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Divisions threaten Trump’s hope of winning his next big legislative battle: Taxes

After Republicans withdrew their health-care plan on March 24, President Trump announced he would shift focus to tax reform. (Video: The Washington Post)

The Trump administration is planning a much more assertive role in undertaking a broad overhaul of the tax code than it did during the failed effort to repeal and replace the Affordable Care Act, with some advisers working to craft a concrete blueprint for specific changes instead of letting Congress dictate details.

But there are divisions with congressional Republicans and within the administration over who should be in charge of the effort — and how ambitious it should be, say administration officials and congressional aides.

Some GOP allies say they have already produced tax legislation and that it would not make sense for the White House to produce its own. Key division points could be about whether to seek a broad overhaul of the tax code or whether to limit it to more specific provisions — such as those affecting corporations — and whether such an initiative could increase the deficit without offsetting spending cuts or changes to tax policy. Also highly controversial is a proposal to impose a new tax affecting imports.

Within the administration, meanwhile, there are open questions about who will lead the charge on tax policy. The Treasury Department has close to 100 people working on the issue, and Treasury Secretary Steven Mnuchin has signaled to lawmakers that he will be a point person in any negotiations. At the same time, some legislators say National Economic Council Director Gary Cohn has also emerged as a powerful force within the White House for overseeing economic policy and that he could attempt to take the reins of what is likely to be the administration’s most important policy issue going forward.

“We have so much in common with the Trump administration,” House Ways and Means Committee Chairman Kevin Brady (R-Tex.) said Sunday on Fox News. “It wouldn’t make sense to have a separate tax bill from Secretary Mnuchin, a separate tax bill from Gary Cohn, a third from whomever.”

There will be several key tests of the White House’s new approach. Congress must vote by April 28 to authorize new funding for federal agencies or face a partial government shutdown. If the Trump administration allows Congress to negotiate spending levels on its own, there could be another split between GOP centrists and conservatives. Another legislative setback could weaken the White House’s hand even further and embolden Democrats during the tax discussions.

That’s one reason the White House is trying to jump-start the tax negotiations. To take more of a leadership role, the administration is planning to issue a document that lays out the specific changes to the tax code it wants in any legislation, people familiar with the deliberations said, speaking on the condition of anonymity because they weren’t authorized to speak publicly.

This approach reflects how the White House is adjusting to lessons learned from the intraparty collapse that occurred when House Republicans drafted a bill to repeal the health-care law and then splintered into different factions. The White House needs Congress to achieve crucial legislative victories, but some key White House officials warn that they executive branch should not be too deferential to the legislating process.

Trump believes that a major overhaul of the tax code — complete with huge tax cuts for the middle class — will lead to more economic growth and hiring. Administration officials have also said the tax code is too complicated and full of loopholes for special interest groups that have lobbied for pet provisions over numerous years.

Several GOP congressional aides said a key issue in the discussions will be which White House official emerges as their main interlocutor. Mnuchin has known Trump for 15 years but is a newcomer to government and has never negotiated even a simple piece of legislation before. Overhauling the tax code is considered to be one of the most daunting legislative tasks, and it hasn’t been completed since 1986 despite efforts by lawmakers from both parties.

“We’ve been working diligently since the first days of this administration to develop a tax reform plan that helps achieve our goal of sustained economic growth, provides relief for middle class families and creates a more competitive business environment that supports greater job creation and reinvestment in the American economy,” Treasury Department Assistant Secretary for Public Affairs Tony Sayegh said in a statement.

Lawmakers have also spoken with Cohn about the tax overhaul plan, and he is seen as very close to Trump and one of his top advisers, son-in-law Jared Kushner. If Mnuchin and Cohn work closely on the effort, they could bolster the White House’s influence on Capitol Hill. But if they are seen as representing different views, the White House’s message could become cloudier.

Some House Republican leadership aides have pushed the White House to take more ownership of the tax overhaul plan, complaining that the appearance of lukewarm support for repeal of the health-care law, and a lack of fluency on the details by Trump, made it harder for the party to unify.

