Will the Reconciliation Route Work?

Republican efforts to reform the tax code received an important boost with last week’s passage of the annual budget resolution in the House of Representatives. But the GOP should not celebrate just yet. How Republicans overcome the remaining challenges will determine whether they actually cross the finish line.

Passing a budget resolution is a critical step, required under the GOP’s plan to use the reconciliation process to enact tax reform. It’s a special process that protects budget-related legislation from a filibuster in the Senate.

The razor-thin margin, though, by which the budget passed in the House belies Republican predictions that the task before them is more achievable than repealing and replacing Obamacare, which eluded them on several occasions this year (once in the House and twice in the Senate). Passage came on a vote of 216 to 212, with 20 Republicans joining House Democrats to oppose the measure. This does not augur well, suggesting as it does that GOP leaders may be mistaking widespread support for the idea of tax reform (which exists) with agreement among Republicans on the details of tax reform (the devil, as they say, resides there). Indeed, the defection of just two more Republican representatives would have been enough to defeat the budget and, by extension, the GOP’s plan to pass tax reform via reconciliation.

The reality is that the caucus is philosophically split. Some Republicans want to reform the code and cut taxes to spur economic growth. Other Republicans want to reduce the tax burden on lower- and middle-income Americans. Legislation designed to promote economic growth would broaden the base, simplify the code, and reduce rates on savings and investment. It would also lower the top marginal tax rates for individual income.

In contrast, legislation designed to lower the tax burden on lower- and middle-income Americans would at least maintain the tax code’s current progressivity, if not make it even more progressive by shifting more of the tax burden onto higher-income Americans. This could be accomplished by narrowing the base and ensuring that any benefits granted to people in the bottom two-thirds of the income distribution would be unavailable to those at the top.

Fiscal constraints associated with reconciliation have complicated efforts to bridge this divide. This is because legislation that increases the deficit beyond the budget window (that is, after 10 years) loses its protected status and becomes subject to a filibuster in the Senate. To avoid such a scenario, lawmakers must pay for the tax bill. Given the unwillingness of congressional Republicans to reduce spending, this means that new revenue must be raised by a combination of tax increases, economic growth, and better compliance with the tax-collection provisions of the code.

It is not lost on Republicans that the fiscal realities of tax reform exacerbate their underlying divisions over tax policy. As Senators John Cornyn (R-Tex.) and Bill Cassidy (R-La.) recently acknowledged, “Simplifying, pro-growth tax reform will not come without difficult choices.”

Those difficult choices were evident in last week’s House vote. Most Republicans who opposed the budget did so because the GOP plan repealed the federal deduction for payment of state and local taxes. Repealing this provision would raise approximately $1.3 trillion in new revenue that could be used to pay for lowering rates elsewhere in the code. But it disproportionately affects those taxpayers living in states and cities with high tax burdens. In opposing the budget, representatives from those areas signaled to leaders that their concerns needed to be addressed.

Similar dynamics also forced Republicans to modify their original plans to repeal the estate tax, reduce the rate on pass-through business income, and lower the cap on 401(k) contribution limits. And, in a major blow to the GOP effort, the National Association of Home Builders and the National Association of Realtors announced their opposition to the plan days before it was released. The associations’ reason? It would have doubled the standard deduction, the effect of which would be to lower the number of people using the mortgage-interest deduction, thereby impacting home construction and sales.

These challenges illustrate the difficulties well enough, but it also needs to be said that the process that Republicans have followed thus far has compounded them. They appear to be repeating the same mistakes that caused the health-care debate to fall apart earlier this year. As they did then, GOP leaders have announced an ambitious timeline to pass a tax overhaul while crafting the bill behind closed doors.

If the effort ends up failing, it will be clear the leadership made a strategic error by not trying first to pass tax reform via regular order. Proceeding under regular order would not have prevented Republicans from pivoting to reconciliation as a Plan B if enough Democratic members had refused to cooperate. Skilled leaders could even have used the threat of such a pivot to force sympathetic Democrats to choose between playing a role in writing the tax bill, or being frozen out of the process entirely.

True, including Democrats in the deliberations would have made the tax-reform bill less desirable from the perspective of most Republicans. But forgoing regular order for that reason alone assumes that a bill that Republicans enthusiastically support could be enacted via the reconciliation process. Enter the above-described underlying policy disagreements, coupled with the fiscal constraints inherent in the current environment. Reconciliation is not looking like a very good bet at this point.

Moreover, it is incorrect to assume that using reconciliation in this context exacts no political costs. The prospect of passing legislation on a party-line vote is in fact what encourages Republican leaders to try to craft the reform bill behind closed doors. But it means that members are then blocked from proposing alternative ideas to those already in the bill after it’s unveiled. Proponents of the measure typically argue that changing the bill at that stage would upset the compromise agreement. While that may be the case on occasion, their goal in doing so appears to be to present rank-and-file members with a fait accompli, forcing them to choose between voting for the measure or against it. Denying members the opportunity to offer their own ideas forces them to own the tax plan in its entirety, with all its imperfections.

That Republicans keep returning to the same playbook to pass controversial bills reflects House and Senate leaders’ fundamental misunderstanding of the art of legislating. The conflicts stemming from an inclusive legislative process should not be looked upon as obstacles but as a means of reconciling members and their constituents to the kind of suboptimal policy outcomes that are inherent in striking a compromise.

This was the lesson of the healthcare debacle. By the looks of Republican action on tax reform, it appears to be a lesson the GOP has yet to learn.