United States

The Trump budget: The road to tax reform just got tougher

Jun 02, 2017
From the Tax Governance Institute

Is the Blueprint on a collision course with political reality?

By John Gimigliano, Principal in Charge, Federal Legislative & Regulatory Services, Washington National Tax, KPMG LLP

Read more Tracking Tax Reform blog posts

The Trump Administration released its fiscal year 2018 budget last month, which essentially reaffirmed its one-page “principles” on tax reform. And it’s unlikely we’ll see any kind of detailed tax plan until September.

The recent testimony of Treasury Secretary Mnuchin before the House Ways and Means and Senate Finance Committees may have shed additional light on the Administration’s tax reform vision. If his lack of vocal support for the House Blueprint’s border-adjustment tax (BAT) and limits on interest deductions reflect the Administration’s view, then the pathway to tax reform success has become significantly narrower.

The BAT and interest deductibility limits were projected to raise more than $2 trillion to offset the cost of the corporate tax rate reduction. Without them, revenue neutral tax reform is almost certainly an impossibility.

Alternative paths?

In light of this, how does the Administration hope to accomplish tax reform? Here are a few possibilities:

  • Mnuchin floated the idea of a adopting a value-added tax (VAT) to pay for rate reduction. But the political liabilities of the VAT are well documented, and very few Committee members have expressed an interest this suggestion.
  • The Administration appears to be suggesting that it can balance the books on rate cuts through dramatic economic growth. However, this strategy has some likely shortcomings. For one thing, Mnuchin and Budget head Mick Mulvaney appeared to disagree on whether the budget plan was double-counting revenue. Also, the normally tax-cut friendly Tax Foundation threw cold water on this idea.
  • It’s also possible that the Administration will contend that rate reductions should simply not be paid for—and there appears to be at least some level of support for this position in Congress. And Congress could change the budget window to make it easier to enact long-term (although not permanent), unpaid-for rate reductions. While this strategy may circumvent the budget reconciliation rules, it can’t escape the reality that the unpaid-for tax rate cuts will increase the deficit, possibly by trillions.
  • Finally, last week President Trump suggested employing the so-called “nuclear option” and eliminating the Senate’s 60-vote supermajority rule. This would allow a simple majority of 51 votes to pass all legislation. However, this idea appears to have very little support among Senators, so it seems unlikely—at least for now.

Bottom line

So the question remains: how can Congress get tax reform to the President’s desk? Ultimately, the White House can only sign or veto a bill that Congress approves.

Thus, Congress has the ultimate leverage to negotiate a tax bill that complies with the budget rules and also can garner the necessary votes in the House (218) and Senate (51). Apropos to that, in the words of former Ways and Means Chairman, Bill Thomas (R-CA) – and many others before (and since): “The Administration proposes and Congress disposes.”

That was true then, and it may be now.

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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.