After a smarting defeat on health care, President Trump is moving on to an ambitious bid to rewrite the U.S. tax code. But the ultra-conservative GOP lawmakers who stymied Trump on health care aren’t going away, and if Trump is to avoid a second major setback in Congress, he’ll need to win over far more of them this time around.
The “House Freedom Caucus,” as the few dozen members of the group call themselves, blocked Trump and Ryan’s health-care bill because it wasn’t conservative enough for them, offering too much in the way of benefits and interfering too much in the insurance market. When it became clear the vast majority of the group’s members were voting no, Trump — after a consultation with House Speaker Paul D. Ryan (R-Wis.) — pulled the bill.
The good news for Trump and Ryan, however, is that they and the House Freedom Caucus have, in their public statements, expressed broad areas of agreement on what to do with the tax code. There’s still, however, plenty of potential for conflict as Trump, Ryan and the caucus once again come together in search of a deal.
Here’s what the House Freedom Caucus’s members have said they’re looking for.
The big idea
Members of the group generally endorse the same basic principles for reform: Reduce tax rates for everyone. Then, to make up for some of the revenue the government is foregoing under those new rates, eliminate special deductions, exemptions and loopholes that allow certain categories of taxpayers to avoid paying taxes on portions of their income.
This has long been the position of conservative Republicans, and it is also the approach embodied in the plans proposed by Republicans, including Trump and Ryan. For instance, the plan Ryan and his colleagues in the House put forward last year would eliminate all deductions for individual taxpayers — except for the deductions for mortgage interest and charitable giving. Those deductions allow Americans to avoid taxes on money they pay in interest on their homes, along with any donations they make.
That plan might not go far enough for a conservative lawmaker like Rep. Thomas Massie (R-Ky.). In 2013, Massie told Bloomberg he supported a single tax rate for all taxpayers, with no exceptions whatsoever. “I love the flat tax, and I’m not afraid of getting rid of every deduction,” Massie said.
All the same, mainstream Republicans are basically in agreement with their party’s conservative faction when it comes to taxes — at least to a far greater degree than they were on health care.
Closing loopholes could, in theory, allow Republicans to deliver their promised rate cuts without decreasing the total revenue going to the government — a combination that would keep the new legislation from adding to the federal debt.
Under Ryan’s plan, by contrast, reduced taxes would mean the federal government would give up at least $2.5 trillion in revenue over a decade, according to an analysis by the nonpartisan Tax Policy Center. The figure accounts for increased economic growth, so that is $2.5 trillion that the federal government would have to borrow — unless lawmakers found other ways of limiting deductions and loopholes or federal expenditures to save money.
So far, members of the Freedom Caucus have indicated they could accept a plan that implied more borrowing. They are less concerned about closing loopholes than they are about making sure rates go down and that, in general, Americans pay less in taxes.
“I think there’s been a lot of flexibility in terms of some of my contacts and conservatives in terms of not making it totally offset,” Rep. Mark Meadows (R-N.C.), the chairman of the Freedom Caucus, told ABC News on Sunday on “This Week,” arguing that tax cuts would provide financial relief for ordinary American families.
“Does it have to be fully offset?” Meadows asked. “My personal response is no.”
To address the deficit, members of the group almost universally favor steep cuts in government spending, part of an overall mission to shrink government and limit its reach. They also generally believe that lower taxes will produce massive economic growth, so much so that the government may collect even more than it would have under the former higher-taxes, slower-growth scenario.
Rep. Dave Brat (R-Va.) hinted at that last month on CNN, suggested he would be willing to consider new spending on some of Trump’s priorities once taxes had been reduced. “Those spending pieces, we’ll debate those coming up — the military, the wall, the infrastructure plan — but you’ve got to see tax reform in place first,” Brat told CNN last month. “Otherwise, we can’t afford it.”
If those economic benefits do not materialize, though, the government would be forced to borrow more as it went deeper in debt.
Trade and the border
There is one element of Ryan’s plan that could be cause for concern among the Freedom Caucus. The plan would effectively levy a new tax on imports, while exempting goods and services exported from the United States for sale abroad from taxation.
Ryan and his allies argue this provision, known as a border adjustment, would simplify the tax system. In essence, the border adjustment would relieve federal authorities of the responsibility of investigating taxpayers’ business overseas. Proponents also say the provision would encourage manufacturers to produce domestically and to hire American workers.
Yet conservative lawmakers such as Rep. Jim Jordan (R-Ohio) are opposed to any new kind of tax. The border adjustment could increase prices for American consumers buying products from abroad, although economists and legal experts debate the plan’s likely practical consequences for customers, and the effects could vary for different businesses.
“My reasoning is very basic,” Jordan told the Atlantic. “The idea that you’re going to add an entirely new tax is a big problem.”
Meadows is not eager for a border adjustment, either, Axios reported. The lack of support from conservative lawmakers could be a problem for GOP leaders.
Republicans are trying to avoid a Democratic filibuster in the Senate. To do so, they will have to write legislation that does not increase the federal borrowing over the long term — and they are hoping the border adjustment will help them do so.
Because the United States currently imports more than it exports, the new tax on imports would far exceed the exemption for exports. As a result, the border adjustment would bring in billions in new revenue for the federal government, lessening the need for more borrowing.
In the long term, however, most economists expect U.S. exports to increase. Eventually, they predict, exports should exceed imports to the point where a border adjustment — which gets rid of taxes on exports — would cost the government money, adding to the national debt. It remains to be seen whether Congress’s budgetary referees will give Republicans credit for controlling federal borrowing in the long term, given the uncertain trend in exports.
“Let’s go ahead and pass one without [a] border adjustment,” Meadows said.