November 29, 2018

Van Hollen, CQ’s Peter Cohn Discuss Tax Policy Looking Ahead

Tuesday, U.S. Senator Chris Van Hollen (D-MD) joined CQ’s Peter Cohn, Budget and Policy Editor, to discuss tax policy and what to expect on this issue moving forward. The video of the interview is available here and a full transcript is available below.

PETER COHN, TAX AND BUDGET EDITOR, CQ-ROLL CALL: Welcome, everybody. Welcome, Senator. Thanks so much for being here with us this morning.


COHN: The headline of the event is Election Impact and Tax Policy in 2019, those are two terms you don’t often hear go together. It’s not the sexiest topic to talk about in the wake of the monumental election we just had, but the midterms were clearly a sea change, and you’ve kind of been on both sides. As Jason mentioned, Senator Van Hollen was a longtime House member, he was also Chairman of the Campaign Committee in the House. He’s actually one of the rare breeds on Capitol Hill that gets in the weeds on both the politics and the policy.  Also a Ranking Member on the House Budget Committee – so some of the more complicated issues that Congress faces. But let me ask you about the elections, because I think the narrative is kind of muddled a little bit. And we’ve seen a lot of commentary on both sides of this – whether or not it was a wave; whether or not it was a split decision. What do you think the impact was and the message that voters sent on Election Day?  And clearly it’s not over quite yet – we’ve still got another one being decided tonight – but what’s your message?

VAN HOLLEN: I think the message was very clear – which is that the voters wanted a change in what they were seeing coming out of Washington. They did not like the direction the Trump Administration was taking us. That’s why you had a big turnover in the House. And it was a big turnover. The only reason it wasn’t bigger – we should be clear – is because after 2010 there was a lot of redistricting around the country where Republican legislatures and Governors shored-up a lot of congressional districts.  I think if you applied this year’s election to the old congressional districts it would have been an even bigger change in the House.

In the Senate, I think it’s well-known for people who monitor these things closely that we faced the most difficult political map in 60 years faced by either political party. We had 26 Democrats up – only eight Republicans up. And at the end of the day, we won in eight states that Donald Trump carried in his presidential election, and Republican Senate candidates won in zero states that Donald Trump lost. So, given everything we were facing, the outcome in the Senate – while you’re always unhappy to lose good members, we also picked up two seats. I would say the message was a clear rejection of the direction the Trump Administration is taking the country – a rejection of where Republican leadership in the House and the Senate was taking the country. I know we’re going to talk about tax policy, and another lesson out of here was the Republican tax plan was a big political dud with the American people.

COHN: So essentially voters got a look at what happened over the last two years and decided maybe gridlock was a good idea. Is that your sense? Because now we have divided government. And we’ve got a presidential election heating up, now. And a lot of your colleagues in the Senate, potentially, are running, and I know you’re not here to make any announcements, but maybe we’ll get a few questions from the press. This is going to be an interesting couple of years, with divided government. You’ve got Nancy Pelosi, probably will be the Speaker in the House -- Mitch McConnell running the Senate. What conceivably can get done to fix some of the flaws that you see in the law that passed in 2017? And is there anything that you’d keep from that law? Was there anything good that came out of it at all?

VAN HOLLEN:  So when you ask what can be done with this particular political configuration, I think there are a few items that are possible, and then some that people will try to reach agreement on but will be more difficult. In the realm of the possible, you’ve heard a lot of talk about modernizing our infrastructure. So that is something that both parties have said they want to do, but the challenge has always been what’s the financing mechanism for something like that? So, let’s put that aside.

On tax policy – there were lots of mistakes made in this Republican tax plan, and there’s going to be an effort to cure some of those problems. But the problems go much deeper than the technical issues. So, I do believe Democrats are going to be looking through the entire tax plan that was just passed -- and looking at where we can make changes to help primarily middle-class folks and people who are working their way into the middle class. Because the bill that passed was a total give away to very wealthy people, to millionaires, and big corporate interests – added $2 trillion to the debt over the next ten years. And, of course, now you have voices on Capitol Hill among Republicans talking about cutting things like Medicare, Social Security, and Medicaid. So this was a loser on a public policy basis.

