On Capitol Hill, Tax Reform Goalposts Moved?

Tax reform? No tax reform? Lots of tax reform? Incremental tax reform?

Capitol Hill is a land where anything goes, or maybe nothing does. Now, in the wake last month of health care overhaul’s dying on the vine, for better or worse, comes the question, what happens to tax reform?

Where once the hope had been in place for speedy and sweeping tax reform to barrel through Congress, paving the way for lower corporate tax rates and for profits to benefit the U.S. economy as a whole, the reality is proving to be far different.

No less than President Donald Trump has said that, as noted in a recent interview with The Financial Times, his administration intends to “cut a deal on tax reform this year.” That may hint at a longer timeframe than many expected, because “this year” implies at least some leeway beyond the current session, where recess happens in August. Trump also said that in regards to tax reform, he did not “want to talk about when, and I don’t want to talk about timing” for the “massive and very strong tax reform.”

Negotiating on health care reform redux may be in the offing again, with at least some sort of deal on some horizon. This time around, chances are high that the administration will want to make sure the votes are in, and rather ensured, before risking another defeat as had been seen last month. Corralling votes is a bit like herding cats, and so that activity takes time and effort. Tax reform may be thus delegated to a back burner.

One sticking point on tax reform, should it get full consideration, ties in with levying taxes on imports, while exports would get no such treatment. The industries at risk here include international ones, with supply chains that stretch far beyond U.S. borders. The retail industry comes to mind, and so do manufacturing intensive verticals where parts and even some labor are sourced elsewhere. The blowback is one where prices paid by consumers may be hiked to cover the higher costs baked in via taxes. A significant percentage of imports come from China, and Trump has been targeting that country for what he has said has been unfair manipulation of currency and trade.

Corporate tax reform — where rates would be ratcheted down, presumably steeply from the current 35 percent level — may wind up being done separately, as U.S. News and World Report notes, done in tandem with the much-anticipated infrastructure spending program. Putting together such large packages tries to get congressional votes to move along in lockstep. But party factions on both sides of the aisle may derail such unity. Banking on the Hill to goose profits, with stock market valuations already stretched, at least for the U.S., may be a taxing effort.