With House Republicans advancing the tax section of the “megabill’ last week, a vote on the bill by the entire House of Representatives is a possibility the week of May 19.
The massive economic policy effort hit its first major speed bump on May 16, as several Republicans on the House Budget Committee refused to advance the legislation until House Republican leadership makes additional policy commitments around reducing the deficit. But after 48 hours, fiscal conservatives on the committee, who want the bill to be more aggressive around deficits, voted “present” in a rare Sunday night committee meeting, which allowed Republicans to continue the legislation’s advance. The bill would extend Tax Cuts and Jobs Act (TCJA) policy (rate cuts from 2017, Section 199A, etc.) past the end of this year, in addition to creating new breaks and policy changes across many areas of congressional jurisdiction. The May 18 committee vote keeps House Republicans on the Memorial Day House passage deadline of Speaker Mike Johnson, R-La.
Our update contains highlights of the comprehensive tax legislation, though significant changes are possible in the near future.
Conservatives who previously voted against the bill say they secured additional commitments around changes to Inflation Reduction Act (IRA) energy credits, as well as Medicaid policy changes aimed at generating federal savings (though cuts could be politically contentious). House Republican leadership is also negotiating with rank-and-file members from high-tax states who want to see a larger increase to the state and local tax (SALT) deduction cap.
Complicating matters further, Moody’s Ratings downgraded the U.S.’s credit rating from AAA to AA1 on May 16, citing “larger deficits as entitlement spending rises while government revenue remains broadly flat,” as well as, “ persistent, large fiscal deficits will drive the government's debt and interest burden higher,” in relation to “other highly-rated sovereigns.” The ratings agency added that the expectation of continuation of TCJA tax cuts adding $4 trillion more to projected deficits over the next decade as a factor in its decision.
Whether that, along with other internal deliberation, forces Republicans back to the drawing board (or accelerates efforts) remains to be seen. Along with fiscal conservatives and SALT deduction supporters in the House, other rank-and-file Republicans are concerned about the level of spending cuts (or IRA credit repeals) included in the megabill.
Grant Thornton Insight:
Intraparty political hiccups have happened in every significant legislative effort using the budget reconciliation process since the 2010 Affordable Care Act. Any bill with major economic impacts will generate strong opinions, and with narrow majorities in both chambers and few opportunities to make law otherwise, Republican rank-and-file members will seek to maximize their unusual amount of leverage during this process. Congressional Republican leaders have managed to largely sidestep political delays, with help from the White House, up until this point. However, failure to pass any legislation would result in tax increases for most Americans and U.S. businesses and likely be a political catastrophe for Republicans. That creates significant incentives to at least continue much of the personal benefits of the TCJA, though these internal disagreements could slow the process. Bond market reaction could pressure Republicans into adding more tax offsets that some taxpayers might find onerous, similar to how they sought to close pass-through entity tax workarounds in the current Ways and Means draft.
Johnson, President Donald Trump, and other key Republican decision-makers will need to navigate those differences quickly to maintain that timeline.
Then the real work of resolving differences with the Senate will begin.
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