TAX VOTE IMMINENT | Trump Stumps for Deficit-Financed Cuts

Tax Cuts Financed by Borrowing, for the Wrong Taxpayers, at the Wrong Time?

October 18, 2017 – The following is an up-to-the-minute report on tax legislation from Dana Chasin in Washington, D.C.

It describes President Trump's tactics to promote his deficit-financed tax-cut program, a Keynesian fiscal-recovery strategy at a time of full employment. A Senate vote is imminent.

Chasin's report is titled "Trump Wooing Democrats on Tax; Outside Groups Making Inside Pitches Too. (Update #215.)" Reposted here by permission.

Senate debate continued today on the budget resolution that the GOP now has the votes for, and intends to pass, tomorrow night. The resolution includes reconciliation instructions for a $1.5 trillion deficit-financed tax cut. As we watch the amendment process – a.k.a. "Vote-a-rama" – and await the final vote, we examine a strategic choice Trump has pursued while pitching his plan around the country.

Over the last few months, Trump has targeted specific Democratic Senators from states he won who are in the ballot in 2018, seeking to cajole them to join him on his tax plan. What tactics has he employed?  How have outside groups weighed in? Can these efforts succeed? See below.

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Trump’s Methods

Trump has been holding rallies in states he won that have Democratic Senators regularly over the last six weeks. He started just before Labor Day in Missouri, where he called on voters to “vote out” Senator McCaskill if she does not go along with his tax agenda.

The President appeared with Senator Donnelly at his event in Indiana and used a teasing tone to pressure the Senator. In an even lighter approach, Trump gave Senator Heitkamp a ride on Air Force One and praised her as a good woman who he hoped would support his tax plan. Senators Donnelly, Heitkamp, and Manchin each declined to sign a letter with 45 other Democrats opposing tax cuts for the top 1 percent.

Trump has not yet visited Montana. Sen. Tester extended Trump an invitation to visit his state. Expect Trump’s efforts with Tester to be as soft-peddled as with Sen. Heitkamp

Other Forms of Pressure

Trump is arranging dinners with Democratic Senators to woo them on tax. So far, he has dined at the White House with Sens. Manchin, Heitkamp, and Donnelly. Ivanka, Jared, and the administration's legislative director Marc Short hosted Manchin, Heitkamp, and McCaskill on Monday. Sen. McCaskill aired concerns about pass-through rates and insufficient child tax credits.

Trump enlisted Vice President Pence to push their tax plan in Indiana to help pressure Sen. Donnelly. Pence has also pushed the tax plan in Michigan, implicitly targeting Sen. Stabenow. Vice President Pence found more friendly terrain in West Virginia where Sen. Manchin joined him at a tax event in a state that Trump carried by 41 points.

Trump-allied groups are running ad campaigns against Senators Manchin, Heitkamp, and Tester. The ad shows President Kennedy claiming tax reductions would stimulate growth and boost worker wages. The 30-second ad buy costs six figures and has run on television in three states represented by in-cycle Democratic Senators.

There are three potential objectives in the administration’s barnstorming campaign.

• Getting to 50: A small but significant number of GOP senators are raising objections to the tax proposal’s deficit impact. The administration worries about a repeat of the healthcare fiasco when Senate Republicans could not find the votes undo the ACA and hopes to coax one or two centrist Democrats to move Trump’s tax proposal in the event any Republicans break ranks.

• Getting to 60?: The administration is concerned Senate Republicans might fail to pass tax reform via reconciliation (either because they cannot pass a budget resolution or because the vote fails on the floor). It may be  keeping open the remote possibility of a permanent comprehensive reform package that could pass through regular order with eight Democratic votes – extremely unlikely, as it would require a thorough rewrite of the current proposal.

• Positioning for 2018: Trump might use the tax issue to help Republicans position themselves against Democratic senators in the 2018 midterms. He has targeted Democrats in states he won in 2016, calling on voters to “vote out” senators who oppose his tax plan. Nevertheless, Trump wants a win now to deliver legislation in his first year; Congressional incumbents may benefit more from election year accomplishments.

