While comprehensive tax reform seems inevitable to many in the 115th Congress, how it will happen and what it will look like remain a mystery. We have breadcrumbs leading us to the path that includes the method and key provisions, although history suggests that “comprehensive” tax reform–which means significantly altering the tax code in addition to changing tax rates–is no slam-dunk.

Comprehensive tax reform is difficult–evidenced by the fact that it has only happened twice in more than 100 years. It’s been 31 years since the most recent comprehensive reform, but now appears likely, especially since the three key figures in the decision-making process (House Speaker Paul Ryan, R-Wis., Senate Majority Leader Mitch McConnell, R-Ky., and President Donald Trump) are on record supporting tax reform and likely have the votes to do it.

As always, the devil is in the details.

Big-Picture Tax Reform

While much remains unknown about the final tax reform product, Trump’s statements and the Ryan-led House Republican tax reform blueprint published last summer provide some basics. Trump and Ryan endorsed across-the-board cuts in individual income tax rates, with both advocating a plan to reduce the existing seven individual tax rates to three. They also want to abolish the estate tax, which applies to estates worth more than $5.45 million for individuals and $10.9 million for couples.

There is significant momentum for what’s called “border adjustment tax”–a plan to disallow tax deductions for the cost of imports and exclude revenue from exports from taxable income. The border adjustment tax would raise tax revenue and increase the value of American exports–a change that would also increase the price of imported goods. 

The focus on Trump’s tax reform proposal and the House blueprint brings into question the status of the corporate integration plan that Sen. Orrin Hatch has championed for the past few years. Hatch’s plan would eliminate the double taxation of corporate income and the senator said he wants to see how it can fit in the tax reform debate–which implies that it’s possible it doesn’t.

Among the landmines that tax reformers must navigate is dynamic, or macroeconomic, scoring–which attempts to quantify the change in the overall economy that a bill would have and compare it to the cost of the bill. In other words, what’s the true cost of a change? Some tax reform provisions floated during the past year have mixed results in dynamic scoring, adding another layer of complexity to an already complicated scoring system. Ryan embraces dynamic scoring and the Republican argument is that a tax overhaul will boost the long-term growth of the American economy, a claim that some economists doubt–including Douglas Elmendorf, former director of the Congressional Budget Office. Dynamic scoring could play an important role, at least in how the Republican-led reforms are sold to the public. House Ways and Means Committee Chairman Kevin Brady, R-Texas, and McConnell have expressed their desire for tax reform that is revenue neutral on a dynamic or macroeconomic basis.

Weeks or Months?

The provisions in any potential tax reform proposal aren’t the only variables. With Trump assuming office and his rhetorical emphasis on quick action during the presidential campaign, the question of when tax reform will be done is an important and presumably quickly evolving one. In mid-December, incoming White House Chief of Staff Reince Priebus said the GOP would “have a small tax reform package and then a bigger tax reform package at the end of April.”

Brady said he planned to have a tax bill ready for Trump in his first 100 days in office–which means by the last week of April. But Hatch, chairman of the Senate Finance Committee, has said July is a more reasonable time frame. The fact that the last major overhaul–in 1986–took more than a year to pass emphasizes the complexity of a comprehensive reform in three months.

However, reforming the tax code through budget reconciliation makes it easier.

Budget Reconciliation

If and when tax reform passes, it could be through budget reconciliation, a process that allows expedited consideration of certain legislation which isn’t subject to Senate filibuster. That means a bill can pass with a simple majority, rather than the 60 percent needed to stop a filibuster. Reconciliation can be used for legislation that changes spending, revenues and the federal debt limit. In December, McConnell said Senate Republicans plan to use budget reconciliation to overhaul taxes. 

Senate rules say that the Senate can consider each of the three basic subjects (spending, revenue or debt limit) in one reconciliation bill per year. A key consideration: If one bill affects both spending and revenue, for instance, a second bill can only impact the debt limit. Rules limit the scope of amendments and prohibit the use of reconciliation for provisions that would increase the deficit beyond 10 years.

Republicans favor budget reconciliation because they can accomplish their goals without help from Democrats and it wouldn’t be the first time a party has used it for that reason. There have been 20 budget reconciliation bills since the first one in 1980. Among the legislation passed through budget reconciliation were major spending cuts in 1981, welfare reform in 1996 and the George W. Bush tax cuts of 2001 and 2003.

