The push by Republicans to reform the US tax code was thrown into turmoil on Thursday evening as new rulings on the fiscal implications of a Senate bill sent party leaders scrambling to rework their legislation.
Republicans in the Senate had seemed within reach of passing landmark tax legislation earlier in the day, buoyed by supportive comments on the bill from John McCain, the Arizona senator, who had previously refused to reveal his hand.
But their attempt to rush tax reform through the chamber suffered a double blow when one congressional watchdog said the plan would raise less revenue than expected and another barred the use of a vital policy mechanism aimed at curbing the risk of spiralling deficits.
The developments raised a potential threat to US corporations, which have been promised a cut in their tax rate from 35 per cent to 20 per cent that could now be in jeopardy.
On Thursday night Senate leaders were engaged in an eleventh-hour hunt for revisions that would reduce the generosity of tax cuts without alienating key lawmakers and constituencies. Mitch McConnell, the Senate majority leader, eventually said lawmakers would resume voting at 11am on Friday morning.
The last-minute bout of legislative improvisation underscored the risks GOP lawmakers have been running by attempting to speed hugely complex tax legislation through Congress on the back of sparse debate and no Democratic party backing.
But Republican leaders view their promised tax cuts, which are at the heart of the biggest planned overhaul of the tax code since 1986, as vital to their chances of retaining control of Congress in midterm elections next year. President Donald Trump, who has insisted on lower rates for businesses, has put lawmakers under intense pressure to pass a bill this year.
For the GOP, the day started on a bright note as Mr McCain added to the momentum behind the Republican tax plan by saying he would support it. “I believe this legislation, though far from perfect, would enhance American competitiveness, boost the economy, and provide long overdue tax relief for middle class families,” the senator said.
The backing from the senator, who helped kill his party’s attempt to repeal Obamacare earlier this year, brought the GOP closer to the 50 votes it needs to get its sweeping plan through the Senate.
Mr McConnell sounded confident, declaring “we’re heading down the home stretch” before predicting a vote on a finalised bill on Thursday evening or Friday.
However the first blow to Republican leaders was struck when the Joint Committee on Taxation said the bill would not fully pay for itself via higher growth and would leave the government facing a revenue loss of about $1tn over 10 years. It undermined months of repeated claims by Treasury secretary Steven Mnuchin that the tax cuts would pay for themselves — arguments he has never substantiated with detailed economic analysis.
Then the Senate parliamentarian, an independent official who polices compliance with legislative rules, said Republicans could not use a so-called trigger mechanism that deficit hawks wanted to deploy to reverse some tax cuts if revenues fell short.
The parliamentarian’s decision left the party contemplating options including future automatic rises in rates of levies including the corporate tax to narrow the deficit regardless of whether revenues meet expectations.
Fiscal conservatives led by Bob Corker of Tennessee have demanded that the bill does not blow out the deficit, and their views will be critical in determining whether the Republicans can muster the necessary votes to move the legislation out of their chamber.
The Joint Committee on Taxation found that the reforms would raise gross domestic product by an average 0.8 per cent over the decade-long period. The extra growth would, when debt costs are factored in, reduce the deficit by $407bn over the period.
However, that is nowhere near enough to counter the lost revenues resulting from measures including the planned reduction in the headline corporate tax rate.
Lawmakers will now engage in intensive dialogue as they seek legislative fixes that can garner enough support to move the legislation onwards. The legislation would then need to be merged with a separate bill from the House of Representatives. Paul Ryan, speaker of the House, said: "I'm very confident that we can get this done this year."
The day’s developments could trigger a setback to markets after shares enjoyed a day of robust gains as investors grew more optimistic that a tax cut would be passed. The Dow Jones Industrial Average closed above 24,000 points for the first time.
A Goldman Sachs index that measures the performance of a basket of high-tax US companies — that would benefit disproportionately from the corporate tax cuts promised by the Trump administration — gained strongly for a third day running.
Financial Times