Trump’s Targets

To push his tax agenda, President Trump has targeted six Democrats with rallies in their states, invitations to the white house, and ad buys. He has taken a different approach to each Senator.

• Sen. Joe Donnelly, Indiana – The President chided Donnelly during an Indiana tax rally, making an appearance with the Senator. The two have met over dinner at the White House. Sen. Donnelly is not close to supporting the current framework, as the tax benefits are not sufficiently aimed at the middle class.

• Sen. Heitkamp, North Dakota – Trump made a special effort to play nice with Sen. Heitkamp on a trip to Bismarck last month. Not only did he praise her during his tax speech, but he also brought her along from D.C. on Air Force One. Trump-allied groups have invested 30-second ad buys promoting tax cuts on North Dakota TV. Sen. Heitkamp is well liked by the North Dakota business community and has extensive experience in tax policy and administration. She opposes cuts for the top one percent and/or additions to the deficit. Heitkamp has indicated interest in collaboration on tax reform, reaching out after Trump’s visit but the administration has not contacted her or her staff since.

• Sen. Joe Manchin, West Virginia – Sen. Manchin dined with the President and attended an event with the Vice President to discuss tax reform. Trump was scheduled to make a trip to West Virginia but had to cancel to travel to Las Vegas in the wake of the shooting. He's unreachable, barring a radical revision. Sen. Manchin would set the corporate rate at 25 percent, the pass-through rate at 30 percent, and would tax money stashed overseas at 10 percent. Like Republican Bob Corker, he would oppose any plan that adds too much to the debt. He seems to have been most effective among Democrats at negotiating details with the administration.

• Sen. Claire McCaskill, Missouri – She is the first Senator to be targeted by the President during his August visit to kick off his tax plan road show. The President called her out by name saying that if she doesn’t support his plan Missouri should vote her out. Sen. McCaskill emphasizes simplicity, expanding child tax credits, opposing the pass through rate cut. She stated at a town hall recently that she would love to help the administration on a tax reform package, but the current framework is only a cut for the one percent, not middle class families.

• Sen. Debbie Stabenow, Michigan – Vice President Pence stumped for tax reform in Michigan. There have been no reports of President Trump pursuing direct personal outreach. Sen. Stabenow has focused on tax reform as it relates to supporting workers.

• Sen. Jon Tester, Montana – The President has not yet visited Montana. This led Tester to invite the President to his state – which does not suggest he is close to supporting the framework. Trump-allied groups invested in 30-second ad buys promoting tax cuts in Montana. Sen. Tester articulated his priorities on tax: simplify it, make sure it doesn’t add to the debt, and give a break to working families and small businesses.

Will It Work?

As hard as Trump works, his efforts are not yet producing results and despite the extent of the investment, return on it looks fanciful. None of his Democratic targets support the present tax framework. Primary reasons are the plan’s inequity, lack of emphasis on the middle class, the deficit impact, and its lack of detail. To date, there are no signs of division within the Senate Democratic caucus on Trump's tax plan and only fitful indication that Trump might revise his plan to such an extent that Democrats might take another look.

None of these Senators is in a position to support Trump on taxes today, despite his cajoling. To attain bipartisanship, Republicans will have to move closer to Manchin’s principles. From any angle, Trump’s barnstorming appears to to be little more than an attempt to create cover in the event of a meltdown in the Senate. As the tax plan stands now, Democrats will be unwilling give him any votes.

See also Update #211 and Update #204 by Dana Chasin, also on tax reforms.
[Also: Politico, "Why Trump Will Regret Passing Tax Reform."]

HOSPITALS | Outlook Is Worrisome

Good Luck to You I just read the following article posted by Dr. David Posnett today and I am re-posting by permission. At the end I have some brief comments.  – John Tepper Marlin, CityEconomist Short Hospital Stocks! by D. Posnett MD   East Hampton, N.Y., October 10, 2017– I have been waiting for this. Wall street charts show that investors are jittery about hospital stocks.  Here is why:

(1) Investors are approaching hospital stocks cautiously. Les Masterson said earlier today:

Some unfavorable financial trends and an air of uncertainty for healthcare’s future has led to an environment not particularly friendly for major investment… as hospitals continue to struggle with fewer inpatient admissions, lower reimbursements and potential increases in uncompensated care, investors are growing wary.

