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Trump tax  reform  faces hurdles after  health defeat

Hours before the Republicans’ healthcare overhaul was defeated on Friday, the US Treasury secretary was sounding an upbeat note about another element of President Donald Trump’s agenda — tax reform. Healthcare is complicated, Steven Mnuchin declared at an event in a Washington art gallery. Tax reform, he said, is much more straightforward. 

That bold assertion will be tested sooner than expected, as Mr Trump has signalled he is ready to set healthcare aside and move on to tax.

“We will probably start going very, very strong for the big tax cuts and tax reform,” the president said at the White House at the end of a tumultuous week in Congress. “That will be next.” 

Many analysts question Mr Mnuchin’s bullish view on the ease of tax reform. Republicans have put at the core of their attempts to lift growth ambitious and far-reaching changes to taxation of individuals and businesses, including a cut to the 35 per cent corporate rate, constituting the biggest overhaul of the system since the 1980s.

The plans have helped fuel a stock market rally. But Friday’s crushing political defeat of Mr Trump’s attempt to replace Obamacare has cast a cloud over the Trump administration’s entire programme.

The divisions within Congress — and indeed the White House — over the details of plans to ease the tax burden on companies and individuals are no less significant than over healthcare. The Republicans may ultimately end up falling back on a less ambitious set of tax changes for fear of having nothing significant to proffer to the electorate in the 2018 midterm elections. 

Michael Strain, a resident scholar at the conservative American Enterprise Institute, predicted that Friday’s defeat would weaken the president and seriously weaken the speaker of the House of Representatives, Paul Ryan.

“That gives both the Democrats and the Freedom Caucus [of conservative Republicans] more influence over the shape of tax reform than if the speaker and the president had been able to get health reform through,” he said. 

Losing the healthcare bill leaves many legislative hurdles ahead as lawmakers pivot to tax reform, even if specialists do not see these as insurmountable.

One is the need for Congress to pass a new budget resolution for 2018 that includes special so-called reconciliation instructions allowing a tax bill to pass the Senate with a bare majority, obviating any need to harvest Democratic votes. 

Alec Phillips, an analyst at Goldman Sachs, says this budget deal will not be easy given past conservative demands for a budget that balances in 10 years’ time. But he still predicts a tax package will be signed into law by the final quarter of the year. 

Before then lies an additional hurdle: passing a resolution in April to extend funding for the government. That could encounter Democratic opposition if it contains politically combustible demands for funding for Mr Trump’s border wall with Mexico. 

Adding to the complications, lawmakers had previously hoped to scrap a swath of Obamacare-related taxes as well as reducing government spending in their healthcare bill before turning to tax reform proper. This is no longer possible after the so-called Trumpcare bill failed.

Mr Ryan indicated on Friday that the Obamacare taxes will have to remain law for the time being, which suggests he does not want to overload the tax-cutting bill. 

Mr Mnuchin has set an August target date for tax reform — although on Friday he acknowledged the possibility that this slips into the autumn. The question is what the package ends up looking like.

The Ryan plan for tax — which Mr Trump has thus far conspicuously failed to endorse — is enormously complicated. The measures would revolutionise taxation of businesses, shifting it to a so-called border adjusted system that strips exports out of the tax base while including imports.

Other potentially explosive changes include removing preferential treatment of debt over equity finance. 

Retailers are already hostile to the border adjustment, along with some Republicans who worry constituents could be hit by more costly imports. Yet stripping it out of the tax package would cost over $1tn in lost revenue.

Fiscal conservatives would rebel if Republican leaders pushed forward a tax-cutting package that explodes the deficit. 

Mark Mazur, director of the Tax Policy Center think-tank, said any major tax reform package is likely to create losers as well as winners. “It is hard to do substantively and politically,” he said.

He had felt Republicans would struggle to get such a substantial reform through relying solely on their own party’s votes. Ronald Reagan’s tax package in 1986 — the last big overhaul — had bipartisan support. 

To date, congressional leaders have spurned the idea of seeking Democratic support. But their own party is proving fractious and unreliable. Mr Ryan’s tax proposals risk once again splitting the party, as they contain unpalatable measures for both fiscal conservatives and Republican moderates. 

“There was really a lack of appreciation of how hard it was going to be to do healthcare reform,” said Mr Strain. “We are seeing something similar at play with tax reform as well.”

Via FT