It was also a political loser. It is really hard to pass a big tax cut where more people in the country think it was a bad idea than think it was a good idea, but that’s what they succeeded in doing. I’m sure the House is going to have a whole set of hearings and delve into some of these issues that we were talking about earlier with the first group that was here – getting rid of the incentive to move more jobs overseas, actually focusing on folks in the middle class and those working their way to the middle class, and getting rid of some of the big tax breaks for very wealthy people.

COHN: So it sounds like there is nothing in this law that you would like to have in place. Is that an accurate assumption?

VAN HOLLEN: I wouldn’t say that. If you look at this tax bill it was sold by the Trump Administration and Republicans in Congress as some kind of tax plan to help the middle class. But when you look at the numbers and what it really does, it’s this huge giveaway to big corporate interests and very wealthy people. There is some small benefit to folks in the middle class, and so nobody is talking about changing that aspect of it. But when it comes to the tax breaks for millionaires – that will definitely be revisited.

As I said, when it comes to the corporate tax provisions, they created a system that does incentivize – even more that the old system – companies moving plants and equipment overseas. The big promise, of course, was that by providing these big tax breaks you’re going to see all this investment here in jobs and plants and equipment. We just saw yesterday General Motors laying off 15,000 people – planning to lay off 15,000 people – including in a plant in White Marsh, Maryland. They got, just by way of example, $6.5 billion in favorable tax treatment for their overseas tax holdings. That was money that was supposed to come back here and be invested in more good-paying jobs. Instead, they’re laying off people.

This is why this was such a fraudulent argument to begin with. And now the American people are seeing it more and more every day. So, a lot of pieces of this will be revisited in the coming year so that we can focus more on the middle class and not these giveaways to big corporate interests.

COHN: I think a lot of people, at least the Republicans, will tell you that they drafted the law as kind of a carrot-and-stick approach, to multinational companies. And frankly – as you well know – it’s extremely difficult to change corporate behavior in an era of globalization, increased productivity. And this is a trend that we’ve been seeing for the last 50 years, and it’s incredibly difficult to arrest. When you were in the House during the Obama Administration, Congress was controlled by the Democrats. Your party passed a number of initiatives to try and crack down on corporate tax avoidance, multinationals moving profits offshore. And still – here were are. It’s almost like you can try the stick approach, you can try the carrot approach, but nothing really seems to work. It just seems to be the globalization that we live in. Is there anything that tax policy can actually accomplish to prevent more GM-type outcomes? 

VAN HOLLEN: Well in fact, I think the Obama Administration put forward a number of ideas to establish a minimum worldwide tax essentially, at a lower rate – people were debating the range – somewhere between 19 percent and 15 percent. But that’s a very different approach than was taken in this bill. Because in this bill you establish the US corporate tax rate at 21 percent, but if you’re doing work overseas your US tax rate is zero.

Then, they tried to partially cure that by creating this whole GILTI provision – forgive me -- it’s an acronym. This is a provision that says we will try and tax profits in tax havens. But then they ended up making a cure that was worse that the disease, because they created an additional incentive to offset whatever tax you might have to pay for moving your profits to a tax haven by moving more of your own plants, and equipment, and jobs overseas. So it actually took a system that was already incentivizing offshore behavior and made it much worse. Unless it’s changed we will see more and more of the impact of that.

COHN: That’s a good point, I know Paul was out here making a similar point earlier. But the CBO, the Congressional Budget Office – probably the most impartial observer that we know of – has had some positive things to say about the tax law. They said, essentially the combination of the lower corporate rate with the disincentives of the GILTI mechanism (the Global Intangible Low Tax Income), the BEAT tax – it’s a whole panoply of these crazy acronyms. But essentially, the combination of these provisions would have the effect of increasing GDP, faster GDP growth, more jobs, higher wages, more investment in the US – maybe not in the housing sector, but overall more investment – and companies would actually be reducing their profit shifting. So was the CBO just wrong about this? Have we seen enough examples to poke holes in this theory that maybe there were some positive economic benefits from the law?

