Republicans have to put a budget together to do tax reform, but before budget writers get their numbers straight, they would like to have an idea of what the tax legislation will look like first. Call it a "chicken and egg" problem, according to Goldman Sachs (GS) - Get Report .
That's the pickle GOP lawmakers find themselves in as they push to get a tax bill through Congress, Goldman analyst Alec Phillips wrote in a note on Thursday. The process through which they're likely to pass legislation, reconciliation, has two steps, and Republicans sort of need to move both feet at the same time.
Normally, passing tax legislation through budget reconciliation requires Congress to first pass a budget that includes reconciliation instructions that increase or decrease revenues and the deficit by a certain amount. In other words, reconciliation writers lay out the rules of the game. Then, Congress passes actual tax legislation to fall within those pre-set parameters.
The problem that arises now is that it's still not clear what sort of instructions reconciliation writers should aim to lay out as details on even the basic goals of the Republican tax reform plan are slim. Budget committees don't want to say what they'll accept until tax writers say what they want, and tax writers can't say what they want until the budget committees lay down some rules.
"...[T]he problem that arises in the current exercise is that it is unclear what the revenue targets should be in the absence of [a] concrete tax proposal, but it is hard to agree on a tax proposal without knowing what the revenue target is," Phillips writes. "In the current context, the risk this poses is that if Republican leaders opt to pursue revenue neutral tax reform and finalize a reconciliation instruction that omits a net tax cut, we expect they will find that revenue neutral reform is too controversial to win the support of nearly every Republican lawmaker. At that point, it would be procedurally possible to pass yet another budget resolution including yet another set of reconciliation instructions, but the need to reverse course at a late stage (i.e., in early to mid-2018) would lengthen the odds of tax reform further, in our view."
The partial solution is for both tax legislation and reconciliation instructions to move forward simultaneously, which is possible but only to a point, Phillips notes. Budget writers won't have a clearer idea of what policies are politically achievable until tax reform begins to advance.
Thus far, details have been light on exactly what the finalized version of the Republican tax plan might look like. As Cowen analyst Chris Krueger points out in a Thursday note, the U.S. tax code is about 70,000 pages long. The longest current GOP tax proposal out there, the "Better Way" proposal put out by House Republicans in 2016, is 35 pages.
"[Tax policy] is the corporate hunger games and details are the coin of the realm," he wrote. "One person's loophole is another person's business model. We do not even have consensus on the bumper-[s]ticker slogan level."
House Speaker Paul Ryan (R-WI) said on Wednesday that an outline of the Republican tax plan currently being worked on by the so-called "Big Six" will be released the week of September 25. It will then be sent to legislation-writing committees to "fill in the details."
Also on Wednesday, President Donald Trump said his proposal wouldn't cut taxes for the wealthy, even though all signs thus far point to a plan that would, and seemed to flirt with the idea of a bipartisan bill that would need 60 votes (in other words, eight Democrats), instead of the simple 51-vote majority required through reconciliation.
In light of the complications, including the chicken-and-egg problem on budgeting, Goldman has downgraded its view of the probability of an "economically meaningful" tax package to 40%. "While tax reform is clearly still possible, it faces too many obstacles to be the base case at this point," he wrote.
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