Harvey relief and the debt ceiling debate are complicating tax reform

Saul Loeb | AFP | Getty Images

President Donald Trump speaks alongside Senate Majority Leader Mitch McConnell (R), as they hold a meeting about tax reform in the Roosevelt Room of the White House in Washington, DC, September 5, 2017.

America’s budget woes are re-emerging as a flashpoint for debate on Capitol Hill, complicating Republicans’ quest for tax reform.

Fiscal hawks had already signaled unease with efforts by the Trump administration and GOP leadership to raise the federal borrowing limit and pass a government funding bill without committing to structural reforms that would help reduce the deficit. Now, with Hurricane Irma set to strike the Florida panhandle and ballooning estimates of the damage from Hurricane Harvey, some conservative lawmakers and advocacy groups are balking at the numbers.

“We frequently play an unnecessary game of politics with key issues—using must-pass legislation such as disaster relief as a vehicle to sweeten unrelated, contentious bills that may not otherwise pass as stand-alone measures,” Rep. Mark Meadows, chairman of the House Freedom Caucus, wrote in an op-ed in the Washington Examiner on Wednesday.

Texas Gov. Greg Abbott has estimated his state is facing $150 billion to $180 billion from Harvey’s wreckage. Before the hurricane struck, the Congressional Budget Office had predicted that the national deficit would reach nearly $700 billion this fiscal year. The national debt is almost $15 trillion.

The White House on Wednesday agreed to work with congressional leadership to pair a three-month government funding bill and increase in the debt ceiling with aid for Harvey victims. But earlier in the day, a coalition of conservative groups including Heritage Action, FreedomWorks and Americans for Tax Reform formally opposed the idea.

“A debt limit increase – which is effectively another broken promise – risks more frustration in the conservative movement with congressional Republicans at a time when it is critical to gain momentum to pass fundamental, pro-growth tax reform,” the groups said in a letter to House GOP leadership.

The groups have been instrumental in helping to marshal grass-roots support for the Republican effort to simplify the tax code and lower rates. GOP leadership has argued for a plan that will not reduce federal revenues, but the White House has not committed to a so-called revenue neutral proposal. The one-page tax framework that the administration released this spring is estimated to cost between $3 trillion and $7 trillion over the next decade, according to the Committee for a Responsible Federal Budget.

Some conservatives have signaled they are open to increasing the deficit to finance tax cuts, which they argue would be at least partially offset by stronger economic growth. But the double whammy of hurricane relief and Trump’s tax cuts could wind up being too much — particularly if fiscal hawks do not secure spending cuts elsewhere.

“Harvey has made tax reform slightly more difficult,” read a Goldman Sachs note issued Wednesday. “These efforts are likely to add to the deficit, which might reduce enthusiasm for tax cuts.”

Goldman pointed out that its assessment would depend on the size of the final aid package as well as the scope of the tax bill. Analysts had already downgraded their expectations for both the size and timing of any legislation.

“We don’t think it will happen until 1H18,” a Morgan Stanley note released this week read. “And when it does, [it] will fall meaningfully short of original fiscal stimulus and tax cut level ambitions.”