Nearly seven months into the 115th Congress–after multiple attempts to repeal the Affordable Care Act–the so-called “Big Six” unveiled their joint statement on comprehensive tax reform in midsummer, setting up a potentially big autumn.

The Big Six statement July 27 contained 641 words about the overhaul of the 4,000-page tax code. The group announced the promise of ‘unprecedented expensing,’ a timeline for legislation and abandonment of the border-adjustment tax (BAT, but offered few other specifics.

With health care legislation stalled, tax reform finally moved to center stage.

The Big Six–House Speaker Paul Ryan, R-Wis., House Ways and Means Chairman Kevin Brady, R-Texas, Senate Majority Leader Mitch McConnell, R-Ky., Senate Finance Committee Chairman Orrin Hatch, R-Utah, White House National Economic Council (NEC) Director Gary Cohn and Treasury Secretary Steven Mnuchin–said the House Ways and Means Committee and Senate Finance Committee would “take the lead and begin producing legislation for the president to sign.” Their statement signaled the end of the pursuit of the BAT, which would effectively tax imports at 20 percent and encourage companies to conduct business and invest domestically, but was opposed by retail industry groups and many legislators.

However, the BAT proposal could have created more than $1 trillion in revenue, which would have provided significant revenue to pay for lower tax rates. The Big Six announcement also said the process would follow “regular order,” in which legislation is initially developed in Congressional committees, rather than having legislation first being considered directly on the Senate floor, as the Obamacare repeal and replace legislation was treated.

The statement made clear it was the intent of Congressional leadership that the process would hit the ground running in September, with an extremely optimistic goal of getting legislation to the president in November. Republicans seemed eager to jump into tax reform. 

What’s the Plan?

Assuming the Big Six statement is the foundation of the tax reform plan, it set some key principles: a lower rate for all American businesses, “unprecedented capital expensing,” a push to bring back overseas jobs and profits, and permanence.

And, again, no BAT.

While the corporate (and individual) tax rates have been the headline-grabbers, a proposal to allow companies to fully deduct capital spending from income immediately (rather than over years) was not specifically included. The statement called for “unprecedented” expensing, but gave no details on the extent and timing. Congress will likely consider shortening the depreciable life of residential real estate from 27.5 years to 20 years.

The corporate rate question is, as always, a focus. President Donald Trump still desires a 15 percent business rate–a massive drop from the current 35 percent–although many observers consider that the opening gambit in a negotiation. On the opposite end is Hatch, who told Reuters it would be “kind of miraculous if we could get it down to 25 percent or less.” 

One thing is sure: The removal of BAT from tax reform removed a major impediment to tax reform consensus but made it more difficult to finish.

BAT’s Impact

BAT was a focus of Ryan since the release of the “A Better Way” tax reform blueprint last summer. The addition of more than $1 trillion in revenue enabled Republicans to propose lowering the corporate rate to 20 percent and maintain revenue neutrality, which is crucial in budget reconciliation (see below).

How much an impact BAT’s removal makes is debatable. Scott Greenberg, a senior analyst at the Tax Foundation, told Bloomberg that the lowest the corporate rate could go and remain revenue-neutral without BAT is 27 percent. Others expect a 26 to 28 percent range. But the Big Six may go for lower. On Bloomberg TV, Cohn suggested a rate of 23 percent is possible.

Budget Reconciliation or Consensus?

The goal of revenue neutrality ties back a fundamental question hanging over talk of tax reform, specifically, whether tax reform will be pursued through a bipartisan approach (requiring 60 Senate votes) or budget reconciliation, which allows no Senate filibusters and requires only a majority vote to pass. Tax cuts made through the budget-reconciliation process can’t increase the deficit beyond a 10-year window, a requirement that forced President George W. Bush to make the tax rate cuts in his 2001 and 2003 reconciliation legislation expire after 10 years. That’s why BAT was so significant–by raising a significant amount of revenue, it helps allow tax rate cuts to be permanent in reconciliation legislation.

Before budget-reconciliation is attempted, though, a budget resolution must be passed, and we’re still waiting for resolution on the fiscal year 2018 budget. There is a slim possibility that the rules created for the attempt to repeal the Affordable Care Act could stay in place to cover tax reform. 

One potential twist in budget reconciliation relates to the requirement that changes can’t increase the deficit outside of a 10-year budget window. That budget window isn’t set in stone: the Congressional Budget Office (CBO), which set that standard, serves at the pleasure of Congress and Sen. Pat Toomey, R-Pa., has discussed having the CBO switch to a 15-, 20- or 25-year window over which tax legislation would be evaluated under budget reconciliation.

On the other hand, there was some thought of a bipartisan approach. In early August that became unlikely when McConnell vowed to use budget reconciliation for tax reform in response to a letter sent by 45 Democrat and Independent senators. McConnell said the letter made it clear that Democrats wouldn’t work with Republicans on tax reform priorities.