Both Brady and the White House have said they want to pursue a comprehensive overhaul of the tax code, lowering tax rates for individuals and businesses. They have each called for consolidating the seven tax brackets for individual filers down to three brackets. Brady has called for lowering the corporate tax rate from 35 percent to 20 percent, while Trump has said he wants the corporate rate lowered to 15 percent.

Brady has said a goal of his plan is that it will not increase the deficit. In other words, while it might cut tax rates, it will adjust the tax code in such a way that new revenue comes in from other adjustments. He accomplishes some of this by eliminating certain tax deductions, though tax analysts have said the plan would still lead to a sizable reduction in revenue over 10 years.

Tax analysts have estimated that Trump’s proposal would lead to an even more severe revenue loss. Trump has called for huge cuts in tax rates, but he hasn’t specified which deductions he would jettison to make up for the lost revenue. He has said, though, that he wants to increase taxes paid by private equity fund managers and hedge fund executives, but those increases would not make up for the lost revenue from the rate cuts.

There are numerous other differences that will test how assertive the White House plans to be.

Brady, for example, has included something called a border adjustment tax in his plan, which raises $1 trillion over 10 years by effectively imposing new taxes on goods imported into the United States. It also incentivizes U.S. companies to export goods by ending taxation on exports. While House Republican leaders support this new tax, many Senate Republicans oppose the idea, saying it would drive up costs for retailers and hurt consumers.

White House officials have studied the proposal and see benefits and drawbacks, but some have acknowledged that the fierce resistance from Senate Republicans makes it hard for them to consider backing it.

But if the White House rejects the border adjustment tax, it will have to craft its own tax or tariff plan to follow through on Trump’s promise that companies that move outside the United States and try to sell goods back to the country will face a financial penalty.

Mnuchin said during remarks in Washington on Friday that something akin to a border adjustment tax could be proposed for certain products or industries while others are exempt, but he didn’t give more specifics.

The effort to repeal and replace the health-care law ended quickly, and a number of congressional Republicans have complained that more time wasn’t spent devising a better strategy and selling it to the public.

The White House has said it wants to complete an overhaul of the tax code by August, which would give it more time than the health-care effort but still allow only a narrow window compared with past tax negotiations.

Many of these past tax discussions have sought to lower tax rates but broaden the base of revenue that is taxed by eliminating deductions or finding new sources of revenue. Lowering rates is often popular, but finding new revenue to tax elicits major fights.

“If you are going to broaden the base and lower the rates, you are going to have to spend a lot of time working,” former Senate Finance Committee chairman Max Baucus said in an interview. “It just cannot be jammed. I hope that’s a lesson that’s learned in the effort to repeal and replace the Affordable Care Act.”

Rohit Kumar, a former top tax aide to Senate Majority Leader Mitch McConnell (R-Ky.), said the White House and congressional leaders will have to soon decide whether they are going to pursue a tax overhaul that doesn’t widen the deficit or one that will simply become a major tax cut for businesses and individuals.

If they cut taxes for some but raise them for others, it will lead to the kinds of fights that have often killed tax changes in the past.

“At some point, someone is going to look at tax reform and be a net loser in the transaction,” Kumar said. “And that person is going to complain loudly and bitterly, and depending who they are and how loudly and bitterly they complain, that will make tax reform more difficult.”

Following the collapse of the health-care repeal bill, senior White House officials have said they could adjust their legislative strategy and try to woo centrist Democrats toward supporting the tax overhaul instead of trying to keep all Republicans together.

But they have made little headway with Democrats so far, holding only perfunctory meetings and largely keeping them out of any negotiations.

Democrats and Republicans said the White House has only a short time to recover from the health-care-law repeal mistakes, and some suggested that a fair amount of damage has already been done.

“The president lost so much prestige and so much power with the failure of the repeal-and-replace effort, it’s going to be awfully hard to make that up,” Baucus said.