Capitol Hill's opening tax bids leave room for potential deal

As they make their opening bids for tax reform this congressional session, House and Senate tax writers are staking out maximalist positions. They're also clearly leaving space to cut a deal.

Why it matters: A bipartisan tax negotiation will test a divided Congress’ ability to move substantive legislation in a post-debt deal world. It will also be a venue for both parties to signal their priorities to their bases and the general public ahead of the election.

Driving the news: On Tuesday, the House Ways and Means Committee, led by Jason Smith (R-Mo.), passed legislation that would expand the standard deduction and allow businesses to write off more of their research and development expenses as well as their capital expenditures.

• "With this bill, we make a historic investment in the working Americans and families that are the backbone of our great nation," Smith said.

The other side: The White House was quick to blast the GOP proposal.

• "The President believes that any bill that cuts taxes for large corporations must also cut taxes for working people and families with children," National Economic Council director Lael Brainard wrote in a memo earlier this week.

The big picture: The coalition that would support a tax package would look similar to the one behind the debt ceiling deal, which passed with healthy majorities in both chambers.

• Republicans want to seize on the broad consensus that Congress needs to restore the R&D expensing that expired in 2021. They also have other cuts, which would cost an estimated $240 billion, and want to claw back some $216 billion from Biden's green energy tax breaks.
• Democrats are looking for a way to make some form of the enhanced child tax credit — which was included in Biden’s 2020 stimulus for one year — permanent.
• An 11th-hour effort to find a compromise late last year faltered.

What to watch: "I assume that the House will pass their bill on a wholly partisan line,” said Senate Finance Committee chair Ron Wyden. "I hope that as we go further in the year we can get a balanced package."

• “There's a growing sense on both sides of the aisle that we've got to get it done,” said Sen. Thom Tillis (R-N.C.). "Obviously it gets into the question of paying for it and the framework that was set by the debt ceiling vote."

Between the lines: There’s an important difference between the debt ceiling deal and any potential tax package.

• The first had to be addressed; the second is more optional.

What they're saying: “Buried in all the noise of the Ways and Means markup was the distinct signal of a willingness to find a way forward on a year-end [Tax Cuts and Jobs Act] and child tax credit extenders package," said Rohit Kumar, co-leader of PwC's national tax office.

• "The parameters for a deal are there and the resolution of the debt limit should clear the way for talks to start in earnest.”
• “I don’t specifically know what the outline of a deal may be,” said Sen. Chris Coons (D-Del.). "But I see an environment where the odds that a deal could move forward are better than it's been in several years.”
• "I'm glad to hear the conversations being talked about right now are in June rather than in late December,” said Sen. Jim Lankford (R-Okla.)

What we’re watching: The political imperative to pass a tax package will be more acute when parts of former President Trump’s Tax Cut and Jobs Act, including lower personal rates and benefits for small businesses, expire in 2025.

But, but, but: Some Democratic senators are skeptical of House Speaker Kevin McCarthy’s (R-Calif.) ability to move any substantive legislation through the House after conservatives essentially paralyzed floor proceedings last week.

• Under pressure from conservatives, he agreed to pass funding bills at 2022 levels, far below what was agreed to in the deal.
• "That is uncharted territory," said Sen. Bob Menendez (D-N.J.)
• And Wyden will demand that his own priorities, like the child tax credit, are addressed. "We're going to insist on an approach that is proportional," he said.