This post was originally published on New York Times.
WASHINGTON — Senate Democrats on Tuesday warned they would work to block any rewrite of the tax code that repealed the estate tax and the deduction for state and local taxes, arguing that those moves would make a mockery of Republican promises to target tax relief to the middle class.
But before Republicans could consider Democratic demands, they still were struggling to overcome their own disagreements over the arcana of a rewritten tax code.
The clash over specific tax measures comes as the promised tax overhaul enters a pivotal phase. The White House and congressional Republicans expect to unveil the framework of a plan later this month, and the courting of Democrats has already begun. Mr. Trump dined with senators from both parties Tuesday night, reaching across the aisle out of concern that Republican disputes will make it impossible to pass a tax bill with only Republican votes.
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As their influence rises, Democrats are issuing demands with greater vigor.
“We do know they almost universally want to repeal the estate tax — that’s one of the most egregious things they are doing,” Senator Chuck Schumer of New York, the Democratic leader, said on Tuesday. “We’re letting the administration know where we stand.”
Congressional Republicans and the White House agree that the tax on inheritances should be scrapped, arguing that it is harming families with small businesses. During a speech in North Dakota last week, Mr. Trump said that it was a “tremendous burden” on the family farmer.
“We are not going to allow the death tax or the inheritance tax or the whatever-you-want-to-call-it to crush the American Dream,” Mr. Trump said.
Democrats scoff at that language, saying the tax hits only the wealthiest Americans. Estates are taxed at a rate of 40 percent, but the first $5.49 million of an inheritance is exempt from any taxation. Couples can leave their heirs as much as $11 million, none of it taxed, meaning only a few thousand, wealthy estates face the tax a year.
On Tuesday, Mr. Schumer cited new data from the liberal-leaning Center on Budget And Policy Priorities that projected a repeal of the estate tax would benefit 5,400 of the wealthiest Americans.
“This is a totally absurd proposal,” said Senator Bernie Sanders, independent of Vermont. “At the end of the day that is what the Republican agenda is about.”
It remains unclear how wedded the White House is to killing the estate tax. In a meeting with Senate Democrats this year Gary D. Cohn, Mr. Trump’s top economic adviser, suggested that only rich people who plan poorly bear the burden of the tax.
“Only morons pay the estate tax,” Mr. Cohn said.
The red lines from Democrats are becoming increasingly stark. Mr. Schumer also said that a repeal of the deduction for state and local taxes and any changes to the mortgage interest deduction would also be non-starters with Democrats.
Still feeling the sting from its failed effort to repeal the Affordable Care Act without the help of Democrats, the White House is trying to keep hope of bipartisanship alive.
But the Trump administration is not counting on their support. Steven Mnuchin, the Treasury secretary, said on Tuesday that Republicans would use a parliamentary tool called reconciliation to bypass a filibuster in the Senate if Democrats refuse to get on board.
“If we can’t get 60 votes, we’re prepared to use reconciliation to get it done,” Mr. Mnuchin said at a CNBC conference.
But after months of deliberations, Republicans have yet to agree on their own plan.
On Tuesday, Mr. Mnuchin said that Mr. Trump and Speaker Paul D. Ryan are not yet in accord on the corporate tax rate. The president wants it to be slashed from 35 percent to 15 percent, while Mr. Ryan and most tax experts think that getting it to the mid-20 percent range is most likely.
Mr. Mnuchin appeared to acknowledge that the administration was likely to lose that battle.
“I don’t know if we will be able to achieve that, given the budget issues,” he said of the 15 percent rate.
Meanwhile, the special tax treatment of fees reaped by hedge fund managers and private equity executives remains unresolved. Those fees, known as “carried interest,” are taxed as capital gains, not as income, which for affluent financiers, would face a much higher rate.
Another apparent division emerged when Mr. Mnuchin offered insight into how the administration would apply a lower tax rate to “pass through” businesses — small businesses, partnerships and other companies that now pay personal income tax rates instead of the corporate tax rate. Tax experts worry that a lower rate for such businesses would become a giant loophole as wealthy individuals reclassify themselves as small businesses.
“Services companies that are pass-throughs will not get the benefit of the rate,” Mr. Mnuchin explained. “If you earn money that’s clearly income, if you are an accountant firm and that’s clearly income, you’ll be taxed at income rates. You won’t be taxed at pass-through rates.”
Taxation of such firms is one of the most sensitive tax policy debates, and Mr. Mnuchin might have gotten ahead of himself.
Representative Kevin Brady of Texas, the chairman of the House Ways and Means Committee, said that addressing that potential loophole was still under discussion and no decisions have been made.
Republicans have been united on repealing the estate tax, however, and Mr. Brady did not appreciate Mr. Schumer closing the door on the idea before legislation has even been introduced.
“Rather than drawing red lines in the sand, finding that common ground is the key to very successful, very pro-growth tax reform,” Mr. Brady said. “I’d urge all people to keep an open mind.”
Even with open minds, the path will not be easy. The White House and Republicans in Congress continue to press to get something passed this year, but many obstacles remain.
For the tax overhaul to move ahead, Congress must adopt a budget resolution with the parliamentary language that would allow tax legislation to clear the Senate with only a simple majority, rather than the 60 votes needed for most bills.
The chairwoman of the House Budget Committee, Representative Diane Black of Tennessee, has been struggling to round up the necessary votes to pass a budget. The hard-line House Freedom Caucus is demanding details about the tax overhaul before its members will vote for a budget resolution.
“Until we get tax reform specifics, there will be no budget,” said Representative Mark Meadows, Republican of North Carolina and the group’s chairman.
That and other issues have pushed consideration of a budget blueprint to late September at the earliest.
In the Senate, the Budget Committee chairman, Michael B. Enzi of Wyoming, is still working toward drafting a budget resolution.
“We need to do it pretty soon,” said Senator John Cornyn of Texas, the No. 2 Senate Republican. “I think the president has cleared the decks” with the deal he struck with Democrats to raise the debt ceiling and keep the government funded into December.
“But,” he added, “we need to act pretty quickly.”
This post was originally published on the New York Times.