The current environment caused disappointing second quarters and lower earnings projections for major for-profit systems like HCA, Community Health Systems (CHS) and Tenet Healthcare…. The results led stock prices to tumble.

I would go further and add two more disturbing facts:

(2) Hospital Sector Slides. The Financial Times notes that US hospital operators' stock prices are sliding down  following a report that President Donald Trump will sign an executive order this week to withdraw some insurance requirements laid out under Obamacare. Tenet Healthcare, Community Health Systems, Surgery Partners, HCA Healthcare, DaVita shares tumbled lost up to 10% in stock prices.

(3) Some are suggesting "Checking in on the Canadian Healthcare Stocks".

My Comment (CityEconomist)

It's not just the stock market. If hospitals are heading into lean times, then one of the engines of job growth since 2009 will be knocked out. 

Even during the recession before that, the health care industry was growing jobs steadily. When this juggernaut goes into reverse... watch out, America.

FSOC | Delisting AIG

FSOC Delisted AIG, One of Only Two Nonbank SIFIs

The following is a belated posting of an interesting report by Dana Chasin (Update 209) on the FSOC’s De-Designation Decision, posted here by permission:

The Update takes its own “tax holiday” to look at last Friday's Financial Stability Oversight Council (FSOC) under-the-radar vote to de-designate AIG as a Systemically Important Financial Institution (SIFI) and the rationales provided by seven of the ten FSOC members. 

The Council’s 68-page report – the most comprehensive snapshot of the current financial regulatory leadership and administration’s thinking on systemic risk – attributes the decision to material changes in the company’s size, complexity, and risk profile since its designation. Now only one non-bank financial company, Prudential Financial, maintains its SIFI designation. 

Was this decision merely the operation of law or is it the result of a clear Trump agenda to diminish or eliminate FSOC’s impact? What does the vote breakdown tell us? More below.

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The Votes

The Council voted 6-3 to rescind its 2013 designation of AIG as a SIFI. All four Trump appointees on the FSOC voted in favor of delisting, while the Obama-era appointees were split. SEC chairman Jay Clayton recused himself from Friday’s vote in order to avoid a conflict of interests, raising a key legal question about the vote. Fed Chair Janet Yellen voted in favor. 

•  All Those In Favor

–Keith A. Noreika, Acting Comptroller of the Currency: Noreika, an Obama-era appointee, voted in favor of rescission. He does not believe non-bank financial institutions should be regulated as SIFIs.

–J. Mark McWatters, Chairman of the National Credit Union Administration: McWatters voted in favor of rescission on the grounds that AIG today is a far different company than in 2009 when he examined the company as part of the Congressional TARP Oversight Committee. Notably, he fails to acknowledge that AIG’s baseline SIFI designation occurred in 2013, not 2009.    

–J. Christopher Giancarlo, Chairman of the Commodities Futures Trading Commission: Giancarlo explained that AIG’s decreased derivatives liabilities, lending liabilities, capital markets downsizing, and ceasing of swaps activity led to his decision to vote yes.

–S. Roy Woodall, Jr., the Independent Member Having Insurance Expertise: Woodall, an Obama appointee, criticized FSOC’s rescission document as confusing and deviant from the statutory test to determine whether the company poses a risk to financial stability. On the grounds of this statutory test, however, he does not believe AIG to be a SIFI, writing that it is half the size it was during the crisis. 

–Janet Yellen, Chair of the Federal Reserve: Fed Chair Janet Yellen, the most prominent Obama-era appointee on the Council, voted in favor of rescission on the grounds that AIG’s downsizing efforts render is no longer too big to fail.

Steven Mnuchin, Treasury Secretary: Mnuchin praised FSOC’s decision of rescind AIG’s designation, claiming that it showed the Council’s commitment to removing companies that are no longer systemically risky. (The Council is housed in the Treasury.)