VAN HOLLEN: Well, the CBO reports that I’ve seen show that you do get the sugar-high effect in the short term – nobody would doubt that when you throw that much money into the economy, you have some increased economic activity. But if you look at their long-term growth projections, they were not above what they previously project. What they essentially predict is a short-term high and then going back into the pattern of growth numbers that they previously had on the books.

And when you look at the corporate side of it, they also pointed out that a lot of those capital gains benefits – the corporate tax breaks-- are going to overseas bank accounts because a large share of US corporations are owned by foreigners. So when you give a big tax break to corporations in the United States, a lot of that gets off-shored right away into foreign bank accounts. In fact, there was a staggering number that over a period of time because of that effect, as well as the fact that foreigners are purchasing more of our debt, that the foreign share of the corporate tax benefit is over 50 percent in the out years, at a certain point in time. So, I think it’s really important to keep that in mind. The CBO analysis that I saw indicated that for the most part, yes, you’re going to get a sugar-high. But in the long-term you’re really increasing one thing, which is the national debt by over $2 trillion.

COHN: I want to ask you about the debt in a second. But, in terms of foreign investment in the United States, as a result – increased foreign investment – is that a bad thing? Don’t we need more foreign investment coming in?

VAN HOLLEN: No, it’s not a bad thing to have more investment in the United States. You just have to look at all the moving parts and how they interact with one another. Look, there are some other small provisions in this tax bill that were good ideas. They had some opportunity-zone-type investments, which was a small, bipartisan bill that got tucked in here that I support. So, it’s not that every single item in this huge piece of legislation was bad, but the overall thrust of this bill was this big corporate tax giveaway and tax breaks for the very wealthy.

If you’re a millionaire, you’re going to get an average annual tax break of $70,000 under this piece of legislation. When we went into this debate, the Democrats in the House and the Senate established a couple principles for what we would support in a tax bill. One, we said that the primary benefit had to go to the middle-class taxpayers and people working their way to the middle class. Number two, no tax breaks for millionaires. Number three, it had to be deficit neutral, because every time we drive up the debt, Republicans come around and talk about cutting important things like Medicare and Social Security. So those were our principles.

This tax bill violated every single one of those principles. It was primarily directed towards the very wealthy and big corporations, instead of the middle class, and it added dramatically to the debt. When Democrats go back and take another look at this, their tax reform will abide by those principles that I just laid out rather than violate all of those principles.

COHN: I want to talk quickly looking backwards – and then I want to move to looking forwards. One of the big provisions in the tax law that a lot of people seem to be saying contributed to the large gains in the midterms was the capping of the State and Local Tax deduction – which is a big issue in Maryland, a big issue in this area generally, and other states, California, New York, and so forth. To a man and a woman in the Democratic leadership, they all seem to indicate that this cap should be removed. What are your thoughts on that? Is that something, potentially, even Republican could buy into? Because they’d again be giving more tax cuts if removing that cap were to become law.

VAN HOLLEN: Well, you’re right about the political consequences. It’s always hard to know exactly what impact a particular policy change had on a particular election. But there was an analysis done that sort of took into account a lot of other factors, and you had about 10 or 11 House members from states that were especially hard hit by capping the SALT deduction lose their elections. I actually led a letter from Senate Democrats to a number of the House Republican members from those states urging them not to undo the SALT provisions, and they still voted for them – and the results are what the results are in the elections. That will definitely be revisited.

In the state of Maryland, you have about 350,000 households that will actually see a tax increase. And these are primarily households that are facing an increase because they are no longer able to take the full SALT deduction. So that will be reviewed. It will be revisited, and we’ll just have to see how all that plays out. As you know, it was sort of the first time in our history where the federal government decided to tax the taxes that residents were paying to their state governments.

COHN: We’ve got this lame duck session which is lurching its way to a close, presumably over the next two weeks, although maybe that could be extended. What conceivably do you think can happen? We have this tax bill that was introduced late last night by the House Republicans. It would extend a lot of these expired extenders, as they’re called, and make a few technical corrections to the 2017 law – do a few other things in retirement savings, provide a little disaster relief. It seems like Democrats were not necessarily clued into the release of this bill, and I’m wondering what its chances are.