Threat to Tax Credits?

Without BAT and with revenue-neutrality requirements in place, Congress must find other ways to offset the cost of tax cuts–a prospect that rightly concerns many in the tax credit community.

Two means to help achieve revenue neutrality being considered relate to how tax changes are scored and how the revenue baseline is determined.

Regarding scoring, Congress is considering using a “macroeconomic” model to assess the effect of tax changes.  In broad terms, a macroeconomic scoring model estimates the effect fiscal policy changes are expected to have on the overall economy, and incorporates those effects in projecting future tax collections.  For instance, an optimistic view of some changes in tax reform–such as more rapid capital expensing–is that the economy will grow more quickly, companies will have higher taxable income and tax revenues will increase.

The revenue baseline is what an altered tax code is measured against to determine revenue neutrality–and Congress can choose which baseline it uses. A “current policy” baseline assumes that tax provisions scheduled to expire under current law don’t expire, rather, they are assumed to be permanent.  This assumption lowers the estimate of future tax collections. A lower estimate of future tax collections means an altered tax code doesn’t have to generate as much revenue to be revenue neutral. 
Combining these two budgetary scoring provisions could help provide well more than $1 trillion to offset other tax code changes.  

Beyond these two scoring items, more traditional ways are being considered to generate revenue. They include eliminating or limiting state and local tax deductions, limiting interest deductibility, deeming overseas income as being repatriated to the U.S. (albeit at a one-time lower corporate tax rate), taxing income from carried interests at ordinary income tax rates and generating one-time tax by mandating some or all individual retirement accounts (IRAs) convert into Roth IRAs. 

There is concern that some members of Congress may look to modifying or eliminating tax credits as another way to offset the cost of tax cuts and simplify the tax code at the same time–and those in the historic tax credit (HTC) and low-income housing tax credit (LIHTC) communities are particularly concerned. It bears noting that former House Ways and Means Committee Chairman David Camp, R-Mich., proposed to eliminate the HTC and modify the LIHTC in his tax reform legislation. The HTC and LIHTC, because they are a permanent part of the tax code, are a richer source of potential revenue than new markets tax credit (NMTC) and even the renewable energy production tax credit (PTC) and investment tax credit (ITC), all three of which are temporary or phasing down. 

To be fair, none of the current members of the tax-writing committees have explicitly suggested this, but supporters of the HTC and LIHTC are wisely vigorously advocating for their preservation and enhancement.

Ambitious Schedule

Days after the Big Six statement, Marc Short, the White House’s top liaison to Congress, said he expects legislative work on tax reform to begin “right away” when Congress returns after Labor Day. He expects the House Ways and Means Committee and the Senate Finance Committee to hold hearings and markups on a proposed bill in early September, then suggested the House could pass a tax reform bill in October and the Senate could follow in November.

Republican leaders, however, are expected to take some time to massage the details of tax reform before it begins the markup process. With so many moving pieces, they hope to have consensus before the bill is introduced.  Furthermore, September is also packed with other must-pass issues, such as legislation to address the debt limit by Sept. 29, fund the government past Sept. 30, and reauthorize the National Flood Insurance Program and Federal Aviation Administration by Sept. 30.

Ryan told his hometown newspaper that he expects a bill to be considered in September and passed by the House before the end of the year. Mnuchin also said tax reform would be completed in 2017.

As a reminder, the last major tax reform in 1986 was the result of more than two years’ work.

Political Implications

The failure of the Affordable Care Act repeal-and-replace efforts added to the pressure for Republicans to get something big done. Hanging over all tax reform discussion is the fact that 2018 is a midterm election year, bringing significant pressure to finish tax reform by the end of December so it doesn’t carry over into an election year.

Democrats have a chance to take control of the House, where they have 46 fewer seats than the Republicans. While the Senate margin is smaller, Democrats are playing defense–with 23 of the 33 seats up for election held by Democrats and two others held by Independents who generally caucus with Democrats. Ten Democrats are running in states that Trump won in 2016 and Republicans may try to get some of them to cross the aisle on tax reform.

What Will Happen?

After a roller-coaster year of changes in Washington, D.C., tax reform is finally up to bat this fall, but the options and the likelihood of success varies on who you ask and what just happened.

Many top Republicans in midsummer estimated the likelihood of GOP agreement on tax reform–necessary to proceed with a budget reconciliation plan–at about 90 percent. Others aren’t so sure. But even if there is agreement on that 90 percent, the remaining 10 percent difference could be enough to derail revenue neutral tax reform and lead Congress to adopt temporary tax rate cuts.

But assuming it passes (which is no lock), how will it look?

The coming months will provide the answer to a question that has been asked since Trump and the Republicans won power last November: Will tax reform in 2017 look more like the comprehensive reform of 1986 or will it be temporary tax cuts–or something else entirely?

Stay tuned.