Tax cut could unite Republicans, but already there are rifts

WASHINGTON — One week before they are set to unveil a sprawling overhaul of the federal tax code, Republicans struggled Wednesday with key parts of their plan, reigniting a fight over retirement savings and racing to cut a deal with lawmakers from high-tax states before a critical budget vote in the House on Thursday.

The challenges — and the dogged effort to resolve them on Capitol Hill — highlight the increased importance of the tax issue for a fractured Republican Party desperate for a legislative victory.

The prospect of a once-in-a-generation bill to cut taxes on businesses and individuals increasingly appears to be the best hope for a party anxious to find common ground and advance an effort that it has long championed as the pinnacle of Republican orthodoxy. It is a bit like having a baby to save a failing marriage.

But, like a crying newborn, the drafting of the bill is already costing party leaders sleep. That was evidenced Wednesday, when President Donald Trump and a top House Republican sparred over whether the plan would include sharp reductions in how much Americans might save, before taxes, in 401(k) accounts. Meanwhile, congressional leaders worked to forge a compromise on state and local tax deductions that could be necessary for the House to pass a budget measure that is needed to ensure the tax bill does not fall to a Democratic filibuster in the Senate.

Republicans from states where the state and local tax — or SALT — deduction is widely used were not making it easy.

"To me, the only way to stop this is to defeat the budget tomorrow," Rep. Peter T. King, R-N.Y., said Wednesday. "Once the budget passes, they hold all the cards."

"They're asking us to vote on the budget for a tax bill they haven't shown us on a promise that somehow it's going to be fair, even though they're talking about knocking out SALT," King said. "I don't see how anyone from those districts can vote for the budget under that, even if they promise us something."

The challenge facing Republicans is trying to mitigate the revenue-losing effects of cutting tax rates, particularly Trump's push to reduce the corporate rate to 20 percent from 35 percent, which the White House says is nonnegotiable. The budget resolution that is supposed to win final approval Thursday would allow for $1.5 trillion in additional deficits from tax cuts over the next decade, but the proposed tax cuts already revealed would cost well over $2 trillion.

Cutting rates unifies Republicans. Finding offsets, either by eliminating tax deductions or employing accounting tricks, divides them.

On Wednesday, Rep. Kevin Brady, R-Texas, chairman of the House Ways and Means Committee, acknowledged a long list of still-unresolved issues in the House's draft bill, which is to be released Nov. 1. They included where to place the income limits for various tax brackets, whether to maintain or cut tax rates on top earners, and the fate of several critical components of the revamped corporate code.

Two issues in dispute flared up publicly: changes to retirement savings and to individuals' ability to deduct their state and local taxes.

Brady seemed to defend a proposal to drastically lower the cap on tax-free retirement account contributions. He indicated that there were better ways to encourage the bulk of workers to save, even after Trump declared Monday that "there will be NO change to your 401(k)."

"Right now, we are not a nation of savers," Brady said at a breakfast convened by The Christian Science Monitor, adding: "We think in tax reform we can create incentives for Americans to save more and save sooner."

Privately, though, a member of House leadership assured lobbyists Wednesday that retirement account limits would not be touched in the draft bill.

House Republicans have been considering sharply reducing the amount that Americans are allowed to save, before taxes, in 401(k) retirement plans to $2,400 a year, from the current $18,000, or $24,000 for workers who are older than 50. Lowering the cap would be unlikely to encourage more savings, research suggests, but it would amount to an accounting maneuver that would help Republicans make up some of the lost revenue from large cuts to business tax rates. Money in such retirement accounts is taxed when it is withdrawn. By taxing most deposits immediately, Republicans would push future tax revenue into the 10-year budget window they are now working in.

Trump was not giving up. He told reporters that he wanted to "quickly" end speculation because "401(k)s, to me, are very important." Asked whether he might negotiate over the changes, he replied, "maybe we'll use it as negotiating," then added that Brady knew how critical the retirement accounts were.

Rep. David Schweikert, R-Ariz., and a member of the Ways and Means Committee, said the issue of tax rules for retirement savings was far more complicated than Trump's declaration.

"We're the ones writing the bill," Schweikert said. "At some point, he gets to agree or veto. And ultimately, we have to make the math work."

Brady also said Republican leaders were seeking a deal on the state and local tax deduction, which they had targeted for elimination. Brady seemed to suggest the deal could focus on maintaining deductions for property taxes, but not for income or sales taxes.

That would reduce the savings from eliminating the deduction to about $1.3 trillion over 10 years, from an estimated $1.9 trillion over 10 years for eliminating the deduction entirely, according to the nonpartisan Tax Foundation. But it may be the key to passing the budget resolution, which appears in jeopardy if Republicans from high-tax states are not pacified.

A protracted fight over taxes would be particularly rough on a Republican Party already fraying on the edges. Trump is feuding with two Republican senators who plan to retire, Jeff Flake of Arizona and Bob Corker of Tennessee, as part of a growing rift between old-guard conservatives and Trump's new-wave populists in Washington.

In the face of those divides, Republican leaders aim to deliver a completed tax bill to Trump's desk by Christmas. The stakes are rising by the day, as Republican donors and voters worry about the party advancing the legislative priorities it has long espoused. A failure on taxes, after the Republicans did not succeed in repealing the Affordable Care Act, could jeopardize its congressional majorities in the 2018 midterms.

"The Republicans are finally figuring out if they don't pass this, the political consequences are going to be catastrophic," said Stephen Moore, a senior fellow at the Heritage Foundation who is advising Trump on tax policy. "The attitude of the conservative base is, 'If they don't do this, they're worthless.'"

Finding common ground will get only more difficult as the effects of specific tax changes on constituents become clearer.

Polling suggests Republican voters subscribe less to the tax cut philosophy than their elected representatives. A report this week from the Pew Research Center, based on polling in August, found that "Republicans were not especially unified in support of tax cuts," said Carroll Doherty, the center's director of political research.

A September poll from online survey company SurveyMonkey found that three-quarters of Republicans and Republican-leaning independents approve of cutting corporate taxes, which is the centerpiece of the tax plan. But that poll, and a related one in October, found a divide: Republican voters who approve of Trump were far more likely to approve of corporate tax cuts and to say that they believe their individual taxes will fall next year than those who have turned against the president.

The divisions in the party do not, at this point, appear to imperil the tax-cutting effort. Corker is widely viewed as having prevailed in pushing for specific limits on the cost of any tax cuts in the Republican budget. And Flake — diatribe Tuesday aside — is still viewed as a likely "yes" on whatever tax bill makes it to the Senate floor, provided it survives several weeks of political kicking and screaming.