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The Last Waltz? Republicans Prepare for Tax Reform Fight

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Tax reform is either going to end up as the signature win of the Trump administration’s first year, or another spectacular flameout for the GOP.
 
There seems to be little middle ground. Pressure is extremely high on Republicans to get the tax issue to the finish line; however, the same hurdles that upended health care reform are lurking.
 
Whatever happens, it isn’t likely to drag out for too long. Republicans have set an end-of-the-year deadline for a few key reasons — self-preservation, for starters. 2018 is a key election year, which generally takes controversial issues off the table.
 
But the election specter works both ways. Lawmakers need a win to campaign on, as much as they need to avoid tough votes.
 
In addition, the Alabama special election to fill the remainder of Attorney General Jeff Sessions’ term is likely to cost the GOP a reliable vote from their slim 52-48 majority. The Republican candidate, Roy Moore, is hostile to Senate Majority Leader Mitch McConnell.
 
Trump and congressional Republicans are proposing a far-reaching, $5 trillion plan that would cut taxes for corporations and potentially for individuals, simplify the tax system, and nearly double the standard deduction used by most Americans.
 
In early October, lawmakers approved a budget resolution for 2018 that sets up a process for shielding the GOP tax bill from a filibuster in the Senate. The budget reconciliation rules allow Republicans in the Senate to pass tax reform with just 51 votes.
 
“We haven’t reformed this tax system since 1986,” House Speaker Paul Ryan said. “We need to pass this budget so we can help bring more jobs, fairer taxes and bigger paychecks for people across this country.”
 
The key players and the stakes for each are as follows:
 
» President Donald J. Trump: Beltway pundits report the president is eager to deposit some legislative victories in the win column. How eager? Trump turned to Democratic leaders Sen. Chuck Schumer, D-N.Y., and Rep. Nancy Pelosi, D-Calif., last month to cut a deal on the debt limit and DACA children of immigrants. The deal stunned Republicans, who likely haven’t forgotten.
 
» McConnell: To be blunt, 2017 has been a rough year for the Senate leader. Despite a Republican president to go with a GOP majority in the House, little has gone smoothly. McConnell has a diverse caucus featuring hard-right members such as Sen. Rand Paul, R-Ky., and moderate Sens. Lisa Murkowski, R-Alaska, and Susan Collins, R-Maine. Pulling together 50 votes will be a challenge.
 
» Ryan: Of the three, Ryan’s path is the most predictable with perhaps the fewest obstacles. That does not mean his job will be easy. The Freedom Caucus — a hardline conservative group of about 40 Republicans — must be dealt with, but tax cuts are red meat to its members.
 

Estate Tax on the Griddle

The task facing Republicans is as much public relations as it is public policy. Lawmakers must convince investors and voters that another go at supply-side economics will unleash strong growth.
 
The supply-side macroeconomic theory is simple: Lower taxes and deregulation will spur buying, which lowers costs and increases wages/jobs.
 
Economists are generally split on whether the controversial theory works. The nonpartisan Tax Policy Center says the Trump tax plan will most certainly add billions to the federal budget deficit, a nonstarter for many House Republican hardliners.
 
Adding to the GOP challenge is the outspoken independence of key Sen. Bob Corker, R-Tenn. Corker, who is giving up his seat, announced that he will not support any tax plan that adds “one penny to the deficit.”
 
As for financial services, the budget concepts in play are mostly good news, especially if the taxing of retirement plan dollars is off the table, as Republicans claim.
 
The American Council of Life Insurers “would very much like to support tax reform,” CEO Dirk Kempthorne teased.
 
Reticence to go all the way with public support likely has to do with the estate tax. Both Trump and Ryan have elimination of the estate tax in their sights. The tax applies only to estates exceeding $5.5 million and generates about $20 billion annually in revenue.
 
Those super-wealthy on the hook for possible estate taxes are good clients for insurance policies and financial planning services. 
 
Estate tax repeal has been proposed many times in the past, always seemingly as a bargaining chip that is later abandoned. Industry officials say they cannot relax and rely on that history.
 
“A strong life insurance industry helps Americans prepare for their financial futures, alleviating pressure on government programs,” Kempthorne said in a statement.
 

The Taxing Details

 
The central theme of tax reform is tax cutting and streamlining. There is general agreement among Republican leaders on several aspects, such as cutting the corporate tax rate.
 
Here are the main tax issues in play:
 
» Individual tax rate. The number of personal tax brackets would drop from seven to three, with individual tax rates of 12 percent, 25 percent and 35 percent. The plan recommends a surcharge for the very wealthy.
 
But it doesn’t set the income levels at which the rates would apply, so it’s unclear just how much of a tax change there might be for a typical family, and whether its taxes would be reduced.
The plan would nearly double the standard deduction to $12,000 for individuals and $24,000 for families. A move to eliminate a deduction for state and local taxes is being opposed by Republicans from high-tax states such as California and New York.
 
» Corporate tax rate. Corporations would see their top tax rate cut from 35 percent to 20 percent. For a period of five years, companies could further reduce how much they pay by immediately writing off their investments.
 
The plan would impose a new, lower tax on corporate profits stashed overseas, and create a new tax structure for overseas business operations of U.S. companies.
The proposed changes to the corporate tax structure do not stop there. 
 
New benefits would be given to firms in which the profits double as the owners’ personal income. They would pay at a 25 percent rate, down from 39.6 percent. This creates a possible loophole for rich investors, lawyers, doctors and others, but administration officials say they will design measures to prevent any abuses.
 
Also slated for elimination is the alternative minimum tax, a supplemental tax for certain individuals, corporations and estates that enjoy exemptions lowering their income tax bills.
 

‘A Fairer System’

Administration officials are painting the package as an effort to make U.S. businesses more competitive globally.
 
“With significant and meaningful tax reform and relief, we will create a fairer system that levels the playing field and extends economic opportunities to American workers, small businesses and middle-income families,” the blueprint states.
 
As expected, Democrats pounced on the plan. Schumer called it “a massive windfall for the wealthiest Americans” and a plan designed “to be cheered in the country clubs and the corporate boardrooms.” 
 

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com.