JOE BABB: Political ramifications of tax reform still unknown

Feb. 18--President Reagan signed the Tax Reform Act of 1986 on Oct. 22 of that year. The bill, which enjoyed wide bipartisan support, became law 323 days after its initial introduction in the House.

The Tax Cuts and Jobs Act of 2017, the largest tax code overhaul since 1986, was signed just 42 days after it was introduced and did not garner one Democratic vote. Bipartisan politics seems to be a thing of the past. Big hair and over-produced music isn't the only thing we left back in the 1980s.

This political atmosphere will not come as breaking news to anyone who has followed the goings on in our nation's capital as the federal government cranks back up after its second shutdown in a month's time. Normally, I choose to ignore politics for more rewarding pastimes such as reading, playing with my kids or watching baseball, but I was compelled to pay attention when the pundits started talking taxes in late 2017.

To fully understand this expansive new law, we must first examine the politics behind it. When John McCain gave the thumbs down to the Obamacare repeal bill on July 28, the GOP became desperate for a political victory to close 2017. Midterms loomed in 2018 and the party in control of both houses of Congress and the Presidency needed something to show for its time spent in power. Tax reform proved to be the winning issue.

Republicans made the decision to pursue this landmark legislation through something called the budget reconciliation process. This very mundane sounding exercise is only important to us for two reasons: 1) It sets a hard ceiling on the amount of deficit increase allowed over a ten year period -- a limitation known as the Byrd Rule -- and 2) allows for Senate passage with a simple majority and no filibuster that may accompany normal legislation. In today's world, the difference between 51 and 60 votes in the Senate is an often unbridgeable gap.

The Senate set this 10-year ceiling at $1.5 trillion in October. At that point, Congress and the President had to agree on their tax priorities to fit into the space they created, and by Christmas, they were able to do so using a combination of tax cuts and eliminations of deductions that eventually netted to $1.456 trillion.

For example, the individual and corporate rate cuts cost the Treasury almost $2.6 trillion, but the $10,000 cap on the state and local tax deduction and the elimination of personal exemptions saved it $1.9 trillion, and 115 or so law changes later, the tax sausage was made.

Another little Byrd Rule nugget is that Congress made most of the corporate changes permanent and most of the individual changes temporary. Without further congressional action, we return to the old individual tax system after 2025. Republicans are betting that future Congresses won't have the stomach to let taxes go up on 2026 1040s. This looks to be a pretty good bet, considering most of the Bush era tax cuts were originally set to expire in 2012 but were still in effect in 2017.

The long-term political ramifications are yet to be determined. Will the economic impact and higher paychecks outweigh the deficit hit in the minds of voters? Will Democrats, shut out of the process, succeed in attacking this legislation on the campaign trail as Republicans did after being shut out during the Obamacare vote in 2010? Most importantly, will baseball finally get going? Midterms are now just around the corner.

Joe Babb is a CPA/CVA with Eaton, Babb & Smith, P.A. in Tupelo. He can be reached at jbabb@ebs-cpa.com.

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