In Congress, a complicated process to ‘simpler’ tax code

WASHINGTON – As the days wound down on 2017, the promise of a simple, fairer tax code got more complicated.

The sweeping tax cuts that Congress passed just before Christmas capped a tumultuous first year for President Donald Trump and a career capstone for Texas U.S. Rep. Kevin Brady, aRepublican from The Woodlands.

As chairman of the tax-writing Ways and Means Committee, Brady had been outlining an ambitious tax reform package for more than two years — long before Trump became the GOP’s 2016 presidential nominee.

But the endgame of the negotiations focused on the Senate, where Republicans had a slim two-vote majority.

“If anybody decided to withhold their vote, and certainly with two deciding to withhold their vote, that would have doomed our efforts,” said Texas U.S. Sen. John Cornyn, the No. 2 Republican in the Senate.

As GOP majority whip, Cornyn was the man — on paper at least — most responsible for keeping Republicans in line. That meant the political care and feeding of every senator in the caucus.

“It was a matter of working through the objections and concerns of individual senators, and I don’t have to tell you that the tax code is enormously complex,” Cornyn said in an interview, “and we were concerned with both the intended and unintended consequences.”

As originally envisioned, the blueprint Brady produced with House Speaker Paul Ryan, called “A Better Way,” held out the hope of fewer and lower tax brackets, a code so simple, devoid of special interest “loopholes,” most people could do their taxes on postcards.

Dropping ‘revenue neutral’

But in Congress, nothing is simple.

The product that came out of monthslong negotiations among GOP lawmakers increased the number of tax brackets from seven to eight, preserved or introduced new tax breaks for businesses, and curtailed but did not eliminate popular middle-class tax deductions for state and local taxes, including the interest write-off for mortgage loans.

In the end, Cornyn and Brady could say that the vast majority of Americans will see their tax liability reduced, at least initially before some of the individual tax cuts expire. But there were compromises.

“Throughout our nearly seven-year journey on tax reform, we’ve had to make many choices,” Brady told his fellow tax writers as the tax bill headed for final passage in December. “We rejected simply tweaking Washington’s monstrous tax code and just calling it a day. Instead, we put it all on the table and went bold for the American people.”

Critics saw much of the same, including a host of business-friendly measures that would dwarf the average middle-class family’s $2,100 tax savings. One of them was extending the “carried interest” loophole that benefits Wall Street hedge fund managers, a perk that Trump had campaigned against.

In a testy television interview on the morning of the bill’s final passage, Brady called it an “ancillary” issue that most Americans “can care less about.”

But that was hardly the first compromise in the hard-fought tax bill, a historic milestone that Trump was eager to notch by Christmas.

“At the end of the day, the most important thing was to get tax reform done,” said Courtney Alexander, a spokeswoman for the American Action Network, a center-right group that sunk $24 million into a public campaign to pass the tax bill. “Not a year from now, but quickly so that people could see the result.”

One of the first compromises involved Brady’s promise that tax reform should be “revenue neutral,” meaning that, for the most part, rate cuts would be offset by new revenues drawn from closing special tax credits and deductions.

The tax bill Trump signed at the end of December is estimated to add $1.5 trillion to the nation’s debt over the next decade, though Republicans argue that the budget hole will largely be filled with new revenues from job creation and business growth.

The first sign of retreat on the revenue-neutral pledge came last summer when the House leaders’ plan for filling the gap — a new 20 percent “border adjustment” tax on imports — ran into a maw of opposition from retailers and conservatives who balked at any tax increase as part of a GOP reform plan.

The White House, after initially wavering, jettisoned the idea — though not until Brady had become the national spokesman for the border tax, which was supposed to close a $1.2 trillion revenue gap.

With the death of the border tax, it became increasingly clear the original promise of a revenue-neutral bill could stop the whole tax reform project dead in its tracks.

By fall, prominent GOP voices, among them Texas U.S. Sen Ted Cruz, were arguing forcefully that “revenue neutral” had to go.

Revenue neutral, in its traditional meaning, Cruz argued, meant the government would simply maintain Americans’ overall tax burden, “just shifting money from one pocket to another.”

Cruz and his conservative allies maintained that tax reform needed to take into account the expected economic spurt of tax cuts. That concept, called “dynamic scoring” quickly carried the day, allowing congressional leaders to brush off “static” projections of lower revenue based on previous tax law.

Art of compromise

Other compromises would follow.

The House draft of the tax bill, largely shaped under Brady, did not cut the income tax rate for the nation’s top earners.

The revenue saved by leaving the top 39.6 rate in place would pay for other tax cuts, while inoculating Republicans against the charge that they were merely doing the bidding of the super-wealthy like Trump.

