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The Elevator Speech Overview
At long last, House Republicans began their effort to rewrite the U.S. tax code by formally releasing the text of their proposed tax cuts. The bill, called the Tax Cuts and Jobs Act (not the “Cuts Cuts Cuts Act,” as the President suggested), proposes to dramatically change both the corporate tax code as well as the individual tax code. While overall tax rates are reduced for both corporations and individuals, the legislation also eliminates or severely restrains many highly popular and valuable credits and deductions. Therein lies the most critical point to understand at this point – the difference between effective rates versus actual rates, because for many categories of taxpayers, while an overall tax rate may be reduced under the proposal, the effective rate (or amount that actually gets paid by the taxpayer) may very well increase as a result of the elimination of previous credits or deductions. In terms of government revenues, the net effect will increase the deficit by over $1.51 trillion (according to the GOP authors, not the official CBO/Joint Committee on Taxation) during the next ten years on the promise that the shortfall will be filled as a result of massive economic growth unleashed by investment money that otherwise would have been paid in taxes.
In more specificity, the proposal dramatically cuts tax rates for “C” corporations (not to be confused with pass-through corps like “S” corporations, LLC’s, LLP’s and the like) from 35 percent down to 20 percent while eliminating numerous corporate deductions, credits and incentives. On the individual tax side, the proposal collapses seven tax brackets down to four, eliminates the estate tax, the alternative minimum tax, and dramatically alters many popular deductions and credits such as the mortgage interest deduction, the deduction for state and local taxes (SALT), the child tax credit, and the personal exemption. Pass-through businesses would see their tax rates cut to 25 percent, although there are limiting clauses that complicate this change and immediately raised questions about the potential for massive new tax avoidance schemes that could arise for these types of entities. Professional services like doctors, lawyers, and accountants would not be eligible for this reduced rate. In current law, pass-through income is taxed as regular income.
It is unclear how this bill will score by CBO and JCT, the official arbiters of budget impact. This is a crucial question if House leadership wants the Senate to take up their bill. In the Senate, under reconciliation rules, this legislation must only raise the deficit by $1.5 trillion over 10 years and nothing beyond that date. Many of the controversial pay-fors being discussed before this bill was released were left out, including the idea of lowering the contribution limits for 401(k) plans. All told, this bill is probably much more modest a proposal than many in the GOP were hoping for a year or even six months ago.
Reaction to the bill from business groups has been mixed. The National Federation of Independent Businesses, the National Association of Realtors, and the National Association of Home Builders came out swinging in strong opposition against H.R. 1 as currently written and the U.S. Chamber of Commerce, traditionally a staunch Republican ally, put out a rather cool statement saying “a lot of work needs to be done.” One of the few real pay-fors in the bill, eliminating the deduction for state income taxes and capping the deduction for local property taxes, is going to be one of the biggest pressure points for groups looking to scuttle the effort. Vulnerable Republicans from New York, New Jersey, California, and other highly taxed areas are sure to be uneasy with a change that will cost their constituents money and there are more than enough of these types of members to kill the bill before it even reaches the Senate. Members with constituencies where home-values rise above the $600,000 mark – even if that is not the median – will have deep problems with the proposed cap on mortgage interest. During the budget vote that allowed the House to proceed with the process, twenty Republicans joined every Democrat in opposing the measure. Twenty-two “no” votes would be enough to sink the measure in the House. The House Ways and Means Committee is expected to begin consideration of the bill as early as next week.
The other dramatic development came earlier this week. Special counsel Robert Mueller’s investigation into Russian election interference broke its long silence and released indictments of former Trump campaign chairman Paul Manafort and his longtime associate Rick Gates with a 22-page indictment with charges including laundering millions of dollars through overseas shell companies. They both surrendered to the FBI on Monday morning. More explosively, it was revealed just an hour later by Mueller’s team that George Papadopoulos, a former foreign policy adviser to the Trump campaign, had pleaded guilty in early October to lying to the FBI about Russian contact during the campaign. Reportedly, Papadopoulos has not yet been sentenced but has been cooperating with Mr. Mueller’s prosecutors for months. From his admissions, a clearer picture of the Trump campaign’s willingness to accept assistance from Russian government sources is already emerging, specifically in gaining access to Democratic candidate Hillary Clinton’s emails that were hacked by Russian government operatives. Also seemingly caught up in this growing investigation is Democratic lobbyist Tony Podesta, who was hired to do lobbying work on behalf of Ukraine along with Mr. Manafort. Podesta announced that he is stepping down from the firm he founded and bears his name, such as to not embroil his colleagues in the anticipated imbroglio. And, to anyone within the administration or from the Trump campaign who hoped that these charges might be the end of the special counsel’s investigation, Aaron S.J. Zelinsky, a prosecutor on Mr. Mueller’s team said that “There’s a large-scale, ongoing investigation of which this case is a small part.”
One of the first ripples of these indictments was felt on Thursday, when Sam Clovis, a top member of the Trump campaign who had been nominated for the role of the Department of Agriculture’s chief scientist, withdrew himself from consideration. Clovis was revealed to be one of the unnamed campaign officials who was aware of efforts by George Papadopoulos to broker a relationship between the campaign and Russian officials. While there are certainly other reasons Clovis might have pulled out, including the fact that he has no scientific or agricultural background or training, the Russian allegations meant that his sworn confirmation hearing in front of the Senate would have been a legal risk for him. Attorney General Jeff Sessions has also, once again, come under intense scrutiny for potentially perjuring himself before Congress. There are now multiple sources, on the record and under sworn testimony to the special prosecutor, directly contradicting statements made by Sessions to the Senate Judiciary Committee regarding his knowledge of Trump campaign officials communicating with or engaging with Russian officials.
