Expect Import Tax Transition Rules, Not Carve-Outs: Brady

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By Kaustuv Basu and Aaron E. Lorenzo

Transition rules would soften the impact of a border-adjusted import tax, according to the House Ways and Means Committee chairman.

Chairman Kevin Brady (R-Texas) is doubling down on the idea of an import tax, calling it “transformative” at a Bloomberg BNA tax outlook forum in Washington Feb. 7. And despite mounting opposition to the import tax, Brady said “we’re going to deliver tax reform in 2017” but didn’t elaborate on a timeline. Tax overhaul legislation could be released during the first half of the year, he said in a Bloomberg TV interview the same day.

There will be no exceptions or carve-outs, he said.

Brady’s cheerleading for the tax plan comes even as some in corporate America, especially retailers who import a lot of their products, stiffen their resistance to the import tax. They have voiced concern that its impact on supply chains could cause higher consumer prices. Some have petitioned to get excluded from border adjustments, but Brady hasn’t been swayed.

“You will see us go to accelerating the growth provisions in the tax code,” he said, “and smoothing out some of the major changes we’re proposing as well.”

The debate between supporters and opponents, which has begun playing out publicly through recently formed groups for and against border adjustments, could get magnified before Ways and Means at some point.

This year offers a seminal opportunity to pass tax legislation, he said.

Prickly Issue

But others aren't so sure.

Border adjustability and import taxes are a prickly issue that might not end up in a final tax bill, Stephen Moore, a senior fellow at the Heritage Foundation who advised the Trump team before the election, said during a panel discussion before Brady’s speech at the Bloomberg BNA event. As a result, the proposed corporate tax rate in the bill could go up by a few percentage points, Moore said.

The blueprint proposes a corporate tax rate of 20 percent.

The looming battle over repealing and replacing the Affordable Care Act isn’t helping either.

Rep. Kenny Marchant (R-Texas), a Ways and Means member, told Bloomberg BNA that the timing for ACA repeal and replacement efforts, as well as for tax reform, has been elongated following comments from President Donald Trump.

While dismantling the ACA has been at the top of the list for congressional Republicans, when Trump said repeal and replace must happen simultaneously, “that meant we couldn’t do repeal then replace at a later date,” Marchant said. Trump said Feb. 5 that developing a replacement for the law may stretch into 2018, though House leaders have said they are aiming to move a bill out of the Ways and Means Committee by May.

“It put health care replacement on a faster track than tax reform,” Marchant said.

Taking Time

Brady is convinced that the House GOP plan to tax imports and exempt exports would make U.S. companies more competitive globally and reduce their current motivations to move abroad.

But he continues to work to convince others, including lawmakers within his own party, on top of those import-heavy companies in the business community. A stronger dollar would result from the plan and wash away any price increase concerns, Brady said.

Brady met with members of the far-right House Freedom Caucus to talk taxes Feb. 7 after his speech, and he has continued dialogue with Senate Republicans whom he briefed during the recent congressional GOP retreat in Philadelphia.

Freedom Caucus member Rep. Dave Brat (R-Va.) said retailers such as Wal-Mart Stores Inc. shouldn’t be worried that a 20 percent tax on imports will hurt their business models. Economists pushing border adjustability, which taxes imports but not exports, say currency prices will increase to cover the cost of a 20 percent border tax.

That isn’t “theoretical,” it is a certainty, Brat, who previously taught economics, told reporters.

Nearly two dozen of them have direct input on parts of the House Republican blueprint, Brady said, convincing him that they are equally committed to overhauling tax laws soon. He expects Republicans on the Senate Finance Committee to develop their own tax bill, and hold hearings on the issues, too.

Ways and Means will also hold tax hearings, Brady said, although he didn’t commit to a schedule.

Hearings would go a long way to shedding light on how Brady wants to deal with border adjustment concerns, said one of the panelists, Melissa Mueller, a partner at Capitol Tax Partners.

Bipartisanship Required

Businesses will have little incentive to make changes to their supply chain and move operations back to the U.S. if the changes to the tax code were to expire in 10 years, said Rohit Kumar, co-leader of tax policy services in PricewaterhouseCoopers LLP’s Washington National Tax Services practice. That could be a possibility if the Senate passes a tax bill through a fast-track budget process called reconciliation.

Kumar said there will be pressure on Congress to do something more permanent.

Moore said Republicans would do well to get Democrats on board as they try to pass a tax bill in the Senate. Some parts of the overhaul such as individual taxes might be very difficult to pass without Democratic help, he said.

And if this effort at tax overhaul fails, the trend of companies exiting the U.S. for more favorable tax climates will accelerate, said Ray Beeman, a principal with Ernst & Young LLP.

With assistance from Colleen Murphy and Laura Davison in Washington.

To contact the reporters on this story: Kaustuv Basu in Washington at kbasu@bna.com and Aaron E. Lorenzo in Washington at aaron@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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