But that populist message succumbed to supply-siders in the Senate, who argued that traditional GOP orthodoxy called for across-the-board tax cuts.

Democrats, who uniformly opposed the tax bill as a deficit-funded giveaway to the rich, called it “trickle down.”

But Senate Republicans stuck to their philosophy, dropping the top individual rate to 37 percent, a difference that could mean tens of thousands in savings for some of the nation’s wealthiest people.

At the same time, Trump had been pushing for a drop in the top corporate rate from 35 percent to 15 percent — well below the 20 percent in Brady’s original plan. But needing to fit the bill’s “static score” within an agreed-upon $1.5 trillion limit, lawmakers eventually settled on 21 percent.

The $1.5 trillion tax cut limit was the result of another critical decision: To skirt a likely Democratic filibuster in the Senate, which would take 60 votes, Republicans were forced to use a budget maneuver limiting the size of the projected deficit.

Democrats, feeling frozen out, complained of a dearth of public hearings.

Still, there was also dissension in the Republican ranks, and with a paper-thin majority in the Senate, GOP leaders could ill afford defections.

To help get there, the American Action Network, the largest outside group pushing the tax bill, quietly convened a series of weekly meetings of top House, Senate and White House leaders, along with representatives from a host of conservative groups. “There was always someone from each faction in the room at these meetings,” Alexander said.

Other brush fires had to be put out, principally those set by Republican lawmakers in high-tax states like New York, New Jersey and California. Many saw that their constituents would actually face higher federal tax bills if they lost their relatively substantial state and local tax deductions. The specter of net tax increases in a tax cut bill was sobering, particularly for enthusiastic tax cutters like Cruz.

Brady, heading up the House delegation in Senate-House negotiations, ultimately had to settle for capping, not eliminating, the deductions for state and local taxes. The negotiations also resulted in a revised cap on the mortgage interest deduction.

On the business side of the tax code, negotiators decided to eliminate the alternative minimum tax for corporations altogether, another benefit designed to stimulate the economy — the GOP’s guiding principle.

But the push for lower corporate tax rates gave rise to new fairness concerns, particularly for small businesses.

That concern was championed by Sen. Ron Johnson, a Wisconsin Republican, who lobbied successfully for the first-ever 20 percent deduction for “pass-through” businesses, those that pay taxes through their owners’ personal returns.

While intended as a boon to small businesses, the change also helps mega-real-estate conglomerates, including Trump’s real estate empire. Another crunch-time change preserved a tax break that benefits pipeline companies, further exposing Cornyn — the official GOP vote getter — to criticism from the bill’s opponents.

Amid growing criticism of the multiplying benefits for the wealthy, a pair of Republican senators, Marco Rubio of Florida and Mike Lee of Utah, finally threatened to hold out unless the GOP plan put more money into the child tax credit. It was a middle-class, family-friendly proposal that ultimately held sway.

Along the way, Cruz succeeded in adding a tax break for private and home-school families, though the benefit for home-schoolers was eventually struck down on technical grounds.

Obamacare repeal

The final controversy of the tax bill was perhaps the most significant: the repeal of the Affordable Care Act’s individual mandate, a pillar of President Barack Obama’s health care overhaul that required most Americans to buy health insurance.

Cruz, an outspoken critic of Obamacare, said he probably had the support of only a half-dozen senators when he first sought to make repeal of the mandate part of the tax plan. Some saw it as a poison pill, but in the end the entire GOP caucus went along.

While repealing the mandate freed up revenue for more tax cuts — the government would save money on insurance subsidies for low-income Americans — it created one final compromise: Sen. Susan Collins of Maine would extract a promise that, in exchange for her vote, Republicans would support separate legislation to shore up the Obamacare insurance marketplaces.

Amid all the interlocking parts, Cornyn called the end-game the most difficult legislative work of his 15 years in the Senate.

“We all had concerns about the optics of this because we knew this was going to be criticized as tax cuts for the rich, and we were determined to make this benefit all tax brackets,” he said.

If there’s simplicity in the end, he said, it will come from fewer Americans having to itemize deductions on their tax returns — largely owing to a doubling of the standard deductions and child tax credits.

“The major simplification was that now only about one out of 10 taxpayers have to itemize,” he said, “and previously it was about three out of 10.”

Cruz, who ran for president on a flat-tax platform, said his biggest regret is that the tax cuts weren’t made deeper and more permanent. But he allowed that compromise was critical to success.

“Getting all the pieces together to get everyone to ‘yes’ was a complicated endeavor,” he said.

But he pronounced himself satisfied with the final product: “If we were able to reduce taxes and allow 90 percent of taxpayers to fill out their taxes on a postcard, that’s a good thing.” kevin.diaz@chron.com twitter.com/diazchron