Democratic Win Sets Up Clash Over Trump Tax Cuts

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A new bridge under construction in Surf City, N.C. Both Democrats and Republicans have signaled interest in a plan to improve the nation’s infrastructure.

A new bridge under construction in Surf City, N.C. Both Democrats and Republicans have signaled interest in a plan to improve the nation’s infrastructure.


Photo:

Matt Born/Associated Press

WASHINGTON—Democrats will aim to reverse tax cuts for high-income households when they take the House majority, setting up a clash with Republicans that will color fiscal debates over the next two years, including prospects for a bipartisan deal to improve the nation’s infrastructure.

Both sides have signaled they want a spending program to improve the nation’s roads, bridges, tunnels and other public works, but disagree on how to fund it. Last year, Senate Democrats proposed a $1 trillion infrastructure plan, financed largely by rolling back cuts in the corporate and top individual tax rates. Republicans are sure to reject that idea.

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In a press conference following the midterm election, President Trump said he hopes to work with Democrats on specific issues. WSJ’s Gerald F. Seib explains two areas where the two parties could work together. Photo: Getty

“If Democrats actually want to enact legislation, they will need to identify and develop offsets that Republicans and Trump can accept as well,” said Russell Sullivan, a former staff director for Senate Finance Committee Democrats who is now a lobbyist at Brownstein Hyatt Farber Schreck LLP.

President Trump last year signed the new law, which lowered tax rates, removed some breaks and increased projected budget deficits by $1.5 trillion over a decade. Households in all groups benefit but the largest gains go to high-income taxpayers.

The partisan collision on taxes for the wealthy could also affect discussions on health care, education, more tax cuts for middle-income households and future budget deals on defense and discretionary spending.

In some cases the two parties might agree to borrow more money for tax cuts or spending, as they did when they agreed this year to boost military spending and other outlays. But Democrats argued against last year’s tax law in part because it increased budget deficits. Many Democrats insist that further spending or tax increases be paired with provisions to avoid raising budget deficits.

Democrats on the tax-writing Ways and Means Committee met before the election to start planning.

“We want an agenda that deals with the infrastructure system, which people have been talking about for a long time and never really have come up with a plan to pay for,” said Rep. Bill Pascrell (D., N.J.), a Democrat on the committee. He added that Democrats should “undo the damage” from last year’s tax cuts, including the steep drop in the corporate rate.

Mr. Pascrell said Democrats also should examine whether to raise the gasoline tax, which isn’t indexed to inflation and hasn’t changed since 1993. “We’ve had several ideas about this and I think we shouldn’t be afraid to discuss it,” he said. “We’re really abdicating our responsibility if we don’t.”

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Any talk of higher taxes runs smack into opposition from Republicans. Their control of the Senate and White House lets them block House Democrats, especially when there isn’t must-pass, deadline-driven legislation.

“There is bipartisan interest in infrastructure,” said Rep. Kevin Brady (R., Texas), who will go from being the Ways and Means chairman to its top minority member. “The challenge has always been how to pay for it. I haven’t seen any proposals from Democrats that don’t include either higher taxes or borrowing a great deal more of debt.”

On Wednesday, President Trump expressed openness to “adjustments” to pay for a 10% middle-class tax cut that he floated before the election. But he wasn’t specific about what kind of adjustments he had in mind or how serious he was about compromise on the issue.

There aren’t enough politically viable proposals to finance a tax cut that large, said Rohit Kumar, a former senior aide to Senate Majority Leader Mitch McConnell (R., Ky.) “I don’t hold out high hopes for a middle-class tax cut getting enacted in 2019,” said Mr. Kumar, now at PwC LLP.

Rep. Nancy Pelosi (D., Calif.), who is trying to reclaim the House speakership, cited bipartisan agreements that Democrats and President George W. Bush reached in 2007 and 2008 as a model for what could be accomplished in divided government.

Some of those previous deals included targeted revenue-raising provisions, such as expanded taxes on the investment income of young adult dependents and tighter tax requirements on people who renounce their citizenship. Others didn’t, especially as the economy turned into recession.

“We’re not going for the lowest common denominator,” Mrs. Pelosi said Wednesday. “We’re going for the boldest common denominator. Our position will be a consensus within our own party for what we can support but also welcoming other ideas.”

Democrats’ freshman class is full of pragmatic members from suburban districts who want accomplishments, said Arshi Siddiqui, who was a tax-policy aide to Mrs. Pelosi and is now a lobbyist at Akin, Gump, Strauss, Hauer & Feld LLP.

“If there’s the political will there, then the offsets come together,” Ms. Siddiqui said. “If the Trump administration decides that they want to get to a deal then I actually think the funding source will fall into place.”

Write to Richard Rubin at richard.rubin@wsj.com