Next year, a reconciliation bill with Trump tax cuts is expected to be passed by the House Ways and Means Chair Jason Smith.

• At the CNBC CFO Council Summit in Washington D.C. on Wednesday, Missouri Rep. Jason Smith, Republican Chair of the House Ways and Means Committee, stated that he anticipates the passage of a single major reconciliation bill in Congress next year, which will include President Trump's top priorities, such as tax cuts, energy, and immigration.
• Smith stated that he would require a 217-215 vote advantage next year to secure agreement on a tax package that includes corporate tax measures, small business tax rates, and individual tax deductions such as SALT.
• President-elect Trump has proposed a lower corporate tax rate, but Smith believes the rate will remain at 21% and is more concerned about preserving the 199A tax deduction, which benefits 99% of small businesses.

The debate in the nation's capital continues about whether President Trump's legislative priorities, specifically tax cuts, should be divided into multiple bills next year. However, Republican House Way and Means Committee Chairman Jason Smith predicts that a single big bill will be passed, with a narrow margin for approval.

At the CNBC CFO Council Summit in Washington, D.C., on Wednesday, Smith pointed out that reconciliation bills have been passed by both parties in recent years, and there has never been a case where two reconciliation bills were passed in the same year. Given the narrow margins held by the GOP, even after its election sweep, reconciliation, which only requires a simple majority, is the preferred path for new legislation.

"In my opinion, it is foolish to come up with a plan that includes a small reconciliation on energy, immigration, and defense, followed by tax, as it will breed failure."

Smith intends to propose a single reconciliation bill that addresses several of President-elect Trump's key priorities, including energy, immigration, and tax cuts. However, Smith acknowledges that it will not be an easy task, as he anticipates a narrow GOP majority in the House of 217-215 (including two GOP members leaving to take roles in the Trump administration). According to Smith, "We will definitely have a task ahead of us to thread the needle."

John Thune (R-S.D.) proposed breaking up GOP priorities into multiple bills during a policy retreat on Capitol Hill.

Unlike recent history, the House has become the more challenging legislative body to pass legislation through, with many deficit hawks present. However, Smith believes that with his expertise in tax policy, he can successfully navigate the challenges of passing a bill with tax cuts in the House.

A larger bill that includes tax cuts and other Trump campaign promises may face opposition from marginal members in districts where controversial issues such as immigration policy are not popular, potentially derailing a broader bill.

Cost of tax cuts in deficit hawk world

Smith believes that existing tax policy should not be offset when being extended, as the cost of Trump's expiring 2017 tax cuts alone is $4.6 trillion.

Smith stated that although the Joint Committee on Taxation in Congress considers the extension of tax policy as new policy, he and others in the House and Senate view it as having a baseline new policy cost of "zero." He wants this reflected in tax legislation language, and he expects it to happen.

Idaho Senator Mike Crapo has long held a philosophical stance on taxes and the budget.

Smith stated that some of the budget math has been more optimistic than previous forecasts, with fiscal year 2022 generating $900 billion more in revenue than the original projection. Despite this, the revenue to GDP ratio remains consistent with decades of history, meaning that the country did not add debt or deficit from the 2017 tax cuts.

The big problem is overspending, with spending to GDP increasing by up to 26% over the past four years compared to a long-term average of 20%.

New Trump tax cut promises and budget reality

Smith stated that the decision on new tax cuts depends on Congress's willingness to act.

Trump promised several things during his campaign, including eliminating taxes on tipped income, increasing overtime pay, cutting some Social Security taxes, providing tax cuts for first responders and the military, reducing taxes for Americans living abroad, and allowing deductions for auto loan interest. He also pledged to revise the SALT deductions in his 2017 tax law.

Smith believes that any new tax cut not part of the policy baseline will have to be offset, and he does not think the Budget Committee chairperson will add to the deficit with new tax cuts or if they do, it won't be a large number.

Smith stated that in order to determine how to fund the new additions proposed by the president, which are based on his campaign promises, we must consider all the proposals he made.

Corporate and small business tax priorities

Many corporate tax priorities, including provisions on research and development expense tax policy, bonus deprecation, interest expense, and Trump's goal of lowering the corporate tax rate to 15%, will expire or have already expired by the end of 2025.

Smith has been working with 10 tax committees since April on crafting legislation that includes an extension of the 2017 tax cuts and a review of the entire tax code, as well as new tax cuts. Additionally, he has been in frequent conversations with Trump, who often calls his cell phone.

Smith believes that the prospects for lowering the corporate tax rate below the rate set by the 2017 tax law are not good, despite Trump's talk of a lowering to 15%. "I am confident the tax rate will stay at 21%," he said, citing the view held by many tax experts that the only certainty for large companies is that the tax rate will not increase.

Smith emphasized the importance of addressing the expiration of section 199A of the tax code, which is used by 99% of small businesses for tax deductions and is set to expire at the end of 2025. If it expires, the average tax rate for small businesses will increase from the current range in the 20s to 43.4%.

Smith stated that if he could only choose one tax measure to make permanent, he would select 199A due to its impact on the economy, and the corporate tax rate of 21% is already competitive worldwide.

Tariffs and individual taxes

New tariffs from Trump are being considered as a way to offset the cost of new tax cuts by generating additional revenue for the government. Smith stated that "everything is on the table" when discussing "how to thread the needle" and achieve the necessary votes in the House and Senate. He emphasized that ruling anything out would make the process more challenging.

Introducing tariffs into budget math poses risks for both Congress and Trump, as the income from tariffs is not always predictable and can be difficult to tie to tax policy. Additionally, for Trump, this would mean giving up control over tariff policy and limiting his ability to use tariffs as a unilateral tool to apply pressure.

The guaranteed deduction, child tax credit, and individual tax rates are among the expiring tax provisions, with 70% of them affecting individuals. If Congress fails to act, every American will face a tax increase, according to Smith.

The SALT tax deduction, which was capped at $10,000 in the 2017 law, will be a significant topic of discussion, Smith said. However, tax experts have stated that a complete reversal of the cap would be too expensive. Smith stated that he will look for a "middle of the road" solution on the cap. Smith added that $10,000 is not sufficient for his colleagues from New York, New Jersey, and California, and so it's a delicate balance. He doesn't know what the number will be, but SALT will be a significant part of the discussion.

Smith mentioned that in addition to the tight margin of votes, he faces another challenge between now and the passage of new tax legislation: the amount of education required on the Hill with the changes in committee composition, including his own. Only 84 GOP members have been through the process of writing tax legislation that includes expiring provisions, while on his House Ways and Means Committee, there are now only 5 GOP members (including Smith) who were part of the committee in 2017 when the Trump tax cuts were passed.