•  The Dissenters

–Richard Cordray, Director of the Bureau of Consumer Financial Protection: As a member of the 2013 Council, Cordray does not believe AIG has made true reduction changes based on planning but has shrunk due to a failed business model and weakened financial market.

–Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation: Dissented for three reasons – an increase of liabilities/assets in other areas of AIG like life insurance and annuities, an inconsistent determination of the Council, and continued irresolvability due to AIG’s size and operations.

–Melvin L. Watt, Director of the Federal Housing Finance Agency:  the two legal standards for FSOC designation were not given independent reviews. If FSOC reviewed AIG under the other standard (size, scope, etc.,) then the Council would have found AIG is still in need of enhanced supervision.

AIG’s Material Changes

Many see FSOC’s decision as a manifestation of Trump’s deregulatory agenda. The FSOC here was fulfilling its legal obligation to re-evaluate its designations annually. At the time of designation, the FSOC concluded that AIG posed significant systemic risk primarily because of its exposure to financial intermediaries, its inability to conduct an orderly liquidation of its assets, the company’s “financial contagion” risk in insurance markets, and its general complexity.

Friday’s announcement comes after more than a year of interaction between AIG and FSOC and an official request for de-designation on July 7, 2017. FSOC’s re-evaluation focused on “material changes” since the Council’s previous review. 

Since 2012, AIG has:

• decreased its debt by 58 percent since 2012
• decreased its asset size from $547 to $498 bn
• divested billions including $30 billion with divestiture of ILFC assets
• sold non-core operations and businesses including ILFC, AIG Advisor Group, and United Guaranty Corporation

FSOC’s Determination

FSOC based its determination of designation of AIG in 2013 on three transmission channels of negative effects on the financial market:

• Exposure: material impact on creditors, counterparties, investors, etc.
• Asset liquidation: liquidation in such a way that asset prices and markets are affected.
• Critical function/service: entity no longer provides services that are relied upon.

At that time, AIG produced negative risk most frequently and powerfully through excessive exposure and asset liquidation. The decision to rescind the company’s designation was due to the reconstruction and reduction of various high-risk practices.

Capital market/institutional exposures lead to a cascading effect if a non-bank experiences distress later on. Therefore, AIG reduced its total assets, total debt outstanding, short-term debt, and securities lending from their 2012 levels. Also, the complexity of AIG rendered it irresolvable in 2013. The Council considered that the company has simplified its total assets, multi-jurisdictional operations, and global financial impact in order to address this. Yet, it maintained that the entity is still complex and requires further efforts.

State of Play

•  One Last Shadow Banking SIFI 

After Friday, Prudential Financial is only nonbank financial company to bear a SIFI designation. The institution is the largest nonbank by by asset size at $784 billion – over $285 billion larger than AIG. As FSOC must re-evaluate all designations each year, we could soon see the announcement of its de-designation.

•  Trump Decision on MetLife Appeal Expected

Metlife challenged its SIFI designation and won de-designation in court. President Obama’s justice department appealed the decision. The Trump could announce that it will not move forward with the appeal at any point.

•  Two-Thirds Requirement Satisfied? 

Clayton’s recusal might be legally significant. Section 113(d) of DFA requires two thirds of serving FSOC members to vote yes for a SIFI rescission. If Clayton is considered to be a serving voting member FSOC, then FSOC has ten serving members. Six of ten is not a two thirds majority. This would open up a question about the legal standing of AIG’s de-designation.

TAXES | Using the Budget to Reform

Mike Enzi (R-Wyoming), Chairman
Senate Budget Committee

The following is from Dana Chasin's Update 211, reposted by permission (see last sentence):

Washington, D.C., October 5, 2017 – Today saw two major steps toward Congressional approval of a FY 18 budget resolution. The House passed its 2018 budget resolution providing reconciliation instructions, paving the way for tax reform, on a 219-206 vote, 18 GOP members voting against. And Senate Budget reported out its budget resolution along partisan lines.  

The Senate language allows for a $1.5 trillion deficit increase. The House measure calls for deficit reduction. Reconciliation instructions included in both the House and the Senate resolutions would allow Republican leadership to craft a tax package that adjusts revenues and spending that could be passed with a simple majority in the Senate.  To pass the cuts, Senate Republicans would have to vote in near unison.

