Fatal flaw

A fatal flaw in Trump's tax cut: Senate rules

By Phil Mattingly

President Donald Trump's ambitious goal of reducing the corporate tax rate from 35% to 15% without concern over deficits has a fatal problem: Senate rules.

That's per the Joint Committee on Taxation, which in a private analysis requested by House Speaker Paul Ryan and obtained by CNN, found that a significant corporate rate cut (in this case, from the current level of 35% to 20%, which House Republicans have proposed) for just three years would result in deficit increase after 10 years.

Why does that matter?

Well, in order Republicans to move any tax cut at that level through Congress, they would have two options: find Democratic votes, or try to go through reconciliation, a budget process that would allow Senate Republicans to pass a bill with just 51 votes -- or in other words, no Democratic support (Republicans control 52 seats in the chamber). The only caveat: The tax bill would not qualify for a simple majority vote if it adds to deficits beyond 10 years.

Democrats have made clear that they would be unlikely to support a substantial rate cut without anything sizable in return. That leaves reconciliation as the only pathway.
Which is a problem.

The JCT analysis concluded that a cut, to 20%, put in place for only three years would result in a "nonnegligible revenue loss in the tax years immediately following the budget window." Translation: it wouldn't pass muster to go through reconciliation.

Now, there are ways to fiddle with the numbers to make a three-year cut feasible -- the JCT projects it would add $6 billion to the deficit after the budget window, a number that, while large, can be likely be made up through various ways. Lawmakers could shift the time window, massage or finesse the numbers, or even add on smaller level off-sets to address the increase. But that's the best-case scenario for a three-year cut -- which corporations, the targeted beneficiaries, would be unlikely to be able to take advantage of given their long term planning windows. Should lawmakers try to make those cuts 10 years, as opposed to three, the numbers would be even more ominous.

The JCT analysis echoes something Ryan's senior tax counsel, George Callas, laid out during an April 20 tax policy panel at the International Institute of Finance Summit last week.

"You could not do a straight up, un-off set three-year corporate rate cut through reconciliation," Callas told the audience. "The rules prohibit it. You might be able to do two years. A two-year corporate rate cut ... I will say would have virtually no growth effect."

Or, as Callas put it bluntly: "It would just be dropping cash out of helicopters on corporate headquarters for a couple of years."

So what does this all mean?

It's a window into why Ryan and his team, who, along with top GOP tax writers and Senate Majority Leader Mitch McConnell, are scheduled to meet with Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn in the Capitol on Tuesday evening, are pushing for full-blown tax reform, not just cuts, which would be offset (the primary driver: the controversial border-adjustability tax, which would impose a levy on imports while exempting exports entirely).

The analysis is also a dose of reality for Republicans -- including those in the White House -- who are concerned that tax reform is too heavy a lift, at least right now, and instead are pushing lawmakers to start with a significant cut to the corporate rate.