VAN HOLLEN: Right – so this is a [297]-page bill that was just introduced last night, so I haven’t had a chance to review it. And it was sort of put together in the same way their huge tax bill was put together – which is in the dark of night, behind closed doors, without lots of hearings. And it is kind of ironic that they are now coming up with a [297]-page tax bill, when they supposedly just did tax reform. Obviously, it wasn’t really tax reform, because there were all these other pieces that were left on the table that would normally be included. So, we’ll take a look at the individual elements.

I think Democrats are not going to allow this bill to be used as a vehicle to cure just some of the problems with the big tax bill that was passed last year.  If people really want to take another look at that tax bill, we’re happy to do it. Again, we would apply the principles that I just mentioned. There are – as you know – other provisions in there that have to deal with clean energy incentives and a whole array of other tax extenders. People can look at them on their own merits. But as to the overall vehicle being used as an opportunity to fix some of the problems from the other tax bill, that’s going to require a lot larger effort.

And as I indicated, I know Richie Neal, the incoming Chairman of the Ways and Means Committee, intends to hold a whole series of hearings in the Ways and Means Committee – which is what Republicans should have done before they embarked on the tax bill that they passed last year for the wealthy and big corporations. I think Democrats are going to do it right, they’re going to take the time, have the hearings, and then move forward in accordance with the principles that I just mentioned.

COHN: Just briefly on the debt question. Because you did mention the CBO estimate that the tax law is going to add nearly $2 trillion to deficits over the next decade – and you mentioned infrastructure as possibly one area of cooperation, a lot of fixes to the tax law potentially. Everything needs to be paid for. It still sounds like there is a lot of expensive moving parts on the table and maybe, in some areas, you just don’t dig any deeper but don’t necessarily improve the deficit picture. What’s the outlook for reigning in the debt over the next couple of years and beyond? And do we even need to?

VAN HOLLEN: This is one of the big problems that we were left with as a result of this tax plan – they blew this bigger hole in the national debt. I do believe we need to be much smarter about how we deal with the deficit. No one knows exactly what the magic number is when it comes to debt to GDP ratios, but clearly it’s something that, in my view, we need to keep an eye on. Which is why I said that one of the principles that we would establish is that any additional tax reform not increase the debt.

Now, you’re right, that doesn’t address the big hole that Republicans just added to the national debt. We can look at different ways to address that. I don’t have a good solution for you here today. That’s always the problem when you make things that much worse. And of course the Republican answer, at least among some Republicans on Capitol Hill, has been, okay, well now we added $2 trillion to the debt – we’re going to come back and cut Medicare, Social Security, and Medicaid. We’re not doing that.

I think what you’re going to see from Democrats is, again – a review of the tax plan, keeping the benefits of any tax cuts focused on the middle class, making sure we eliminate the perverse incentives to move jobs overseas, and something that really helps folks in the middle. After all, the promise was that you’re going to see these $4,000 paycheck increases. I remember that number very well. There were lots of charts that Republican Senators put up on the floor saying this corporate tax cut is going to result in a $4,000 pay increase – right? That hasn’t happened. We know that hasn’t happened. We just mentioned that GM was laying people off – not giving people pay increases. So that promise was a complete illusion.

The tax bill was a fraud in that sense. And the American public knows it. And that’s why you didn’t see Republicans running on the tax cuts. Hey, that’s why you had President Trump – Congress had already gone out of session, and he says hey, now we’ve got to come back and do a middle-class tax cut. Remember that? Mid-election, it was like a light bulb went off, and he goes, oh that tax bill we just passed -- $2 trillion– that really didn’t help the middle class. We said it was going to help the middle class, but it didn’t. We’ve got to come back now and do one. Someone should have reminded him that Congress was already out of session.

But my point is that they know. They know that the public is on to this tax plan. And the public sees it for what it is – which a big tax giveaway to corporations. Eight hundred billion dollars plus, as of today, has gone into stock buybacks. So this promise that all that money was going to be invested in hiring workers and giving people pay increases was just a fraud. And people are on to it.

COHN: Thanks, Senator.