GOP tries to tighten the screws on Dems with ‘Tax Reform 2.0’

This week, House Republicans are poised to release what they are calling “Tax Reform 2.0,” their update to last December’s massive rewrite of the tax code. GOP leaders promise a floor vote by the end of the month.

As a matter of substance, and against the backdrop of December’s historic changes, the new proposals are more “0” than “2.” But as a matter of politics, they put Democrats in a tough position heading into the midterm elections. Still Democrats may have some options.

Based on what we know from brochure-like previews, the centerpiece of Tax Reform 2.0 will be to “make permanent” some of the more politically appealing tax cuts passed last December. Just a bit of background is necessary to understand what this does and does not mean:

Under complex congressional rules, in order to get last year’s tax reductions through the Senate, Republicans had to insure that the revenue loss over 10 years came in under $1.5 trillion. Republicans’ wish list of cuts would have cost more than that. So they worked into the law that some tax reductions would automatically expire within the 10-year window.

In deciding precisely how to hit the $1.5-trillion mark, Republicans had a number of variables to play with and a number of dynamics to take into consideration. The basic mechanical dynamic: The more substantial the expiring cuts were on a per-year revenue-loss basis, the later in the window they could expire.

The basic political dynamic was the ratchet effect caused by the fact that law changes, including repeals, have to jump three separate hurdles: House, Senate and president.

That means that when a law divides along party lines, the opposition party needs to gain control of all three decision-makers to change its course. “Permanent” tax cuts would have the benefit of this ratchet lock-in; expiring cuts would not.

In choosing what should expire and when, Republicans went for late, large and popular. The cuts that expire do so a full eight years into the 10-year window, on Jan. 1, 2026. They are among the largest in terms of per-year revenue loss.

They include the across-the-board reduction in tax rates for individuals, the doubling of the standard deduction, the effective 20-percent reduction in the tax rate on small-business profit, a doubling of the child tax credit and a defanging of the despised alternative minimum tax.

The politically difficult corporate rate reduction as well as obscure changes in plant and equipment write-offs and in the taxation of foreign corporate income — these law changes were made permanent.

Now, nine months later, and six weeks ahead of elections that will determine whether they can retain control of Congress, Republicans in the House are proposing to make permanent the cuts that their December law will cause to expire.

For several reasons, the proposal has little actual substance. In the first place, the Senate is unlikely to pass it. The exception that allowed Republicans to get last December’s bill through the Senate with a simple majority will not apply to Tax Reform 2.0. In any event, the Senate appears to have little interest and less time.

Second, 2026 is a long way off. The government should certainly have its eye on what happens seven-plus years forward. But a lot of political water will be flowing under the bridge between now and then. The ratchet effect is less important over a longer span of time: The opposition party needs to hit the control trifecta just once over the time period.

Third, if it is true that Republicans picked for expiration the provisions they thought would be extended anyway —and if they guessed right — it matters little whether they are made “permanent” now.

Politically, however, the planned House vote on Tax Reform 2.0 may carry some real weight. The House is in contention in November’s elections. Nearly 10 percent of districts are up for grabs, more than necessary to swing the House to either side.

With House passage of Tax Reform 2.0, Republicans send a potent political message — some combination of “Here’s what we’ve done for you lately,” and “see, you still need us.”

A Democrat in a swing district who votes against “making middle-class tax cuts permanent” will have some explaining to do. He or she won’t necessarily be able to count on polling data showing that only around 40 percent of the public support the December tax reductions. That’s the whole law. What’s at issue here are its popular bits.

That leaves swing-district Democrats with an interesting strategic decision — one that might be appreciated by tacticians on either side of the aisle.

Here’s a question that likely to come up in any spitballing session: Why shouldn’t the Democrats just vote for it? Why isn’t the best political response to take the choice they are being offered at face value? Forced to decide between the December tax cuts with the popular portions or without them, they choose “with.”

The risk, of course, is that Democrats are viewed as conceding that Republicans have been right all along on tax policy. But there is some backfire risk in Republicans’ December strategy that Democrats might exploit to counter this “told you so.”

If it is true what Republicans will be saying — that it really does matter that these middle-class tax cuts be made permanent now — then why didn’t Republicans make them permanent last December? Back then, when they had to make their $1.5 trillion mark, they had a number of choices.

“When push came to shove,” says a hypothetical Democrat, “they shoved the middle class under the bus and saved coveted permanence for the corporations.” 

Even if Republicans can somehow get across the strategic considerations they faced in making that choice, they risk opening themselves up to the accusation that they were playing cynical partisan games.

One thing is certain: This will be an interesting and important show to watch over the next several weeks.

Chris William Sanchirico is the Samuel A. Blank professor of law, business and public policy at the University of Pennsylvania Law School and the Wharton School.