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Tax Reform Is an Even Bigger Challenge than Repeal

The House GOP health plan has failed, and the reaction of many congressional Republicans, including President Donald Trump, was to switch issues and change the focus to tax reform. Treasury Secretary Steve Mnuchin maintains a positive attitude about their chances of success, as he claims that tax reform is simpler to handle than the far “more complicated issue” of health care. To say that this is an overly optimistic viewpoint would be a massive understatement.

Several obstacles to a simple process of tax reform exist, beginning with the fact that Republicans can’t even agree on their revenue goals. Speaker Paul Ryan is pushing for R, maintaining the status quo; President Trump evidently wants tax cuts, since his talk of tax reform always focuses on lower taxes. Without an agreement on revenues after this tax reform, there’s no way any tax reform initiative can even get off the ground.

Congress is certainly divided over health care, but it’s a whole different ballgame when it comes to taxes. Divides in health care tend to be drawn over partisan lines. With taxes, splits are often regional. A member could vote one way because of how energy taxes would affect his region, or because of the views of a large employer in his area. While energy may not ultimately be the foremost topic of tax reform that is discussed, many believe that the price of electricity is a crucial issue that needs reform and that tax reform and domestic energy policies go hand in hand.

One of the many aspects of tax reform needing to be addressed is Section 179D of the Internal Revenue Code, a tax incentive for commercial buildings that reduces their energy and power costs. Originally enacted in 2005 as part of the Energy Policy Act of 2005 (EPAct), the provision allows for a deduction of up to $1.80 per square foot when a building meets certain energy and power requirements for efficiency in usage. For buildings meeting only part of the requirements, there is a separate provision that offers a lesser deduction.

Since its 2005 enactment, Section 179D has been renewed several times but has yet to become a permanent part of the tax code. As it currently stands, the deduction expired on December 31, 2016, and has yet to be renewed. However, three bills have been proposed in Congress that would potentially either extend and/or add to the deductions that 179D allows. While none of these would offer a permanent solution, at the very least the deductions could continue for both buildings that are new and those already built. For the time being, the 179D deduction can still be claimed as is for completed buildings.

The fact that the most recent tax code rewrite was over three decades ago doesn’t help matters, either. Experts predict that overall tax reform will bring benefits as well as downfalls for some. If Republicans go with a revenue-neutral tax reform plan, there are going to be parties who come out ahead and parties who end up paying more. But if the energy sector has a solid tax code in place, it will help the American economy by supporting domestic energy producers, allowing the US to become even more independent in the electricity realm and lowering consumer costs domestically. A permanent set of tax codes for the energy sector could even stabilize prices, allowing the US economy to grow and promoting the inflow of capital for businesses, likely even creating new jobs in the process.

One of the reasons Republicans were trying to pass their health care bill before handling tax reform was because it would have saved $1 trillion, so they’d already be playing with house money. Without $1 trillion in savings, it makes the process of passing revenue-neutral tax reform harder to get past the Congressional Budget Office and the Joint Committee.

Taxes also affect far more people than healthcare. There are about 324-million Americans, and approximately two-thirds of them already have health insurance provided by employers, Medicare, or other government programs. While healthcare reform could affect them, it would be over the long term or indirectly. The people directly affected would be uninsured Americans, Americans on Medicaid, and people that purchase insurance coverage on the individual market, which includes about 100 million people. While that’s still a large number, health care reform doesn’t affect everybody, while tax reform does.

Finally, there’s the issue of Trump’s approval rating. To push any tax reform bill through, Trump is going to need people’s support, and his approval rating is just getting lower and lower. No president in modern history has come into office with a lower approval rating than Trump. Then it dropped with the investigations about possible Russian interference in the Presidential Election and sank even further with the failure of the AHCA. It’s unlikely that Trump could get his tax reform passed unless his approval rating reverses course.
A major tax cut is a possibility, at least for this year, but it will come at a cost. Cutting taxes will only increase the national debt, so it becomes a matter of how much money the moderate Republicans in the Senate allow to get stacked on that debt. As far as tax reform goes, the many challenges in its way means there’s a slim-at-best chance of that occurring. And considering how many Republicans are underestimating the challenge of tax reform, particularly compared to healthcare, they could be in for an unpleasant surprise.