Long near the top of the priority list, congressional Republicans now have an opportunity to move forward with tax reform. In fact, Republican leaders have committed to utilizing one of this year's two budget reconciliation bills to expedite tax reform and enable it to pass the Senate with only 51 votes (the other reconciliation bill being the repeal of the Affordable Care Act). The legislation, which will likely not move forward until sometime late spring/summer, is expected to build on past proposals, including Speaker Ryan's Better Way. The House tax reform package will likely include replacing the corporate income tax with a cash flow tax; significantly cutting taxes on high income individuals, corporations and pass-through entities; and a shift from a worldwide system of taxation to a territorial tax system. Congressional leaders are also committed to ensuring the package is revenue neutral by cutting spending at the same time. President Trump campaigned on a narrower approach to the tax code when compared to the more comprehensive House proposal.
Senate Finance Committee Chair Orrin Hatch (R-UT) has indicated a strong desire to develop a bipartisan proposal. He emphasizes that he agrees with the House in wanting to reduce corporate rates, move to a territorial tax system and enact tax reform to make the U.S. more competitive. However, he acknowledges the battle in the Senate will be much different from that in the House.
A major potential sticking point has already emerged between the House and Senate over the House border adjustability approach to raise revenue to pay for reduced corporate income tax rates. Senate Republican leaders, including Senator Hatch, are unlikely to support such an approach, instead preferring to take a step back and examine whether they can offset lowered corporate tax rates through different means. President Trump's proposal to impose a 20 percent tariff on imported goods to encourage domestic manufacturing and pay for a wall along the southern border of the United States and Mexico was initially perceived as an endorsement of the House border adjustability approach. House Speaker Paul Ryan expressed reservations about the tariff, instead suggesting that a "border adjustment tax" could achieve Trump's goal without inciting a trade war. However, the two ideas are distinct from one another in terms of purpose and operation, and both appear to be different from Trump's campaign pledge to tax companies that outsource jobs to overseas facilities that make goods that are then imported into the U.S.
Takeaway: Along with health care, tax reform will be one of the dominant themes of the 115th Congress. That said, President Trump, House Republicans and Senate Republicans all seem to be on different pages as to the process and substance of any tax reform measure. House Republicans are pushing to pass tax reform this summer, but don't be surprised if the process is delayed.
