitious August goal.
Throughout May, the Trump Administration will hold listening sessions with stakeholders to receive feedback on the proposal. At this time, it is not yet known when the Administration will release a more detailed tax plan. The House is also continuing to translate its tax reform blueprint, released last summer, into legislation, and plans to hold tax reform hearings over the coming months. The Senate has not yet announced its own formal process, but is very unlikely to accept either the House or Administration’s plans without significant changes.