The failure of Congress to advance the Republican healthcare bill on 24 March was not necessarily a surprise. Healthcare policy is arguably one of the most complicated policymaking areas. And as we noted earlier (see “Market Response to Trump’s Speech Doesn’t Change Policymaking Realities” and “Trump’s First Year: What’s Realistic”), governing is difficult. In 2009, after all, it took congressional Democrats and President Obama 14 months to pass Obamacare, despite larger congressional majorities than U.S. President Donald Trump enjoys.
For investors, the most salient question is what is next? President Trump and Speaker of the House Paul Ryan have both mentioned they would prioritize tax reform. Yet while certain markets seemed to welcome the news, investors might temper their enthusiasm:
- Tax reform is also complicated. Tax reform – which involves winners and losers – is different from tax cuts, which involve mainly winners (except, perhaps, for the impact of deficits). For this reason, while we have seen several successful tax-cut bills signed into law over the years, tax reform, despite having been attempted several times on Capitol Hill, has not been successful since 1986.
- Congressional Republicans lack a unified vision on tax reform. While divisions on tax reform are not comparable to those on healthcare, Republicans also lack a prevailing view about how to reform the tax code. For instance, the centerpiece of the House of Representatives’ plan is the “border adjustment tax,” a concept which several Republican senators have vociferously opposed.
Can these issues be reconciled? Of course. But after concessions are made, the likely result is passage of a less ambitious and smaller “tax reform lite” bill (e.g., less reduction of the corporate rate), not the bold tax reform many have envisioned.
- Abandoning healthcare altogether is tricky. Prioritizing tax reform could be problematic for three reasons. First, congressional Republicans and President Trump campaigned on repealing Obamacare, so no progress could haunt them in next year’s midterm elections, when the incumbent party usually loses seats anyway. Second, because of the process of budget reconciliation (in which bills can pass the Senate with only 50 votes versus the usual 60 ), if Republicans move on from healthcare, they forfeit the ability to use reconciliation again for another year – most likely precluding healthcare from being addressed until after the midterms. Third, repealing Obamacare would have made tax reform easier by decreasing the ever-important (but wonky) revenue baseline.
Lessons from healthcare
Speaker Ryan and President Trump will likely heed the lessons from the healthcare bill by taking their time to ensure that whatever bill they bring up for a vote actually passes. Practically, this means going through the tedious legislative process of holding hearings, getting various outside groups on board and ensuring that the concepts are well-socialized and supported before a vote is held.
In short, tax reform is likely to be a relatively time-consuming process, so statements about ambitious time frames should be qualified.
Libby Cantrill is PIMCO’s head of public policy and a regular contributor to the PIMCO Blog.