• Missouri Rep. Jason Smith, Republican Chair of the House Ways and Means Committee, said at the CNBC CFO Council Summit in Washington D.C. on Wednesday that he expects one major reconciliation bill in Congress next year encompassing President-elect Trump's top priorities, from tax cuts to energy and immigration.
• But Smith said he will need to "thread the needle" with a 217-215 vote advantage next year to get agreement on a package that includes key tax issues, from corporate tax measures to small business tax rates and individual tax deductions like SALT.
• While President-elect Trump has called for a lower corporate tax rate, Smith said he is only confident the corporate tax rate will not go up from 21%, and he said he is much more concerned about preserving the key 199A tax deduction which affects 99% of small businesses.

There's ongoing debate in the nation's capital about whether President-elect Donald Trump's legislative priorities, and tax cuts in particular, should be split up into multiple bills next year, but Republican House Way and Means Committee Chairman Jason Smith tells CNBC to expect one big bill next year, and that his margin for getting it passed will be narrow.

Speaking at the CNBC CFO Council Summit in Washington, D.C., on Wednesday, Smith cited the history of reconciliation bills passed in recent decades by both parties and the fact that there has never been a case where two reconciliation bills passed in the same year. Reconciliation, which only requires a simple majority, is the preferred path for new legislation given the narrow margins held by the GOP, even after its election sweep. 

"So to come up with idea that we will do a small reconciliation at the beginning that does energy and immigration and defense, and a second will be tax, is very foolish," Smith said. "It breeds failure, in my opinion."

This view is leading Smith to push for one big reconciliation bill covering many of President-elect Trump's major priorities, from energy to immigration and tax cuts. Smith added even with one bill, it won't be easy. He expects a slip GOP majority in the House of 217-215 (including two GOP members leaving to take roles in the Trump administration). "We will definitely have a task ahead of us to thread the needle," he told CNBC Washington correspondent Emily Wilkins at the CFO Council Summit.

The idea of breaking up the GOP priorities into more than one bill was proposed by incoming Senate Majority Leader John Thune (R-S.D.) during a policy retreat on Capitol Hill.

Unlike recent history, when the Senate has more typically been the more difficult legislative body through which to move legislation, it's now the House, where there are many deficit hawks, and where the effort to pass a bill with tax cuts may be even more difficult. But Smith added that "no one in the House understands tax policy better than I do and I know what's necessary to get to 217."

The downside to a larger bill encompassing both tax cuts and other Trump campaign promises is that the more contentious issues, such as immigration policy, can require difficult votes for marginal members from districts where the policy may not be popular, and derail a broader bill.

Cost of tax cuts in deficit hawk world

One of the top concerns on the Hill is a cost from Trump's expiring 2017 tax cuts that alone runs to $4.6 trillion, without taking into account any of the new tax cut promises he made on the campaign trail. But Smith said he takes the view that existing policy is not a new tax item that needs to be paid for when being extended. "Existing tax policy is never offset," he said.

Despite the fact that the Joint Committee on Taxation in Congress would score the extension of tax policy as new policy, Smith said he and others in the House and Senate view it as having a baseline new policy cost of "zero" and he wants that reflected in tax legislation language. "I expect that's what will happen," he added.

This has been a philosophical view of taxes and the budget also championed by Idaho Senator Mike Crapo.

Smith said some of the budget math has proven to be more optimistic than previous forecasts, with fiscal year 2022 alone registering $900 billion more in revenue than the original projection and the highest amount of revenue the country has ever generated with a corporate tax rate at 21%. He added that the revenue to GDP ratio remains around 17%, which is consistent with decades of history, "so we didn't add debt or deficit from the [2017] tax cuts," he said.

Spending is the big problem, with spending to GDP up to 26% over the past four years versus a long-term average of 20%. "If you believe we're not taking enough taxes from Americans then make that argument, but the facts don't add up that way if you look at 2017," he said.

The Congressional Budget Office released its latest projections related to the 2017 tax cuts on Wednesday.

New Trump tax cut promises and budget reality

Still, on the issue of any new tax cuts, Smith said it will "depend on the appetite of Congress. That's the broad answer."

President-elect Trump made many promises on the campaign trail, from no tax on tipped income, overtime pay, some Social Security tax cuts, tax cuts for first responders and the military and Americans living abroad, and deductions for auto loan interest, among others, and a revision of the SALT deductions his 2017 tax law put in place.

"Any new tax cut, providing any not part of the policy baseline, I believe will have to be offset," Smith said. A Budget Committee chairperson could add to the deficit with new tax cuts, but Smith said he does not think they will do that, or if they do, it won't be a large number.

"When you look at all the proposals the president made … things he campaigned on and would be new additions, we would need to figure out ways to pay," Smith added.

Corporate and small business tax priorities

That includes many corporate tax priorities that have already expired or will expire at the end of 2025, from provisions on research and development expense tax policy to bonus deprecation, interest expense, and Trump's desire to lower the corporate tax rate to as little as 15%.

Smith said he has been working with 10 tax committees since as far back as April on how to craft legislation that would include not only an extension of the 2017 tax cuts but looks at the entire tax code and new tax cuts as well.  And he has also been on the phone with Trump. "I have conversations with Trump quite often. You never know when he will call your cell phone and when he calls, you pick it up."

But Smith would not say that the prospects for lowering the corporate tax rate below the rate set by the 2017 tax law are good, even though Trump has talked about a lowering to 15%. "I am confident the tax rate will stay at 21%," he said, referencing a view held by many tax experts that the only certainty for large companies is that the tax rate will not increase.

Smith expressed more urgency about the small business tax rate under section 199A of the tax code which is what most small businesses under various structures use for deductions and is set to expire at the end of 2025. Smith said it is used by 99% of small business and upon expiration would increase the average tax rate for small businesses to 43.4%, from a current rate that is in a range in the "20s."

"We can't let that happen," Smith said. He said 199A is the one tax measure he would choose to make permanent if he could choose only one, because of its effect on the economy, while the corporate tax rate of 21% is already competitive on a global basis. 

Tariffs and individual taxes

New tariffs from Trump have been cited as one way to offset the cost of new tax cuts by adding a new revenue source for the government. Smith said "everything is on the table" when he is looking at "how to thread the needle. .. I have to get 217 votes out of the House and make sure at least 51 in the Senate and if I rule anything out it gets harder."

Using tariffs as part of budget math would introduce risks for both Congress and Trump. The income from tariffs is not necessarily consistent and easy to score, with limited history of tying tariffs to tax policy. And for Trump, it would mean ceding control of tariffs policy to Congress and limiting his ability to unilaterally ratchet up pressure through threat of tariffs.

Of all the expiring tax provisions, 70% are on the individual side and Smith said if Congress doesn't act that will mean "every single American will face a tax increase," he said, related to the changes in the guaranteed deduction, child tax credit and across individual rates.

The SALT tax deduction which was capped at $10,000 in the 2017 law will be part of the discussions, Smith said, but tax experts have said a full reversal on the cap would be cost prohibitive. Smith said he will look for a "middle of the road" on the cap. "$10,000 is not satisfactory for my colleagues from New York, New Jersey and California, and so it's a threading of the needle but I don't know what that number will be, but SALT will be a big part of the discussion," he said.

Smith said that between now and the passage of new tax legislation, another challenge he faces in addition to the tight margin of votes is the amount of education that will be required on the Hill with the changes in the composition of committees, including his own. Only 84 members of the GOP 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.