Republicans’ tax reform drive hit by deficit projectionsHeat Profit
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Senate Republicans’ effort to overhaul the US tax code hit an eleventh-hour hurdle on Thursday evening after a congressional watchdog determined the bill would send the budget deficit skyrocketing, sending party leaders scrambling to rework the legislation.
The landmark tax bill, which has been pulled together with unprecedented speed, appeared headed for a quick victory after John McCain, the Arizona senator, became the latest wavering Republican to back the legislation, which would slash corporate taxes from 35 per cent to 20 per cent.
But the Joint Committee on Taxation, which passes judgment on the fiscal implications of all tax legislation, blocked the rush to get the bill through the Senate by determining the plan’s growth projections were too optimistic, meaning it would raise less revenue than forecast.
In a further blow, the Senate’s parliamentarian, who rules on congressional procedure, barred the use of a “trigger” that would automatically raise taxes again if revenue targets were missed, a measure that leaders had hoped would placate Republican deficit hawks who are vital to the bill’s passage.
The double blow sent Senate leaders into a last-ditch effort to hunt for revisions that would reduce the generosity of tax cuts without alienating key lawmakers and constituencies. Mitch McConnell, the Senate majority leader, said lawmakers would resume voting at 11am on Friday morning.
The late-night bout of legislative improvisation underscored the risks GOP lawmakers have been running by attempting to speed hugely complex tax legislation through Congress on the back of sparse debate and no Democratic party backing.
Revenue loss over 10 years estimated by Joint Committee on Taxation
But Republican leaders view their promised tax cuts, which are at the heart of the biggest planned overhaul of the tax code since 1986, as vital to their chances of retaining control of Congress in midterm elections next year. President Donald Trump, who has insisted on lower rates for businesses, has put lawmakers under intense pressure to pass a bill this year.
Mr Trump attempted to rally Republicans on Friday morning, writing on Twitter that they were ”working hard” to pass what he called “the biggest Tax Cuts in the history of our Country”.
“The Bill is getting better and better,” he wrote. “This is a once in a generation chance.”
Even as the bill headed to the floor for its first votes on Thursday, leaders were unsure whether they had all 52 Republicans on board, giving them a narrow path to passage. Mr McCain’s backing added to the momentum behind the plan. “I believe this legislation, though far from perfect, would enhance American competitiveness, boost the economy, and provide long overdue tax relief for middle class families,” the senator said.
The backing from the Arizona Republican, who helped kill his party’s attempt to repeal Obamacare earlier this year, brought the GOP closer to the 50 votes it needs to get its plan through the Senate, and before the new deficit findings on Thursday evening, Mr McConnell declared “we’re heading down the home stretch”.
I believe this legislation, though far from perfect, would enhance American competitiveness, boost the economy, and provide long overdue tax relief for middle class families
But the Joint Committee on Taxation finding was a significant blow, ruling the bill would not fully pay for itself due to higher growth and would leave the government facing a revenue loss of about $1tn over 10 years. It undermined months of repeated claims by Treasury secretary Steven Mnuchin that the tax cuts would pay for themselves — arguments he has never been backed with detailed economic analysis.
Then the Senate parliamentarian, an independent official who polices compliance with legislative rules, said Republicans could not use the so-called trigger mechanism that deficit hawks wanted to deploy to reverse some tax cuts if revenues fell short.
The parliamentarian’s decision left the party contemplating options including future automatic rises in rates of levies, including the corporate tax, to narrow the deficit regardless of whether revenues meet expectations.
Fiscal conservatives led by Bob Corker of Tennessee have demanded the bill does not blow out the deficit, and their views will be critical in determining whether the Republicans can muster the necessary votes to move the legislation out of their chamber.
The Joint Committee on Taxation found that the reforms would raise gross domestic product by an average 0.8 per cent over the decade-long period. The extra growth would, when debt costs are factored in, reduce the deficit by $407bn over the period.
However, that is nowhere near enough to counter the lost revenues resulting from measures including the planned reduction in the headline corporate tax rate.
Even if the legislation clears the Senate, it would still need to be merged with a separate bill from the House of Representatives. Paul Ryan, speaker of the House, said: “I’m very confident that we can get this done this year.”
The setback could jolt Markets after shares enjoyed a day of robust gains as Investors grew more optimistic that a tax cut would be passed. The Dow Jones Industrial Average closed above 24,000 points for the first time.
A Goldman Sachs index that measures the performance of a basket of high-tax US companies — that would benefit disproportionately from the corporate tax cuts promised by the Trump administration — gained strongly for a third day running.