Congressional Republicans are launching another tax-cut push this week, but it’s more about your November election ballot than your 1040 form.
And in California and other high-tax states, it could further inflame debate about the controversial new $10,000 limit on deductions for state and local tax payments that hits many residents hard.
Analysts said the legislation, which would make individual tax cuts and the deduction limit permanent, has no chance of passing the Senate this year. Republicans are pushing ahead anyway to force House Democrats — who unanimously opposed last year’s tax-cut bill — to take another tax vote ahead of the midterm elections.
“You could get Democrats in moderate districts on record as opposing another tax cut and maybe that could help their Republican opponents,” explained Gregory Valliere, chief global strategist at Horizon Investments, an investment management firm.
But Republicans who are scrambling to hold their House majority also will be making some of their own vulnerable lawmakers in California and elsewhere take a difficult vote on a tax overhaul that hasn’t proved to be as popular with voters as party strategists had expected.
Only about a quarter of Americans have reported increases in their take-home pay, and a Fox News poll last month showed 40% of registered voters approved of the tax reform law, while 41% disapproved.
Rep. Steve Knight (R-Palmdale), who voted for last year’s tax bill, is one of those endangered incumbents. A spokesman said Knight’s not committed yet on the new tax legislation.
Knight’s Democratic opponent, Katie Hill, said she’s happy he’s going to have to take another tax vote in the weeks before the election to permanently limit the state-and-local tax deduction used by many residents in the Antelope Valley district.
“If he doesn’t vote for it this time, then he’s being hypocritical,” said Hill, who opposed the tax cuts because of the deduction limit and large benefits for the wealthy and corporations. “If he does vote for it, it’s a fresh reminder of whose side he’s on.”
Dubbed tax reform 2.0, the new House legislation centers on permanently extending the temporary tax cuts for individuals and so-called pass-through businesses that took effect Jan. 1. Those across-the-board cuts, including lowering the top marginal tax rate to 37% from 39.6%, and the cap on state and local tax deductions, expire after 2025.
Republicans had to sunset the changes to the individual side of the tax code in order to make permanent a big reduction in corporate tax rates — to 21% from 35% — while also keeping to a legislative commitment that last year’s tax bill wouldn’t add more than $1.5 trillion to the federal budget deficit over 10 years.
No House or Senate Democrats voted for that bill. One of their complaints was that the individual tax cuts were temporary while corporate tax cuts were permanent. Republicans said the new legislation would fix that and Democrats should get on board.
“Now that they're seeing that those hardworking families across the country are benefiting, I challenge them to switch their vote and now vote ‘yes’ to make those tax cuts permanent,” Rep. Steve Scalise (R-La.) told reporters last week.
The tax-writing House Ways and Means Committee will begin considering the legislation on Thursday. The tax reform 2.0 package also includes bills to promote retirement savings and spur entrepreneurship by allowing businesses to deduct start-up costs.
The U.S. Chamber of Commerce supports making last year’s individual tax cuts permanent because those apply to pass-through businesses, which are taxed at individual rates and include mom-and-pop operations, privately held manufacturers and large partnerships such as law firms and hedge funds.
“Businesses want certainty. We have certainty on the corporate side,” said Caroline Harris, the group’s vice president for tax policy and economic development.
“We very strongly believe in the need to have the most pro-growth [tax] code, and that means having the permanency of lower rates for all small businesses,” she said.
But making the individual tax cuts permanent would produce another large hit to federal tax revenues. Congress’ nonpartisan Joint Committee on Taxation estimated this week that the new tax legislation would increase the federal budget deficit by an additional $631 billion over the next decade.
Democrats said that’s a big concern given that corporations and the wealthy are already getting a large chunk of the tax savings.
The new tax bill can pass the House with no Democratic support but can’t get through the Senate without it.
Last year’s tax bill was able to pass the Republican-controlled Senate with a simple majority vote using an arcane process called budget reconciliation. That mechanism is not available to the Republicans this fall, meaning they’d need 60 votes — and the support of nine Democrats — to pass this time.
Valliere called the Republican effort “quixotic,” particularly given the short amount of legislative time remaining this fall.
Republicans have another problem, particularly in the House.
Some of their own members oppose the new tax legislation because it would make permanent the new $10,000 limit on state and local taxes. The limit hits hard in California, New York, New Jersey and other high tax states.
Dana Rohrabacher (R-Costa Mesa), who is in a tough reelection fight, was among a dozen House Republicans nationwide who opposed last year’s tax bill because of that provision.
“Tax reform 2.0 would make the existing code permanent, so he will vote no,” said his spokesman, Andrew Eisenberger.
Knight is on the fence about the new tax bill although he was a strong supporter of last year’s tax cuts.
“The Tax Cuts and Jobs Act has brought more money in each paycheck to the overwhelming majority of middle-class American families and our economy is booming,” he said. “It is important that we allow this growth to continue.”
But the latest bill puts him and some other House Republicans in states like California in a difficult position, said Jennifer Duffy, senior editor of the Cook Political Report.