(Bloomberg) Republican leaders billed their decision to abandon a controversial plan to tax companies’ domestic sales and imports as an essential step toward uniting their efforts to overhaul the U.S. tax code—but its death adds new complications to an already intricate task.
Though the so-called border-adjusted tax had circled the drain for months, its last gasp on Thursday greatly increased the chances that any tax cuts Congress delivers will be shallower than President Donald Trump and other GOP leaders want, or shorter-lived, experts said. Without the proposal’s estimated $1 trillion in new revenue, a resulting bill may look more like the temporary tax cuts of 2001 than the once-in-a-generation overhaul of 1986 on which Trump and lawmakers have set their sights.
The death of the BAT “means a lot,” said Douglas Holtz-Eakin, who leads the GOP-aligned research and advocacy group American Action Forum. “Obviously it was a big pay-for so it puts pressure on the other pay-fors. There’s a lot at stake.”
Trump administration officials and top congressional lawmakers said in a joint statement Thursday that the border-adjusted tax wouldn’t be part of negotiations on tax legislation. The announcement was a victory for retailers and other import-heavy industries and for groups backed by billionaire brothers Charles and David Koch, which had strenuously opposed the measure.
The proposal, which had been pushed by House Speaker Paul Ryan for more than a year, enabled Ryan and his allies to propose lowering the corporate tax rate to 20 percent from the current 35 percent. Trump has called for going even lower—to 15 percent, a target that may be far harder to achieve.
‘Retreat from Permanence’
Republicans, who control only 52 seats in the Senate, plan to use congressional budget rules that would allow for approving a tax bill with a simple majority. But those rules also require that tax cuts would have to be offset so they don’t add to the budget deficit in the long run. If they did increase the deficit, they’d have to be set to expire over time.
Losing the revenue raised by the border-adjustment concept “could be a retreat from permanence,” said Marc Gerson, a former Republican tax counsel for the Ways and Means Committee. “The other alternative is to do something temporary that has a deficit impact."
If Republicans remain committed to a permanent remake of the tax code—and the leaders’ joint statement Thursday cited a “priority on permanence”—they’ll either have to settle for shallower rate cuts than they’ve promised, or come up with other ways to raise revenue.
In crafting the House leaders’ blueprint for taxes, Ryan felt like he had two options—pursue BAT and take on retailers, or raise revenue from a broad swath of industries by taking them all on, according to four people familiar with the speaker’s thinking. The latter approach, attempted by former Ways and Means Chairman Dave Camp in 2014, received scant support from House Republicans at the time and went nowhere. So Ryan originally chose the border tax, the people said.
So far, Senate Republicans haven’t backed any major revenue raisers, and the joint statement released Thursday didn’t specify any. Returning to a broad, Camp-style approach now could unleash a new array of opponents as industries seek to preserve their favored breaks in the tax code. It may also mean a corporate tax rate that’s higher than Republican leaders want.
Higher Corporate Rate
Without a border-adjusted tax, the lowest the corporate tax rate could go is 27 percent for a tax bill to remain revenue neutral, said Scott Greenberg, a senior analyst at the conservative Tax Foundation.
Dean Zerbe, the national managing director of tax advisory firm alliantgroup and a former Senate Finance tax counsel, said he was betting the corporate rate would be in the 26 to 28 percent range.
Setting a 28 percent tax rate would be largely meaningless for more than 150 of the largest U.S. companies, which already paid lower rates than that from 2008 through 2015, according to a recent study.
Still, Neil Bradley, the senior vice president and chief policy officer at the U.S. Chamber of Commerce, a powerful trade and lobby, said not specifying how low a corporate rate could go was a good move since "one sign of getting close to an agreement is not drawing hard lines in the sand about particular numbers."
It’s unclear how the elimination of the border-adjusted tax will affect Trump and the GOP’s plan to simplify the tax code for individuals by condensing the current seven income tax brackets to three, with a top rate of 35 percent instead of 39.6 percent, and doubling the standard deduction.
Immediate Expensing
Another potential boon for many companies—a costly proposal to allow them to fully deduct their capital spending from income immediately instead of over years—didn’t receive full-throated support in the joint statement Thursday. The statement called for "unprecedented" expensing, but didn’t make clear that it would be full and immediate.
Eliminating full expensing could save revenue for deeper rate cuts, but that’s a bad idea, according to Greenberg, who said it would boost economic growth more than a rate cut would.
One other workaround—which might extend the life of tax cuts that weren’t offset by new revenue—would be to change the time-horizon in which the cuts would be analyzed. That notion, which would increase the current 10-year budget window to as many as 25 years, has been endorsed by Senate Finance Chairman Orrin Hatch. The Utah Republican, like Ryan, is a member of the so-called Big Six group that has been meeting weekly to discuss tax priorities.
Senator Pat Toomey of Pennsylvania, who came up with the proposal for a temporary tax cut with a longer budget window, said the elimination of BAT strengthens his case.
He said without the border-adjusted tax it would be much harder "to get really pro-growth policy" on a permanent basis.
2018 Elections
Agreeing to shelve the border-adjusted tax doesn’t make it any easier to get a tax overhaul completed by the end of the year, according to John Gimigliano of KPMG LLP’s Washington National Tax practice. Ryan has said it’s imperative to accomplish the task in 2017 to avoid the influence of the 2018 elections on the legislative process.
The statement from the Big Six emphasized that tax legislation will now proceed under “regular order” meaning committees in the House and Senate will take up the tax of crafting actual legislation.
“That takes a lot of time,” Gimigliano said. “It’s going to be really hard to get this done this year."
But the U.S. Chamber’s Bradley disagreed, saying "I think we can see something enacted by the end of the year."
Even before the decision on the border-adjusted tax was made public, Republicans were racing to work on their messaging. On Thursday morning, congressional staff members briefed representatives from business groups and conservative interest groups about their planned statement with the goal of shoring up support, according to two people who were familiar with the meetings. The people asked not to be named because the sessions were private.
The staff members who ran those sessions seemed to be trying specifically to end campaigns against the border-adjusted tax, such as one led by Koch-backed groups, to keep from damaging the prospects for a tax overhaul, one of the people said.
As House members prepare to begin a five-week recess next month, the Koch-backed Americans for Prosperity announced plans to kick off a series of 50 events around the country to "unify around a positive vision for tax reform.”
—With assistance from Matt Townsend
