How GOP tax overhaul may play in the midterms

With final passage of the most sweeping tax overhaul in 31 years on Wednesday, President Trump and the Republicans in Congress have a significant legislative achievement under their belt – the crown on an economy with a surging stock market, the lowest jobless rate in nearly two decades, and annualized economic growth that tops 3 percent.

These are the contours of the Trump economy, and the president and his party now own it – happily, they believe. “Our team will go onto many more VICTORIES!” Mr. Trump tweeted. 

How it plays out politically next year – whether it curbs the traditional loss of congressional seats for a first-term president, and a highly controversial one at that – will depend on how Americans perceive and experience the economy, and what else is competing for their attention.

“How people feel about the economy will help guide their vote in 2018,” says Nathan Gonzales, editor and publisher of the nonpartisan Inside Elections. American elections are often about the economy, but not always, he says. North Korea or a terrorist attack could refocus attention on national security. The unfolding sexual harassment saga on Capitol Hill could scramble races in unpredictable ways.

At this point in time, Republicans have cause for concern. According to opinion polls, the tax bill is unpopular and so is the president – despite the positive economic indicators. Recent elections in purple Virginia and deeply red Alabama show Democrats on the rebound. Their base is revved up, while enthusiasm for Republicans is at a historic low in generic ballot polling, says GOP pollster Ed Goeas.

“The intensity gap is on steroids,” he says, adding that Republicans hope the tax overhaul – which includes eliminating the penalty for the individual mandate under Obamacare – will help gin up enthusiasm for their party’s candidates.

But how will voters react to the $1.5 trillion tax cut? The messaging war to frame the bill – hastily hammered out by Republicans with no Democratic support – is already under way and will continue next year.

Republicans say that slashing the corporate rate from 35 to 21 percent and giving other businesses a substantial break will make America more globally competitive, generate economic growth, and in turn result in more jobs and higher wages. The president on Wednesday touted the corporate tax reduction as “probably the biggest factor in our plan.”

By doubling the standard deduction and the child tax credit, middle- and low-income Americans will have more money in their pockets – $2,059 for a family of four that earns a median income of $73,000, House Speaker Paul Ryan (R) of Wisconsin repeatedly points out.

The vast majority of Americans will see a tax cut in 2018, according to independent analyses. But Democrats counter that for most families the cut won't amount to much and it’s temporary – while the bulk of the plan will benefit the wealthy and corporations and will increase the deficit by at least $1 trillion. They call it a “tax scam.”

Differences in paycheck withholding may come as early as February, “but for most people, the change won’t be big enough to make much of a difference,” says Stan Collender, a budget expert in Washington. Meanwhile, the midterm elections will take place before people have their first real reckoning with the full effects of the bill – when they do their tax returns in April 2019.

When it comes to the economy, “perception is stronger than reality,” says Democratic pollster Celinda Lake. One of the biggest factors shaping many people's perceptions of the economy right now is the stock market. In that, Ms. Lake finds an irony, since many of the strongest supporters of the president’s “Make America Great Again” agenda are blue collar and not invested in the markets.

Democrats will have to win over some of those voters to flip the House or retake the Senate (a much longer shot), she and others point out. But she says Democrats have yet to lay out a clear economic alternative: “You can’t beat something with nothing.”

Impact on wages

It may be that the expectation of a tax bill, on top of swift deregulation, have already been largely baked into the stock market, and that economic conditions won’t rocket ahead next year. Much has been made of corporate leaders who said they would use their tax cuts to buy back stock or automate, rather than create jobs or raise wages.

But Republican pollster Goeas says one part of the tax bill that could increase wages is getting scant attention, and that’s the big break that has been given to “pass-through” businesses such as partnerships and S corporations. That includes real estate titans like Trump, but also many small businesses.

“For the first time, they are giving a tax break to small businesses at the same level as to corporations,” he says. Companies that have middle-income owners are often closely and personally connected to their workers – and they may be more likely to give them a wage increase and add staff than corporations focused on shareholders.

Republicans are staking everything on the tax bill and the economy, says Republican consultant Matt Mackowiak, in Austin, Texas.

By getting the bill passed, they’ve topped off a significant list of achievements – including deregulation, a Supreme Court justice, and the appointment of federal judges, he says. And they have a stark contrast to point to, with Democrats intent on shutting down the president’s agenda, investigating him, and impeaching him: “You can imagine two very different futures here.”

If the president’s approval ratings are still in the mid-30s by the time the midterms come, “it’s going to be ugly for Republicans, there’s no way around that,” he says. “But if the tax reform works, even if [the economy] doesn’t go gangbusters ... it could contribute to a positive environment and increase Republican enthusiasm. That’s a big part of this mix. [Until now] Republicans haven’t been as enthusiastic as Democrats.”

'It's the economy, stupid'

When Bill Clinton was running for president in 1992, strategist James Carville famously drilled the same line over and over again: “It’s the economy, stupid.” But that’s not always the whole story, Rep. Tom Cole (R) of Oklahoma told reporters Wednesday.

“We’re in a very polarized period in American history. The opposition is always energized at the midterms. The economy will be a factor – I think it will be a factor in our favor – but I don’t think in and of itself it will be determinative,” says Congressman Cole.

Republicans still have to go out and fight, he says. “If a guy like Ronald Reagan lost 26 seats in a midterm, then anybody’s vulnerable.”