Finally, another senior Republican House Member announced his retirement this week. Representative Jeb Hensarling of Texas, chairman of the House Financial Services Committee and a leading voice for deregulation in the financial services sector, told reporters that he will not run for reelection next year. Hensarling was going to be term-limited out of his spot on top of the Financial Services Committee in the next Congress, so his retirement is not too shocking from that perspective. However, Hensarling is surely discouraged by the lack of progress in the Congress thus far. The Congressman has made it clear that he hoped to pass a repeal of Dodd-Frank now that Republicans have control of the government for the first time since 2006. His repeal bill, the Financial CHOICE Act, passed the House only to languish in the Senate. Similarly, his plans to neuter the CFPB and reform the National Flood Insurance Program have gone nowhere. Beyond his committee role, Hensarling is a close ally of Speaker Ryan.
This Week’s Top Stories
Here’s a look at some of the top political stories of the week:
- House Republicans on Thursday unveiled their long-awaited tax bill which preserves the popular 401K retirement account, lowers rates for many individual households but trims deductions for state and local taxes. A summary of the plan, which was made available to reporters ahead of its public release, would also reduce the cap on the popular deduction to interest on mortgages to $500,000 for newly purchased homes. The current cap is $1 million. The plan also limits the deductibility of local property taxes to $10,000 while eliminating the deduction for state income taxes. Republicans in high-tax states such as New York and New Jersey had come out strongly against it. “I view the elimination of the deduction as a geographic redistribution of wealth, picking winners and losers,” New York Republican Rep. Lee Zeldin said. “I don’t want my home state to be a loser, and that really shouldn’t come as any surprise.” (Fox News)
- House Republican leaders began rolling out a tax bill Thursday that contains sweeping changes for business and individual taxes, including a measure to cut the corporate tax rate to 20 percent. House Speaker Paul Ryan pledged fast action on the legislation, telling reporters he senses “ironclad” political will to revamp the U.S. tax code for the first time in 31 years. The bill ran into opposition almost immediately Thursday. It would cap the mortgage-interest deduction on new home sales at $500,000 — a departure from the current cap of $1 million for couples filing jointly. The National Association of Realtors, which has been wary of the tax plan, said that measure “appears to confirm many of our biggest concerns.” (Bloomberg)
- The special counsel, Robert S. Mueller III, announced charges on Monday against three advisers to President Trump’s campaign and laid out the most explicit evidence to date that his campaign was eager to coordinate with the Russian government to damage his rival, Hillary Clinton. The former campaign chairman, Paul Manafort, surrendered to the F.B.I. and pleaded not guilty to charges that he laundered millions of dollars through overseas shell companies — using the money to buy luxury cars, real estate, antique rugs and expensive clothes. Rick Gates, Mr. Manafort’s longtime associate as well as a campaign adviser, was also charged and turned himself in. (New York Times)
- The U.S. Department of Agriculture’s chief scientist nominee, Sam Clovis withdrew his name from consideration Wednesday amid revelations that he was among top officials on the Trump campaign who was aware of efforts by foreign policy adviser George Papadopoulos to broker a relationship between the campaign and Russian officials. Court documents unsealed Monday revealed that Papadopoulos pleaded guilty in early October to making false statement to FBI investigators about his contacts with foreigners claiming to have high-level Russian connections. In August 2016, Clovis encouraged Papadopoulos to organize an “off the record” meeting with Russian officials, according to court documents. “I would encourage you” and another foreign policy adviser to the campaign to “make the trip, if it is feasible,” Clovis wrote. The meeting did not ultimately take place. (Washington Post)
- U.S. Rep. Jeb Hensarling won’t run for re-election next year, a decision that continues the reshaping of Republican politics in North Texas. The Dallas lawmaker joins Rep. Sam Johnson, R-Plano, as veteran GOP congressmen who are retiring at the end of 2018. It mirrors a trend across the country. According to CNN, at least 11 Republicans have announced they won’t seek another term, resigned or are running for another office. Hensarling, 60, has represented the 5th Congressional District since he was elected in November 2002. He chairs the powerful Financial Services Committee and has been a strong voice in regulating the financial industry. (Dallas Morning News)
The Week Ahead
The House and Senate will be in session next week.
- Although not yet released at the time of publication, the weekly legislative schedule for the House will be posted
- Although not yet released at the time of publication, the weekly Senate schedule will be available
- Although not yet released at the time of publication, the President’s daily schedule will be posted
White House
Congress
- Scott Garrett’s bid to chair the Export-Import Bank remained uncertain Wednesday as South Carolina Republican Tim Scott, a pivotal vote for or against confirmation, still had reservations after questioning the nominee at a confirmation hearing.
- Arizona GOP Senate candidate Kelli Ward got her first Senate endorsement Wednesday from Kentucky’s Rand Paul. “Today shows that conservatives are coalescing around the candidacy of Kelli Ward,” Paul said in a call with reporters Wednesday afternoon. ”I think the establishment fears her and will work overtime to oppose her candidacy.”
- A Utah Republican added fuel to speculation that Senate Finance Committee Chair Orrin Hatch (R-Utah) will retire and former GOP presidential nominee Mitt Romney may run for the seat. While on their way to the House floor, Rep. Mia Love (R-Utah) told another House Republican she expected Hatch, 83, to retire in 2018 at the end of his current term. Love said she would not run for Hatch’s seat.
- House Minority Leader Nancy Pelosi offered a forced smile recently when asked on MSNBC about a Tom Steyer-sponsored ad that calls for President Donald Trump’s impeachment. “That’s a great ad,” Pelosi said twice, before rushing to plug the Democrats’ Better Deal economic agenda as the TV hit wrapped up.
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