How the Senate Can Overcome Three Obstacles to Tax Reform

Republican efforts to cut taxes on American workers and businesses overcame two significant hurdles yesterday when the House passed tax reform legislation and the Senate Finance Committee approved its version.

The most sweeping tax overhaul in a generation moved forward without any support from Democrats. The Senate Finance Committee approved the bill on a strict party line vote of 14 Republicans for the bill and 12 Democrats against. The House bill also won no Democrats but garnered even more Republican votes than expected, winning 227 votes in favor with just 13 GOP lawmakers opposed.

That was better than the Obamacare repeal vote, which won 217 votes in May. That may be an indication that Republicans are more united on taxes than they were on Obamacare. Tax reform has been moving swiftly through both the House and the Senate since the legislation was first unveiled just two weeks ago. The Senate Finance Committee took just four days to debate and then approve its bill.

The bill now moves the way for the full Senate to consider the bill shortly after Thanksgiving. The seeming intractable Democratic resistance to tax reform and the slim majority 52 seat majority held by Republicans in the Senate means that the GOP cannot afford to lose more than two votes in order to pass the legislation.

Several Senate Republicans have indicated concerns about the bill. These concerns generally fall under three categories: budget deficits, health insurance premiums, and small business taxes.

Deficit Hawks can rest easy.

Both Senators Bob Corker (R-Tenn) and Jeff Flake (R-Ariz) expressed concerns on Thursday that the Senate bill might risk raising budget deficits higher than its current sticker price of $1.4 trillion over a decade. The principal concern appears to be that temporary tax cuts could be extended, which might add to budget deficits in the future. If all of the temporary tax cuts were made permanent the cost of the tax cuts would grow to $1.9 trillion.

While it is popular in Washington, D.C. to attack so-called temporary tax cuts as budgetary shenanigans, history demonstrates that whether a tax cut is called temporary or permanent indicates very little about how long it will stick. The Reagan administration’s permanent tax reduction in the top rate to 28 percent did not even last through George H.W. Bush’s term as president. Many of the so-called temporary tax cuts of the Bush administration were extended or made permanent.

The reason for this is simple but also reflects a deep wisdom of the American political system. The simple part is that no Congress can bind future Congresses on spending or tax measures, which means that whatever Congress declares permanent or temporary in 2017 will be up for revision at least every two years if not more frequently. Democracy means that long-term budget projections are typically an exercise in pretending that whatever legislation that is currently under consideration will actually be controlling law for a decade or more–even though everyone knows that is not the case.

While this inconstancy irks some policy wonks and scrambles the government’s budgetary forecasting models, it reflects an admirable flexibility of the American political system. If tax cuts prove not to aid economic growth or add too much to budget deficits, they can be reversed. If scheduled tax hikes endanger growth or would burden taxpayers too much, they can be put off.

This may help ease the concerns of Corker and Flake. If budget deficits loom too large in the future and threaten America’s fiscal stability–chiefly by generating too much inflation–then tax policy can be revisited. If anything, the labeling of certain tax cuts as “temporary” will just force a reconsideration in light of what we learn about the economy in the future. Instead of relying on forecasts, the future of today’s tax cuts can be evaluated against data and the political mood of the American people.

Healthcare fears are misplaced.

Senator Susan Collins (R-Maine) has expressed concerns about the repeal of Obamacare’s individual mandate that is included in the Senate bill. While she says she continues to oppose the mandate, she worries that the mandate would cause premiums in the individual market to go up as younger, healthier people drop out once released from the mandate.

Collins fears of rising premiums were apparently sparked by a recent report from the Congressional Budget Office that showed that repealing the individual mandate would increase premiums at least 10 percent. “I have new statistics that show that for some middle-income people, will will cancel out their tax cut. The increased premium would be more than the tax reduction they would get from this bill,” Collin said.

The flaw in the CBO report, however, is that it assumes that once the younger, healthier Americans in the individual market drop out, no other legislation is enacted to support that market. This is not the CBO’s fault. That’s how it has to make its assessments, assuming that all current laws remain unchanged. But it does a bad job of reflecting political and economic reality, much less explicating policy alternatives.

There’s no good reason why the burden of keeping premiums lower in the individual market should fall chiefly upon the younger workers who would go without insurance if not for the mandate. In fact, this is a regressive policy that distributes the burden of subsidizing this market onto workers who are often just getting their start. It is economically destructive, lowering productivity, discouraging work, and slowing household formation and its components–marriage, home buying, and childbearing.

The individual mandate has always been a regressive, hidden tax on a small portion of Americans. An unfunded mandate intended to keep a subsidy off the books of the federal government while burdening a politically uninfluential group: young workers.

There are better ways of keeping premiums down in the individual market. It should, first and foremost, be a burden shared by all Americans–and not just young workers yolked into insurance by the mandate. That means making the subsidy an explicit part of the federal budget rather than having it eat into individual household budget. And since the government can borrow more cheaply than young households, this is also the most economically efficient way of dealing with the problem. If it is too cumbersome to administer at a federal level, the subsidies can be block granted to the states.

While the concerns Collins raises about rising premiums in the individual market deserve to be addressed, they have very little to do with the individual mandate or the tax bill. Collins should be able to vote for the Senate bill with a clear conscience. The same goes for John McCain (R-Ariz) and Lisa Murkowoski (R-Alaska), the two other Senators whose votes against repealing Obamacare sank that bill.

Small business taxes in the Senate bill are too high and can be brought down.

Senator Ron Johnson (R-Wis.) on Wednesday became the first GOP Senator to say he couldn’t support the tax plan as written.  His objection is that small businesses organized as pass-throughs–those whose profits are taxed through their owners’ income tax filings–do not get a “fair shake” in the Senate plan.

In other words, he wants more generous tax cuts for pass-throughs. Many conservative policymakers share his concern that the Senate plan gives short shrift to small businesses. The House plan’s tax cuts for these are deeper and broader.

Johnson’s concerns can probably be allayed by reassurances that the bill will move in the direction of the House bill once it is passed by the Senate and goes to the joint conference for reconciliation. This is less of an objection to the Republican tax plan than a reminder of what it needs to accomplish.