Budget reconciliation was also used to pass the Affordable Care Act in 2010–and McConnell said the same process will be used to repeal significant parts of President Barack Obama’s signature legislation. Tax reform is expected to be the second step in the budget reconciliation dance of 2017, but then there’s this: The Senate Finance Committee has historically worked toward bipartisan solutions and Hatch and Ron Wyden, D-Ore., presumably still want that.

Because reconciliation legislation can’t increase the deficit beyond the first 10 years–and the likelihood of a multiyear transition period in comprehensive tax reform would eat up part of that decade–Senate leaders could also go for a more traditional approach: getting eight Democrats to vote for reform. With 10 Democratic senators facing reelection in 2018 in states that Trump won, that’s not impossible and it would result in tax reform with a much longer lifespan.

In short: budget reconciliation is likely, but not guaranteed, for tax reform legislation.

History of Tax Reform

While reconciliation makes tax reform easier, many attempts to significantly reform the tax code fell short and there’s no guarantee that the 115th Congress will succeed in producing major reforms. There have been two occasions of major comprehensive tax reform since the present federal income tax was signed into law by President Woodrow Wilson in 1913. Other efforts gained significant steam before falling short.

The Internal Revenue Act of 1954, the first comprehensive reform, came after two years of work involving the Treasury Department, Congressional committees and others and was highlighted by a major codification, including thousands of technical changes to the tax laws. The primary effect was the modernization of the tax code, creating the Internal Revenue Code of 1954.

The Revenue Act of 1964 began as an effort at comprehensive reform, backed by Treasury and the House Ways and Means Committee with primary goals of a reduction in taxes and the closure of numerous loopholes. The first objective was largely successful–there was a reduction in rates for individuals and corporations. The second didn’t succeed. The minimum standard deduction was added, along with other changes, but most loophole-closing provisions failed.

In 1978, President Jimmy Carter and Congress again looked at comprehensive reform, hoping to reduce the tax burden on low- and middle-income families and shift it to the wealthy and corporations. Carter wanted to eliminate hundreds of loopholes and greatly reduce rates, but business lobbyists pushed hard and after several months, the final legislation included a tax cut that tilted toward upper-income earners and didn’t end most tax shelters (although it added the historic tax credit [HTC] to the federal code).

Six years later came the second comprehensive change, the Tax Reform Act of 1986. It was two year bipartisan legislative marathon that ultimately simplified the tax code, broadened the tax base and eliminated many shelters. It also created the low-income housing tax credit (LIHTC) and the updated Internal Revenue Code of 1986.

Where Do Tax Credits Fit In?

Assuming comprehensive tax reform takes place, the status of the LIHTC, HTC, new markets tax credit (NMTC) and renewable energy investment tax credit (ITC) and production tax credit (PTC) are unclear.

Steve Mnuchin, Trump’s nominee for Treasury secretary, said tax cuts for those in the highest income levels could be offset by a reduction in the deductions they can claim. The Republican blueprint was silent on tax credits, leading to wide speculation about what that means.

There was optimism in the affordable housing world when word leaked out in mid-December that the Republicans on the House Ways and Means Committee had informally voted to retain the low-income housing tax credit during tax reform. However there is a significant gap between a December informal, nonpublic vote behind closed doors during a member retreat to support a provision and what that looks like when legislation is completed months later.

Even if all the tax credits survive (which is very possible), lowering the individual and corporate rates has differing effects on various tax credits. A discussion of how tax reform could affect the LIHTC equity market can be found on our blog. The blog also has analysis on the HTC and NMTC, and, shortly, the ITC and PTC.

2018 and Beyond

Of course, even if comprehensive tax reform goes through and includes either a dramatic reduction in the tax rate or the reduction or elimination of some tax credit programs, the results will not be seen immediately. The Tax Reform Act of 1986, for instance, included transition rules for two to four years. Former House Ways and Means Committee Chairman David Camp’s tax reform legislation had five years of transition rules. Tax reform legislation in 2017 would likely have a similar timeline, meaning that even if there are dramatic changes, the full effect of them may not be felt for a few years.

There are a lot of moving pieces in tax reform. Budget reconciliation makes it easier, but history suggests it will be difficult. The idea of “comprehensive tax reform” is like the idea of a great meal: Many people like it, everyone has a different idea of how it looks and few can execute the recipe.