The budget resolution's chances of passage and what's at stake are considered below. 

_____________________________________________

In day one of the two-day Senate Budget Committee markup, Senators drilled down tax policy. Republicans attempted to legitimize the Big Six’s policy framework, claiming it was based off bipartisan principles, but Democrats excoriated the proposal for rewarding the wealthy, dramatically increasing the deficit, and increasing taxes for the middle class.  

Stakes: Reconciliation

Senator Bob Corker (R-TN),
Maverick on Senate Budget Committee

Per the House resolution, top lines instructions for 11 House committees require a $213 billion decrease in spending. House Judiciary ($45 billion), Oversight and Government Reform ($32 billion), and Ways and Means ($52 billion) Committees are charged with producing the largest cuts in spending from 2018 to 2027.

Reconciliation instructions now require specific  changes from the Senate. Given debate during the markup session regarding the $470 billion of cuts expected to Medicare, much anxiety revolves around the reconciliation recommendations that will arise from Senate Finance. Sens. Sanders, Harris, and Stabenow led the Committee with the most amendments opposing these cuts. 

FY 18 Spending Top Lines

Today’s Senate budget resolution sets a topline FY18 discretionary spending at $549 billion for defense and at $516 billion for nondefense discretionary. By contrast, the House resolution calls for $621.5 billion for defense and $511 billion for non-defense discretionary spending in FY18  President Trump’s FY18 budget proposed $616 billion in defense, $538 billion non-defense.

The Senate figures represent a decline from the FY17 budget toplines of $616 for defense and $551 for non-defense discretionary spending. The administration and the House are more consistent with last year’s numbers, although the House resolution calls for a slight increase in defense spending matched by a slight decrease in nondefense discretionary spending.

The Senate resolution also calls for $632 billion in nondefense spending cuts between 2018 and 2027. Budget Committee Democrats repeatedly raised concerned that these spending cuts would translate into deep slashes vital social programs. Particularly contentious were proposed cuts to Medicare and Medicaid, Pell grants and Head Start programs, and WIC programming.

Points of Agreement

Today’s markup was anything but bipartisan. Democrats repeatedly introduced amendments to protect social programs, push Republicans towards budget neutrality in tax legislation, and ensure that the CBO analysis of tax proposals. Time and time again, these amendments were either tabled or failed outright – almost always along 12/11 partisan lines... yet another indication that Republicans plan on using a majoritarian route in pursuit of their tax reform agenda.

Sticking Points Going Forward

Yesterday, Sen. Corker indicated an unwillingness to play ball with his fellow Republicans, stating that he would not vote for a tax bill that was not permanent and that added to the deficit. While it is not clear how much he will end up pushing back, his dissent is worth noting – Republicans can only lose two votes on the Senate floor if they want to move their tax plan with reconciliation.

Beyond this, the Senate is unlikely to accept the $203 billion in mandatory cuts to social programs as the House sets out. These differences will have to be addressed in conference for agreement to be reached on a joint budget resolution.

Next Steps and Deadlines

Since the budget resolutions passed on the House floor and through the Senate Budget Committee today, attention turns now to how it will fare on the Senate floor. 

The Senate will address the budget after its return from Columbus Day/Indigenous People's Day recess on October 16. Thereafter, the two houses will conference to hash out differences.  Both the House and Senate Budget Committees are to have their recommendations for tax reform submitted by November 13. The reconciliation process and budget for FY 18 must be completed by December 8 in order to avoid a government shutdown.

THE FED | Who Will Follow Yellen?

Janet Yellen, Fed Chair

The following is Update 206 (September 20, 2017) from Dana Chasin, reposted by permission:

Today's Fed Statement

Yellen today confirmed that the federal funds rate target range from 1-1.25 percent will remain unchanged once again, and that further reduction of the balance sheet will occur in October.

Under its asset sales plan, the Fed will be receiving monthly payments of up to $30 billion for its maturing Treasury securities, and $20 billion per month for its mortgage-backed securities, 12 months into the plan. A full transcript of Yellen's statement is here.

