(Bloomberg) Republicans struggling to pass a major tax overhaul that doesn’t add to the federal deficit are discussing a kind of compromise: mixing permanent revisions with temporary rate cuts for individuals and businesses.
Officials on the House and Senate tax committees are talking with the White House about a hybrid approach that would combine lasting tax code changes to deter offshore profit shifting by corporations with lower rates for a number of years, according to three people familiar with the discussions.
Mixing and matching proposals—making some permanent and others temporary—could be a potential workaround for GOP leaders who want to use a budgetary process known as reconciliation to prevent Senate Democrats from blocking tax legislation. That course limits the scope of the overall bill because it requires that any tax changes that add to the nation’s long-term deficit would have to expire.
The combined approach has emerged as administration and congressional staff evaluate the effects of various proposals, said the people, who described it on the condition of anonymity.
“It’s the best of both worlds,” said Daniel Clifton, a former tax lobbyist who was involved in the tax-cut negotiations under former President George W. Bush in 2001. “But if you’re a purist for tax cuts or a purist for tax reform, it’s going to be neither.”
Critics caution that temporary changes won’t spur the level of economic growth that President Donald Trump and congressional leaders have targeted.
A hybrid plan isn’t a new idea, but it may be gaining traction now that the controversial border-adjusted tax on imports has been eliminated from tax negotiations. The BAT was estimated to generate more than $1 trillion in revenue over a decade. Without it, tax writers are forced to find other revenue raisers to offset rate cuts—if they want permanent changes.
White House advisers, along with top congressional leaders, said last month their plan “places a priority on permanence,” but some have individually signaled some openness to shorter-term changes. Treasury Secretary Steven Mnuchin summed it up at a hearing in May: “Permanent is better than temporary, and temporary is better than nothing.”
House Speaker Paul Ryan has been more resistant, pushing especially for the corporate rate cut to be permanent, according to one of the people familiar with the negotiations.
“Consistent with our joint statement, we are placing an emphasis on permanence but no decisions have been made yet,” Natalie Strom, a White House spokeswoman, said in a statement.
Spokesmen for Senate Majority Leader Mitch McConnell and Senate Finance Committee Chairman Orrin Hatch said the tax committees would be working this fall to develop tax legislation. Hatch’s office added that the goal was a package that will provide more relief to the middle class, increase U.S. wages and job growth, and ensure American businesses can compete in global markets.
Lauren Aronson, a spokeswoman for the House Ways and Means Committee, said chairman Kevin Brady continues to believe that permanent changes to the tax code will deliver more years of economic growth. Ryan’s press office directed comments to Ways and Means.
Middle Class Cuts
The one-page outline of a tax plan that the White House released in April called for cutting the corporate tax rate to 15 percent—down from the current 35 percent. It also would condense the existing seven individual income tax rates to three, cut the top rate to 35 percent from the current 39.6 percent and double the standard deduction. Overall, the plan might cost as much as $5 trillion over 10 years, according to an estimate from the nonpartisan Committee for a Responsible Federal Budget.
Administration officials have disputed that number, but even coming up with half of it—by raising new revenue, closing out deductions and other benefits or cutting federal spending—would require a delicate balancing act that has bedeviled negotiators in the past.
Trump has repeatedly emphasized that one of his main objectives is to provide the middle class with a tax cut. He’s under pressure to deliver, especially after another promise—to repeal the 2010 Affordable Care Act—has run aground in Congress.
Making individual tax cuts temporary would help with the math. Just a reduction of 1 percentage point to the current top rate of 39.6 percent would cost $106 billion in tax revenue, without accounting for the macroeconomic effects of the cut, over the next decade, according to a calculation by Scott Greenberg, a senior analyst at the Tax Foundation.
Temporary cuts could be extended eventually. That’s what happened in 2010 as part of a deal between Republican lawmakers and former President Barack Obama over temporary tax cuts enacted under former President George W. Bush. And other proposals affecting individuals, such as calls for eliminating the alternative minimum tax and the estate tax, could be phased in slowly to avoid an immediate decline in federal revenue, or even stay in place if they’re too costly, said two of the people.
The corporate side is more complicated. Some business groups say changes affecting corporations must be permanent because executives need certainty before they can commit to hiring new workers or building more factories in the U.S.—a necessary step for achieving the White House’s goal of 3 percent annual economic growth.
But some companies would prefer a lower rate—no more than 25 percent—even if it’s just for 10 years, said one of the people familiar with the tax discussions.
It’s not clear how long a temporary corporate rate cut could last without adding to the deficit. A study that Ryan requested from the Joint Committee on Taxation showed that cutting the corporate rate to 20 percent for just three years would result in lost revenue more than a decade later. The Tax Foundation’s Greenberg said lawmakers could extend the cut by creating a revenue raiser that would kick in at the end of Congress’s 10-year budget window, though he didn’t recommend that approach.
A separate study from the Tax Foundation found that lowering the corporate rate to 15 percent for just 10 years would initially boost growth, but then would be slower in the seventh year than if there hadn’t been a cut at all, as companies braced for the higher rate to return. A temporary cut would be more likely to benefit shareholders according to that June report, while a permanent cut’s benefits would trickle down to workers.
Meanwhile, there’s broad agreement that rules to shift the U.S. tax code to a territorial system, in which most foreign profits would be exempt from U.S. taxes, must be permanent, Clifton and three others briefed on the plan said. Currently, the U.S. taxes business income no matter where on earth it’s earned—though businesses can defer taxes on offshore income until they return it to the U.S. Those features of the tax code spur companies to shift their profits offshore, and leave them there.
GOP officials are discussing how to pair a territorial system with another mechanism to prevent such profit-shifting, the three people said.
Other tax proposals—such as a costly one that would allow companies to fully deduct their capital spending from income immediately instead of over years—are being evaluated to see if they should be made temporary or permanent, the three people said. Allowing full and immediate expensing on a temporary basis could encourage companies to accelerate their investment plans—and help get the growth the White House is banking on.
Clifton, who is now the head of policy research at Strategas Research Partners, said if Republicans want to use reconciliation, then they have to accept that they won’t be able to have a full Reagan-style overhaul of the tax code. “From a practical perspective, there are going to be provisions that are not going to be fully permanent in this bill,” he said.