Republicans’ spectacular failure to repeal and replace Obamacare threatens to sabotage another cornerstone of their agenda, tax reform — because of simple math.
The GOP was counting on wiping out nearly $1 trillion in Obamacare taxes to help finance the sweeping tax cuts they’ve got planned for their next legislative act. And now it’s unclear where all that money will come from.
“This does make tax reform more difficult, but it does not in any way make it impossible,” House Speaker Paul Ryan said at a news conference on Friday. “We will proceed with tax reform.”
While Obamacare taxes will remain, he said, “We’re going to fix the rest of the tax code.”
But losing the revenue from Obamacare repeal is fueling speculation that Republicans will settle for just tax cuts rather than sweeping reform.
President Donald Trump on Friday seemed to lament not taking up tax reform first.
“Right now we’ll be going for tax reform, which we could have done earlier, but this really would have worked out better if we could have had some Democrats’ support. Remember this, we had no Democrats’ support. So now we’ll go for tax reform, which I have always liked,” he said.
But now Republicans will have to look elsewhere for money to meet their top targets: bringing the corporate tax rate down to 20 percent from 35 percent, cutting the top individual tax rate to 33 percent from 39.6 percent, and generous new writeoffs for business investments.
“We’re going to analyze the complete impacts here. But clearly it makes a big challenge even more challenging,” said House Ways and Means Chairman Kevin Brady (R-Texas).
Even if the Republican health care plan had succeeded, tax reform wasn’t going to be a cakewalk. The House, Senate and businesses are already clashing over key elements of a House GOP plan, notably a provision known as “border adjustability” that would tax imports but not exports.
Ultimately the issue centers on House Republicans’ desire to pass a tax overhaul that would raise the same amount of money as the current tax code. Eliminating taxes tied to the Affordable Care Act would have made reform cheaper by pulling down the budget baseline of how much money was expected to come in to the federal government.
About $43 trillion in revenue is expected from the 2018 federal fiscal year through fiscal 2027, according to projections from the CBO, a sum that includes money raised by ACA taxes.
“That is a huge issue,” a corporate tax adviser and ex-House staffer said on condition of anonymity to protect client sensitivities.
But Republicans may have to trim their sails. Rather than dramatically rewriting the tax code, they might fall back on their bedrock policy of tax cuts, perhaps with a smattering of policy changes and money raisers to offset some of the cost.
Earlier this week, analysts at Goldman Sachs put the odds of a tax cut at 80 percent, even if the Obamacare replacement plans collapsed.
But Brady said Republicans wouldn’t settle for just tax cuts.
“Tax rates alone will not make America competitive. We know China, Germany, Canada, Mexico are not just beating us on low rates, they’re beating us by not taxing worldwide, they’re beating us with border adjustability,” he said.
Lawmakers closely aligned with the president are worried about the broader political consequences of failure to repeal the 2010 health law.
“If this goes down, we don’t get tax reform, we don’t get infrastructure,” said Chris Collins (R-N.Y.), the first lawmaker to back Trump’s campaign. “We may lose the Senate. We may lose the House.”
Meanwhile, the Ways and Means Committee is ready to get to work.
“Tuesday morning is our first tax reform meeting,” said committee member Kenny Marchant (R-Texas).
Colin Wilhelm and Brian Faler contributed to this story.
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