All Eyes on Tax Reform as We Head to Year’s End

Hope you had a wonderful Thanksgiving! Now that Congress is back in town, it’s all eyes on tax reform as we head to the end of the year.

There was an 11AM meeting today in Majority Leader Mitch McConnell’s (R-KY) office on the Senate tax reform bill. We understand that Senate GOP leadership was most concerned about Senators Rand Paul (R-KY), John McCain (R-AZ), Susan Collins (R-ME), Bob Corker (R-TN), and Jeff Flake (R-AZ) voting against the bill, although you may have seen that Senator Paul just published an opinion piece saying that he will vote for the Senate bill. We know that Senators McCain and Flake have not hesitated in the past to oppose President Trump’s agenda. The question remains, however, if these members have it in them to oppose the president on something this big. Senators Ron Johnson (R-WI) and Steve Daines (R-MT) have raised concerns about taxes on unincorporated “pass-through businesses,” although we are now hearing this is likely to get fixed, bringing these Senators back on board. Additionally, Finance Committee members met with President Trump today.

As you know, the Senate bill also includes a provision repealing the Affordable Care Act’s (ACA) individual mandate, and GOP leadership is concerned this could also impact how Senators McCain, Collins, and Jerry Moran (R-KS) vote on the underlying tax reform bill. While there are likely other Senators who may be uncomfortable with the inclusion of the repeal in the tax reform bill, the revenue from repealing the individual mandate is helpful, as it helps to pay for other things in the bill that might be higher priorities for these members. Revenue raisers are especially important, as every 1% cut in the corporate tax rate comes with a price tag of $120 billion.

Today and tomorrow, the Senate will give the bill a “Byrd Bath” – i.e. doing a last scrub of the Senate bill for any “Byrd issues.” While we thought we might see a new version of the bill today, it sounds like a new version of the bill, which will combine the tax reform bill marked up by the Finance Committee and the Arctic National Wildlife Refuge (ANWR) drilling bill reported by the Energy and Natural Resources Committee, could be released by the Budget Committee as early as tomorrow. It is then expected the Budget Committee will report out its bill on Wednesday, with floor debate potentially beginning on Thursday or Friday. It is possible for another substitute bill to be offered during the full Senate debate. 

It is widely assumed that the House and Senate will go to conference to attempt to reconcile differences between the two tax reform bills, especially as House Speaker Paul Ryan (R-WI) made a commitment to some House Republicans who he needed to vote for the measure that there would be an opportunity to resolve outstanding issues in conference. While there had been some speculation before the holiday that Congress could take a similar approach on tax reform as it did with the FY18 budget resolution – where a curative amendment is used to make the Senate-passed tax reform legislation acceptable to the House – this now seems like a long shot for tax reform. House GOP leadership lost 13 Republican votes on its tax reform bill, 12 of which were due to the House language on the State and Local Tax (SALT) deduction. If SALT comes out worse in the end, House GOP leadership could be at risk of losing more votes.

The timing of the tax reform conference committee will be key. If the Senate were to pass its tax reform bill late this week or over the weekend, it is likely that House and Senate GOP leadership will quickly appoint conferees, likely on Monday or Tuesday. The focus, of course, remains on December 12th – the date of the special election in AL. While it could take the AL secretary of state 10 days to certify the special election results, congressional GOP leadership is still aiming to finish tax reform by December 15th, since whoever wins the election in AL is unlikely to be helpful to Republicans’ efforts on tax reform. Our view is that tax reform is getting rammed through so quickly that, if passed, there are likely to be surprises in the final bill once the dust settles.

While right now all attention seems fixed on tax reform, we wouldn’t put it past the GOP to try to wrap up the FY18 appropriations process while there are “so many distractions.” Individual companies and lobbyists across town are so focused on playing offense and defense on tax reform that GOP leadership may be able to take advantage of the fact that, out of necessity, an end of the year package does not seem to be on the forefront of anybody’s minds. While there has been some thinking that a CR would extend into January or February, we believe Republican leadership may have already agreed to various components of an end of the year package and would like to wrap up the full FY18 appropriations cycle before people are more “focused/available” to address other potentially controversial issues that might be included in an omnibus appropriations bill.

We’re keeping a close eye on both tax reform and the FY18 appropriations endgame. The one thing that is certain is it will be a busy few weeks to the end of the year!