Republicans seeking to overhaul the federal tax code faced new head winds Wednesday, including a new $74 billion hole in their plan and political fallout from GOP losses in Tuesday's state and local elections.
Democrats won gubernatorial races in New Jersey and Virginia on Tuesday and also stood on the cusp of winning control of the Virginia House of Delegates – a setback that many are calling a wake-up call to the GOP.
But top Republican tax writers split on Wednesday over exactly what signal voters sent.
Senate Finance Committee Chairman Orrin G. Hatch (R., Utah) said the losses could shape the tax bill going forward.
"I mean, it could, because the elections went against the Republicans," Hatch said in a brief morning interview.
Asked if he is feeling pressure to tilt the tax plan more toward the middle class, Hatch said, "I think we've been moving that way anyway."
But House Speaker Paul D. Ryan (R., Wis.) said that he intended to move full steam ahead on a House plan that would cut taxes by $1.5 trillion over 10 years but deliver the bulk of the cuts to corporations and the wealthy.
"It doesn't change my reading of the current moment," Ryan said of the elections during a morning event hosted by the Washington Examiner. "It just emphasizes my reading of the current moment, which is: We have a promise to keep, and we have to get on with keeping our promise."
"I fundamentally believe, when we deliver on comprehensive tax reform and tax relief … I think that's going to bear fruit politically, but most importantly it's going to help people," he added.
The initial version of the House tax bill delivered only 21 percent of its benefits to individuals, including the middle class, according to an analysis by the nonpartisan Joint Committee on Taxation. Four-fifths of the bill's aggregate tax cut benefited corporations and business owners with family earnings of more than $260,000 a year, as well as wealthy individuals who would no longer be subject to the federal estate tax.
On Wednesday, the party faced a new challenge that could force it to take some of the bill's tax benefits away from businesses, individuals or both.
Changes made to the bill since its introduction mean it would now add $1.574 trillion to the deficit over a decade, according to the JCT. That's $74 billion over the maximum amount of debt a GOP bill can add if Republicans want to take advantage of special rules that would allow them to pass the bill through the Senate with 50 votes – a must given that Republicans hold only 52 Senate seats and Democrats have signaled broad opposition to the bill.
Changes made to the House bill since it was released last week have largely benefited corporations at the expense of individuals. While a change on Monday restored a $3.2 billion middle-class provision allowing those enrolled in employer-sponsored dependent-care savings plans to deduct up to $5,000 from their taxes, a revision on Friday rolled back individual tax cuts by nearly $82 billion by indexing individual tax parameters to a different measure of inflation that tends to grow more slowly.
Another amendment adopted Monday largely reversed a 20 percent excise tax levied on certain transactions between subsidiaries of multinational corporations. That tax, intended to prevent companies from shifting profits to lower-tax overseas affiliates, had generated strong resistance from powerful business interests.
The Joint Committee on Taxation found in an analysis issued late Tuesday that the reversal of the excise tax would cut revenue by $147.5 billion over a decade. A tweak to another corporate tax, the JCT found, would cut another $9.6 billion in revenue.
Republicans argue that the business tax cuts will drive economic growth, adding jobs and pushing up wages, thus creating benefits for Americans at large. But they have had to battle analyses showing that middle-class taxpayers would reap only a fraction of the bill's direct benefits, and that some of those taxpayers – such those claiming a deduction for medical expenses that stands to be repealed – would actually face a tax increase.
And while GOP leaders argue that the bill will mostly pay for itself by increasing growth, that is based on speculative analyses that congressional scorekeepers have not endorsed.
The Congressional Budget Office estimated Wednesday that the bill would add $1.67 trillion to the debt by 2027 due to the revenue cuts in the bill as well the increased cost of interest payments to federal bondholders. The tax bill, the CBO said, would increase the debt in 2027 from 91.2 percent of the gross domestic product to 97.1 percent.
More than half of the overall tax cut, under the JCT's number, now flows to corporations, with another 32 percent benefiting owners of businesses that pass their earnings to the owners to be taxed as individual income. Individuals would get 16 percent of the aggregate tax cut.
Democrats pounced on the election results Wednesday and warned of a middle-class backlash that would only grow if Republicans continued their tax push.
"It should be a giant stop sign for the tax bill," Senate Minority Leader Charles E. Schumer (D., N.Y.) told reporters. "Want to pass this tax bill? Want to hurt the suburbs? Make our day."
Senate Republicans plan to release their own version of the bill Thursday, which is expected to differ significantly from the House bill. It could delay a planned cut in the corporate tax rate, for instance, but also eliminate a popular individual deduction for state and local taxes.
Members of the House Ways and Means Committee entered their third day Wednesday debating and seeking to amend the tax bill. Only one Republican amendment has been adopted; the committee voted down nine Democratic amendments that sought to highlight the bill's impact on the middle class and on the federal budget deficit.
Rep. Richard E. Neal (D., Mass.), the ranking Democrat on the panel, said his party would continue offering amendments Wednesday "till the last dog barks."
Neal said Tuesday's result "casts a shadow" over the GOP tax bill that the party will be hard-pressed to escape.
"You can't say this is middle-class tax relief and then say the priority is to repeal the estate tax, the priority is to repeal (the alternative minimum tax), the priority is to take away student interest deductions," he said. "Those resonate with middle class people."