Yellen called this process of normalization necessary for the Fed, and timely. Inflation has been well below two percent this year. It is 1.6 percent now and is expected to rise to 1.9 percent next year. This increase should be accompanied by higher interest rates and a more stable economy.  It does not impel the Fed to accelerate its planned series of rate hikes.  

Labor Market

Labor market statistics of late offer reasons for optimism. Unemployment remains historically low and household incomes are rising. Additionally, labor force participation (employed/population) has clearly stabilized. Over the last three years, the range has been within 62.4 and 63.0 percent. The Obama years saw the labor market size stabilize, despite large and increasing numbers of Baby Boomers retiring. However, wages are barely moving.  

Yellen admitted that analysts were unsure how to explain the sluggish core inflation rate, but pointed out that temporary inflation dampeners might be source of some of the lag. She defended the Fed’s rate-hike plan, arguing that, with little remaining slack in the labor market and the typical wage-price inflation lag, inflation is likely to increase next year.

Macroeconomic Policy Chops:  Fed v. Congress

The GOP on the Hill has been unwilling for years to approve fiscal policy measures to combat the recession and stimulate the recovery. Recovery came to depend on the Fed to use its monetary policy authority creatively and aggressively – which it did to enormously beneficial effect. But when the economy was desperate for stimulus, the GOP leadership in Congress used debt brinksmanship to push through the rather contractionary 2011 Budget Control Act. 

As yesterday’s reports of deficit-negative budget bills in the Senate might suggest, Republicans' austerity fever may have broken now, or for now, with visions of major tax cuts in the offing. But gone is the day when the Fed will take guidance from Congress or the President or compensate for policies badly designed for current economic conditions. 

Succession Speculation

The President's views on monetary policy, the Fed, and his upcoming appointments to it will become much better known fairly soon. NEC Director Gary Cohn’s chance of being appointed Fed Chair after Yellen's term is up in four months has diminished. A new contender has emerged. Banker Kevin Warsh appears the most likely alternative to Yellen at present. Warsh was one of the youngest Federal Reserve Board Governors from 2006 to 2011. His views favoring broad  financial deregulation clash with those of the Yellen Fed majority. 

But Warsh has criticized low interest rates. The President, King of Debt, probably doesn't want it made too expensive. It is not beyond the pale that Janet Yellen may be reappointed Chair.  

The President praised Yellen earlier this year for being “a low interest rate person.” It stands to reason that President Trump would favor her slow and measured approach to raising interest rates. That's one reason it's hard to predict his stance. 

Fed Board – Trump Majority Forecast

With four central bank Governor vacancies out of seven seats to fill after Vice Chair Stanley Fischer’s announced retirement next month, Trump has the opportunity to shape monetary policy for years to come. A majority of Trump-appointed Federal Reserve Board is likely by early next year. Trump’s presumed preference is for accommodative policy. A howl from the bond vigilantes is likely if his nominees seem bent on economic growth. 

We will find out in short order. Trump’s first nominee cleared the Senate Banking Committee two weeks ago and is headed for a floor vote. We await the appointment of three more nominees, along with Trump’s determination on the Chair and Vice-Chair positions. However, curiously, Yellen did mention during the press conference that the Board could function with only three Governors – three incumbents, that is.

See also Chasin Update 205 (Business Taxes) and 204 (Income Taxes)

TAX REFORM | Business Taxes

Sen. Orrin G. Hatch (R-Utah),
Chairman, Senate Finance Committee

The following is Update 205 from Dana Chasin, reposted by permission:

Sept. 19, 2017 – This morning, Senate Finance held its second hearing this week exploring tax policy. This time, the focus was on corporate taxes. 

The Committee heard testimony on topics such as pass-through rates, C-corp rates, territoriality, and options to raise revenue.

Chairman Hatch again asserted that a tax bill will be written by the Committee in a bipartisan way, insisting that the Secret Six will not force partisan changes since it doesn't legislate. 

