Republicans hope a sweeping package to overhaul the U.S. tax code will be a boon for them in the 2018 midterm elections, betting that voters will appreciate higher take home pay despite the measure’s unpopularity with the public.
The rewrite of the tax code would be one of the party’s most significant achievements of President Donald Trump’s first year in office. It would also check off a number of other major priorities for the GOP, including zeroing out the penalty for not purchasing health insurance, a central plank of the 2010 health care law, and authorizing drilling in the Arctic National Wildlife Refuge. All of that could give Republicans momentum going into the midterms, which usually are brutal for the party in power.
While the legislation has polled unfavorably among voters, even critics concede approval rates could increase once individuals begin to see its impacts. Democrats hoped for the same when they passed the 2010 health care law, but then sustained massive electoral losses in that year’s midterm elections.
Despite Republicans’ belief that the overhaul is a winner for them and the economy, Democrats have portrayed it as a “scam” contrived by a Republican-controlled government that says it is looking out for the middle class but instead is beholden to the wealthy and powerful.
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“The GOP is delusional if they think this is something they’ll get to run on rather than defend,” David Bergstein, spokesman for the Democratic Senatorial Campaign Committee, said. “Bottom line: Republican control of Congress has proved disastrous for their campaign prospects next year.”
Late in the game, Republicans adjusted the measure to be less generous to corporations to increase benefits for individuals, even as some budget experts have labeled some of their moves as gimmicks that did nothing to produce long-term revenue.
“People are going to be surprised at the impact,” Jared Walczak, senior policy analyst at the conservative-leaning Tax Foundation, said in a recent interview. “Polling indicates that the majority of taxpayers expect to receive a tax increase, whereas calculations would suggest that the overwhelming majority of taxpayers would receive a tax cut.”
Asked about the measure’s unpopularity, Senate Majority Leader Mitch McConnell said he expects the tax overhaul to be a key theme in the midterms and “you have to make the argument.”
The tax effort had been a priority of his conference for a long time, he said, and was a clear point of agreement among congressional Republicans and the president.
More money, more support?
The Tax Foundation on Monday released a report that found the GOP tax bill would result in higher after-tax income in 2018 across every income bracket. That means individuals could see benefits relatively soon, depending on how quickly withholdings for paychecks take effect.
Republicans lawmakers say that will improve public opinion of the package.
“When people see in their own withholding what it means for them, it doesn’t matter what we say on either side,” Sen. Rob Portman of Ohio said. “The proof’s in the paycheck.”
Democrats argue that any small increase in after-tax income will be not enough to outweigh the other major effects of the legislation, which includes a drastic reduction of the corporate tax rate and reduced tax rates on the highest-income earners.
“Trickle-down economics hasn’t worked in the past, and I don’t think there is any evidence it will work in the future,” Democratic Policy and Communications Chairwoman Debbie Stabenow of Michigan said.
Much of the benefit of the bill will be felt in the first two years, with the individual tax reductions slowly phasing out before ending completely in 2025 — something Republicans say won’t happen because a future Congress will act to extend them. That, however, would also increase the overall impact on the deficit in the long run.
After an initial bump, several key provisions intended to bolster tax relief on the individual side of the ledger — like the increased child tax credit — will grow at a rate slower than inflation. That means Americans could see a reduced benefit from them over the next eight years unless Congress acts.
Not everyone will feel the positive effects of the bill. Those who don’t itemize their tax returns will likely profit from the enhanced standard deduction, while those who capitalize on popular tax incentives like the state and local tax deduction could see a tax increase.
The legislation, which many lawmakers admitted they did not exactly study intently, is a complicated piece of legislation, and it will require a lot of time to wade through the details.
Experts say it could take months for accountants, tax planners, small businesses and others to fully understand the impact, possibly delaying any uptick in support. And further information from the Treasury Department and the Internal Revenue Service will also be necessary.
“There is a large amount of regulations and guidance that has to come, and there will be a really big push by Treasury and IRS,” Marc Gerson, chairman of law firm Miller & Chevalier and former tax counsel to the House of Ways and Means Committee, said. “They are very sensitive to filing deadlines, and I think they are very sensitive to this bill being a success.”
The evolution of a bill
The measure wasn’t always as generous to individuals as its final iteration.
Earlier versions were much more favorable to multinational corporations. Some provisions were adjusted in the final bill to help pay for more individual tax cuts. The one-time fee to bring foreign money back to the United States, for example, was increased to 8 percent for illiquid funds and 15 percent for cash, an uptick of 3 percent for each from the House-passed bill.
But it took substantial pushback to make that happen.
Republican Sens. Marco Rubio of Florida and Mike Lee of Utah had to threaten to withhold their support for the bill to convince the tax conferees to increase the percentage of the enhanced $2,000 tax credit that will be refundable.
And some House Republicans had to pressure leadership to scale back a proposed repeal of the state and local tax deduction.
But even with the inclusion of a $10,000 cap on deductions for property and income — or sales — tax, the GOP could still face backlash in Democratic-leaning states like California, New York and New Jersey, where the number of individuals who take the SALT deduction is high.
Some Republican members from those states, like Reps. Darrell Issa of California and John J. Faso of New York, remained steadfast in their opposition for that reason. Even Rep. Rodney Frelinghuysen of New Jersey, who chairs the powerful Appropriations Committee, defied his own leadership to vote “no” when the House passed the conference report, 227-203 on Tuesday.
The rhetoric surrounding the bill, as well as its cost, could end up backfiring on Republicans.
Americans may see their paychecks increase as a result of smaller withholdings, but there are few outside analysts who say the tax package would directly increase wages — something the administration has been touting for months.
It could all rest on perception, as opposed to bottom lines, as voters head to the polls in 11 months.