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The chances for fundamental tax reform this year depend heavily on either a) some sort of “grand bargain” being reached on the budget or b) the endgame of a debt-ceiling fight. (Indeed, the first may well be linked to the second.) As I wrote earlier today, the first option is unlikely. And the clock is ticking on the second one as the sharply declining fiscal deficit has pushed back the debt limit. Again, ace political analyst Chris Krueger of Washington Research Group:
The debt ceiling is the catalyst for tax reform/deficit reduction and each month you extend the discussion, you lessen the timeframe (and likelihood) of meaningful tax reform. … With a tax reform process via the debt ceiling now likely out the window, the debt ceiling showdown this autumn does not have a logical exit strategy. The only realistic scenario in the discussion is to link a debt ceiling raise to a Keystone XL pipeline approval, though that is far from certain.
So don’t expect tax reform this year. And budget expert Stan Collender makes a compelling case that we won’t see tax reform for the rest of the decade. His take: Unlike in 1986, the last time major tax reform passed, Democrats will insist any deal raise revenue. (Democrats will also insist on that in exchange for entitlement reform.) And given that requirement:
House and Senate Republicans cannot possibly agree to a tax increase before the 2016 presidential election without seriously, and probably fatally, hurting their political prospects. …
The deficit is expected to continue to fall both in nominal terms and as a percent of GDP between now and 2017. That will make it even harder for Republicans to justify a tax increase deal to their base.
As the projected deficit starts to rise again after 2017, the pressure to do something about it will increase. This very conveniently will begin to happen after the 2016 presidential and congressional elections are over.
That’s when the real tax reform clock will start to run. … the process is likely to take at least two-plus years from that point. That makes 2019 the earliest tax reform is likely to be enacted with implementation for some, but not all of the changes, starting in 2020.
My one minor quibble: If the deficit continues to decline, doesn’t that hurt the Democrat fiscal argument for making tax reform revenue positive, a tax hike? And if the economy continues in slow-growth mode, wouldn’t the Republican case for cutting taxes, particularly on the corporate side, strengthen even if the CBO would score it as a revenue loser? Anyway, Collender and Krueger are probably correct tax reform isn’t going anywhere this year or this presidential term.
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