President Donald Trump’s tax plan is designed to win over Main Street and Wall Street, but the biggest fight over the plan could come on K Street.
Analysts say the infamous 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. 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 business and personal deductions that would be eliminated were not specified in the nine-page proposal Republicans released earlier this week. That appears 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’s true timeline for passage is longer than their currently stated goal of passage by year end.”
This may also make the lobby volley game more intense, Zezas said, because “where there is grey 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, said Issac Boltansky, an analyst at the research firm Compass Point, those two groups would stand to lose quite a bit from the new plan.
“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, US chief economist at Nomura, wrote that one major tax change included in Republican tax proposals for years was already a casualty of lobbyists.
“If interest groups that favour 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 $US1.5 trillion in new deficits over the next decade, but according to estimates from the Center for a Responsible Federal Budget, the current plan would add $US2.2 trillion to the deficit over that timeframe. That means the GOP needs to find another $US700 billion in savings to make the tax plan work.
One way to solve this issue would be to raise some of the rates from the initial framework, like increasing the corporate rate up a bit from the current 20% proposal or keeping the top tax rate for individuals at 39.6%.
Even if the Trump administration and Republicans decide to get 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 battle for public reaction will also be consequential, said Greg Valliere, 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 getting warmed up and the ultimate winner could be whichever K Street residents can pull the strings the hardest. Or as Kruger said: “Make the Swamp Great Again.”
Business Insider Emails & Alerts
Site highlights each day to your inbox.