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President Donald Trump’s tax plan is designed to win over Main Street and Wall Street, but the biggest fight over it could come on K Street.
Analysts say the home of Washington’s lobbyist core could be set ablaze over the newly released tax plan, as various groups battle to preserve their own carve-outs and beneficial loopholes in the tax code.
Almost every industry, special interest, and consumer group has an interest in the tax code, especially if the package ends up being as ambitious as Trump and Republican leaders want it to be. Chris Krueger, an analyst at Cowen Washington Research Group, told Business Insider that the battle over which loopholes to keep and which to throw out could get nasty.
“Welcome tribunes to the corporate hunger games!” Kruger said in an email. “Only one-sixth of lobbyists were involved with health care (give or take – assuming it is one-sixth of economy). Six-sixths of lobbyists are involved in taxes.”
The nine-page proposal Republicans released Wednesday did not specify the business and personal deductions to be eliminated. That appears to be designed to guard against coming blowback, but it may only delay the inevitable, said Michael Zezas, a strategist at Morgan Stanley.
“The lack of detail has the strategic benefit of holding off lobbyists and individual members who may oppose specific pay-fors,” he said. “Yet in our view, this is a sign that some difficult special-interest battles are ahead, suggesting Congress’ true timeline for passage is longer than their currently stated goal of passage by year end.”
This may also intensify the lobby volley game, Zezas said, because “where there is gray area, there will be lobbyists.”
Two groups that may already be concerned: the real-estate and mortgage-lending industries. Aside from the mortgage interest deduction, there would be quite a bit to lose for those two groups, said Isaac Boltansky, an analyst at the research firm Compass Point.
“We continue to believe that the mortgage industry could become more forceful in its opposition to this effort as the tax benefit of homeownership could be diluted,” Boltansky said. “Notably, there is continued chatter regarding the potential for a targeted mortgage credit as part of a broader package.”
Lewis Alexander, the chief US economist at Nomura, wrote that one major tax change that had for years been included in Republican tax proposals was already a casualty of lobbyists.
“If interest groups that favor these deductions are successful in lobbying for their preservation, the tax reform will have a much harder time being passed,” Alexander wrote in a note to clients. “One telling lesson so far comes from the border-adjusted tax (BAT). Once the BAT was proposed, the retail industry, among others, launched a successful campaign to stop the BAT from being part of Republican plans.”
Republicans will have to make some tough decisions as they work to craft their framework into legislation. The Senate budget is expected to allow for $1.5 trillion in new deficits over the next decade, but according to estimates from the Center for a Responsible Federal Budget, the plan would add $2.2 trillion to the deficit in that time. That means the GOP would need to find another $700 billion in savings to make the tax plan work.
One way to solve this issue would be raising some of the tax rates specified in the plan, such as a 20% corporate rate, or keeping the top tax rate for individuals at 39.6% instead of lowering it to 35%.
Even if the Trump administration and Republicans decided to be less ambitious with lowering the tax rates, however, raising the corporate rate from their opening proposal would set off a firestorm among corporate interests who want every percentage point possible in cuts.
And aside from lobbyists and Washington insiders, the public’s reaction will also be consequential, said Greg Valliere, the chief global strategist at Horizon Investments.
“This initial tax proposal now enters the spin zone, and the reaction – from the media, lobbyists, tax experts and ordinary voters – will be crucial,” Valliere wrote. “Watch the polls.”
The tax-reform fight is just warming up, and the winner could be the K Street residents who can pull the strings the hardest – or, as Krueger said, “Make the Swamp Great Again.”