Ranking Member Wyden took aim at the all-GOP Secret Six, whose tax-reform deliberations are the subject of intense lobbying and speculation, attacking purported GOP plans on pass-through taxation, and expressing outrage about the latest attempt to jam through health care repeal. 

What are the dividing issues here? Are these divides so great that Republicans will have to rely on reconciliation to move on a $1.5 trillion tax cut? Or does Hatch think bipartisan accord is possible? Best, Dana

1. Areas of Discord

Frequently, bipartisan differences on corporate tax proposals were aired, particularly regarding:

•  Pass-Throughs: Republicans defended pass-throughs as a way to support small businesses and spur economic growth by increasing investment.  Sens. McCaskill and Wyden were quick to refute these claims, arguing that the benefits of a pass-through rate cut would accrue mostly to the top one percent of earners, as pass-through income accrues to wealthy owners of larger businesses. 

•  Deficit Financing: Democrats emphasized the likelihood that tax cuts would be deficit financed. Precious few ideas have surfaced from Republicans about how to compensate for this revenue loss. Sen. Carper expressed concerns about deficit-financed tax cuts, particularly those disproportionately benefiting the affluent.

•  Dynamic Scoring:  Conservatives continue to cite this fiscal impact metric to mollify those concerned about adding trillions to the debt, saying that tax cuts will spur growth and in turn increase revenue. Not many serious economists think the government would get more than a dime out of the best designed tax cut dollar. Carper and others today called this trickle-down theory, recalling how similar corporate tax cuts of the past have increased deficits without generating growth to make up for them.

Sens. Brown and Stabenow excoriated trickle-down economic policies.   Stabenow suggested ending the tax subsidies that the five largest oil companies have enjoyed for over a century. She said eliminating the business interest deduction would harm workers, particularly in small businesses. Sen. Cantwell focused on the most vulnerable, highlighting the precarious situation of the Low Income Housing Tax Credit Program, a program with major implications for investment spending patterns of developers.

2. Areas of Potential Accord

The possibility of bipartisan accord is low, but a few isolated points emerged around which members may find bipartisan agreement, if and only if rate reductions are modest:

•  International Competition – Sens. Carper and Warner conceded that it may make sense to lower the corporate rate a few percentage points to increase competitiveness with other nations 

•  Pass-Throughs – Sen. Cardin noted that S-corps in his state plead for moderate reductions on pass through rates. 

•  The Interest Deduction – Two witnesses who did not agree on much else, Scott Hodge and  Donald Marron, concurred on the prudence of eliminating the business-interest deduction as a revenue source to bring in $1.2 trillion in revenue over the budget window. 

3. Reconciliation Process

If the GOP tax plan is so fiscally reckless and inequitable that no Democrats sign on, it will have a better shot if Republicans pass a budget resolution with reconciliation instructions providing for tax changes. No tax changes can add to the deficit outside of a 10-year budget window under reconciliation. A budget resolution that complies means the GOP would need only a 50 + 1 majority to pass the legislation; a filibuster requiring 60 votes to overcome, would not available to Democrats. 

There are a few obstacles to shepherding legislation by way of reconciliation.  Per the Byrd Rule, Senators can raise a points of order against an extraneous provision in a budget bill. A provision could be considered extraneous if it:

•  changes provisions for social security,

•  doesn't change the overall spending or revenue,

•  only incidentally changes spending or revenue,

•  is outside the jurisdiction of committee(s) reporting it.

4. Time Is of the Essence

Republicans must work with alacrity to create a product that overcomes the above obstacles to reconciliation. The window for using budget reconciliation will soon close. The Senate parliamentarian, who oversees the chamber’s arcane procedural rules, decided last week that the current budget reconciliation privileges would expire at the end of September, the last day of this fiscal year. 

The GOP badly wants to get a tax bill done this year, so as not to boot it to 2018, an election year. But it will be nearly impossible for Republicans to get this done by the end of the fiscal year.  

Just tonight, Sen. Corker, a senior Republican on Senate Budget, told reporters that the budget resolution that could unlock the process for reconciliation could be marked up in the coming week or two, depending on whether the Senate is focused on health care.