(Bloomberg) Not long after House Speaker Paul Ryan offered a full-throated affirmation of his tax-overhaul plan, an influential conservative group announced a grassroots campaign against it and a Senate leader said a key part of the proposal is “on life support.”
Senate Majority Whip John Cornyn was diagnosing Ryan’s plan to replace the U.S. corporate income tax with a new, “border-adjusted” levy on U.S. companies’ domestic sales and imports. The proposal has stirred sharp divisions among businesses: Retailers, automakers and oil refiners that rely on imported goods and materials oppose it, while export-heavy manufacturers support it.
So far, the opponents are winning, interviews with lawmakers, lobbyists and tax specialists show. As Congress prepares to depart Washington for a one-week break, Cornyn said he didn’t see the votes lining up for the House leaders’ plan.
“The hard reality is the border tax is on life support, and given the imperative of 51 senators and 218 House members and one president, I think we need to look for other options,” he said.
Some House Republicans have already expressed reservations about the plan. And President Donald Trump, who has promised to produce the outline of his own “phenomenal” tax plan within weeks, hasn’t taken an official position on border adjustability. Without Trump’s enthusiastic support, the plan’s opponents have a distinct advantage, according to several lobbyists on either side of the issue, who asked not to be named because of the issue’s sensitivity.
During a news conference Thursday, Ryan acknowledged the difficulty of steering the proposal, which is nothing short of a complete rewrite of U.S. corporate tax policy. But he said a tax overhaul is vital to ensuring America’s economic health. “We are doing tax reform. Tax reform is going to happen,” he said, acknowledging his forceful tone. “You got me going on tax reform. Sorry.”
“This is existential to our economy, and we know this,” he told reporters. “And so we’re going to get tax reform done and there’s going to be a whole bunch of drama. You’re going to enjoy covering it between now and then.”
Less than two hours after he spoke, some of the drama unfolded. Americans for Prosperity, a conservative advocacy group that opposes the border-adjusted tax plan, announced a campaign that will focus on members of Congress’s tax-writing committees. The group, which was founded by billionaire brothers Charles and David Koch, has traditionally supported Ryan.
Brent Gardner, AFP’s chief government affairs officer, suggested the issue carries potential political costs for the House speaker.
“Based on the number of folks who have already come out in the Senate, this package is probably dead on arrival,” Gardner said during a conference call about the group’s campaign. House leaders should consider whether they want to force their members to defend a vote that “does not have a future when it crosses over to the Senate,” he said.
Koch Industries, the brothers’ Wichita, Kansas-based conglomerate, has interests ranging from oil and ranching to farming and manufacturing electrical components. It would benefit from a border-adjusted business tax because it produces many products domestically, according to a statement earlier this year that was released by Koch’s lobbying arm, Koch Companies Public Sector LLC.
Ryan and other supporters say their plan is necessary to address a trade disadvantage that the current tax system creates for U.S. producers. While most countries levy taxes based on consumption within their borders, U.S. law taxes its companies based on their income— including from exports. Consequently, U.S. exporters pay taxes at home and abroad—“a huge disadvantage,” Ryan said.
He and others say that a border-adjusted approach would result in a stronger U.S. dollar—making imports less expensive and exports more costly. That change would cancel out the tax’s effect on importers and exporters, supporters say. Opponents say too many other factors can change currency valuations.
“We think it’s a bad idea to raise taxes, primarily on consumers, by $1.2 trillion and then claim that through a macroeconomics experiment, maybe it will all wash because the dollar somehow raises in value,” said Tim Phillips, AFP’s president. “That’s just far too dangerous a proposition.”
Ryan said that provision can be adjusted to allow for “a gradual transition” and ease such concerns.
Lobbying over the House tax proposal has put corporate giants on either side of the question. Companies including General Electric Co. and Boeing Co. support the proposal. Their group, the American Made Coalition, wants a plan that “spurs domestic investment and protects American jobs,” said John Gentzler, a spokesman, in an e-mailed statement.
“There is near consensus that the current tax system is complicated and broken,” Gentzler said.
Companies including Wal-Mart Stores Inc. are working against the measure. Their argument that consumers would pay higher prices on imported goods “is being very well received as we talk to members,” said Brian Dodge, a spokesman for the Virgina-based Retail Industry Leaders Association, a trade group.
The border adjustment provision is considered a key ingredient to House leaders’ plan for overhauling corporate and individual taxes. That’s because it’s estimated to raise more than $1 trillion over 10 years—providing revenue to offset a tax rate cut. House leaders want to take the current corporate rate, 35 percent, to 20 percent. They want individual rate cuts as well, taking the top rate to 33 percent from 39.6 percent.
Without a border-adjustment component, the path toward tax cuts is less clear. “My hope is we’ll look for more traditional means of limiting deductions and subsidies and tax expenditures in order to buy down the rates which will help the economy grow,” Cornyn said.
In the House, Representative Kevin Brady, who chairs the tax-writing Ways and Means Committee, said he welcomes questions about the border-adjustability approach, including criticisms from GOP senators.
“But we also make it very clear we’re not going forward with the tax code that favors foreign products” or drives jobs overseas, he said.
That’s “what currently occurs without border adjustability,” Brady said.
Ultimately, the border-adjustment provision may not be an all-or-nothing battle, said a person who participated in developing the proposal but who isn’t authorized to speak publicly on it. For example, the plan’s backers may be open to negotiating a rate lower than 20 percent, the person said.
In the meantime, though, the plan “faces an uphill battle,” said Jon Traub, a principal at Deloitte Tax LLP. “The successful early lobbying appears to have been more by the importers as opposed to the exporters.”
Still, Traub stressed that “we’re in the very early stages of a long game.”
— John McCormick, Anna Edgerton and Ben Brody
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