Five Complications Still Seen in House GOP Tax Blueprint

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By Aaron E. Lorenzo

Nov. 25 — Not many people know all the ins and outs of the House Republican plan to remake the U.S. tax code.

House Ways and Means Committee aides have kept most details under wraps as they develop legislation from the broad framework they released in June, which they call their blueprint.

The blueprint proposes a 20 percent corporate tax rate and a 25 percent tax rate for passthrough businesses, as well as a top individual tax rate of 33 percent, followed by 25 percent and 12 percent rates. In addition, Ways and Means Chairman Kevin Brady (R-Texas) has said he might release draft language that would offer more information on the blueprint’s border adjustment proposal to tax imports and exempt exports.

But most of the changes remain unknown.

That behind-the-scenes staff work on potential legislation has led to a host of unanswered questions, several of which stakeholders, think tanks and lobbyists are eyeing closely since they could become sticking points as this tax overhaul effort starts. Here are five of them.

How Much Will it All Cost?

Brady and House Speaker Paul D. Ryan (R-Wis.) have said the blueprint won’t add federal debt when economic benefits get factored into the equation, but skeptics wonder how.

“We have estimated this proposal, as we’ve seen, would increase debt by more than $3 trillion over the next 10 years, even with macroeconomic feedback,” said Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center. “So by far, the biggest question here is how are they going to find $3 trillion?”

The Tax Foundation produced a much lower dynamic score—$191 billion over a decade. Kyle Pomerleau, the group’s director of federal projects, attributed the gulf between that estimate and Tax Policy Center’s to the latter’s inclusion of House Republican plans to repeal taxes tied to the Affordable Care Act and extra weight given to the economic effects of the federal deficit.

Additional government borrowing doesn’t crowd out private investment because there is sufficient capital, Pomerleau said.

Static scores from the Tax Policy Center and Tax Foundation aren’t as far apart. But notably, the Tax Policy Center’s dynamic score is more likely to resemble the official dynamic score from the congressional Joint Committee on Taxation, which has yet to be publicized, given modeling similarities.

That would mean House Republicans would need to find more base broadeners and make less significant tax cuts while cutting more spending on the other side of the ledger to achieve their revenue-neutral goal, Pomerleau said.

Do Border Adjustments Pass International Muster?

The blueprint’s primary international proposal, based on a destination-based, cash-flow structure, would tax imported goods and services but exempt exported goods and services.

Backers including Brady have said that the border adjustment would meet World Trade Organization standards. Establishing more of a consumption-based structure would make for more indirect taxes, passing muster on international trade, they have said.

But not everyone is convinced, given uncertainties about how much the U.S. would collect taxes based on income rather than consumption.

“There seems to be a lot of questions as to whether or not we can do that,” said Harry Stein, director of fiscal policy at the Center for American Progress.

But the economics are identical regardless of whether the tax is direct or indirect, Pomerleau said.

Still, the import tax idea has triggered opposition from the retail sector. The stronger dollar argument made by border adjustment advocates might have some mitigating effects but wouldn’t entirely eliminate the issue, Stein said, noting the political implications of causing consumer costs to rise.

Other question marks on the international tax component of the plan relate to income sourcing and expense allocation rules, said David Burton, senior fellow in economic policy at the Heritage Foundation.

What Will Qualify for Passthrough Income?

The difference between the blueprint’s top individual tax rate and its passthrough rate could get exploited, some worry.

The 25 percent rate would apply to a taxpayer’s share of active business income from a passthrough entity, excluding what gets defined as reasonable compensation for the taxpayer’s services to the business entity. But setting boundaries on active business income and reasonable compensation introduces uncertainty.

“It’s a huge question whether you can actually have a special low rate on passthrough income that doesn’t create a giant loophole,” Stein said.

The reasonable compensation definition does indeed introduce concern, said Pomerleau, who said that theoretically a lower passthrough rate isn’t necessary if there is full expensing for capital investment, as the blueprint also proposes.

A strict formula to define what qualifies and what doesn’t might emerge as an easy answer for the House Republican plan, but passthrough advocates have never embraced that idea before, Pomerleau said. Passthroughs prefer flexibility in determining labor and capital income, he said.

“So you have a tension there that they may be able to construct rules that reduce the amount of gaming,” Pomerleau said, “but those rules may also make it more difficult for this to be acceptable to certain stakeholders.”

Will They Stay or Will They Go?

The blueprint’s silence on tax preferences the plan would eliminate for businesses and individuals stands out, Burton said.

“What base-broadening provisions will be included?” he asked.

A lot of them would have to go, Burton said. Much will depend on finding agreement with President-elect Donald Trump’s administration, he said.

“I’m optimistic that we’ll get a very pro-growth tax reform plan that simplifies the system, reduces marginal tax rates, improves the tax treatment of capital investment and is a very constructive proposal,” Burton said.

But picking winners and losers is in the eye of the beholder, Pomerleau said.

The Tax Policy Center score assumed they would get rid of all tax preferences and the estimate still ended up deep in the red, Gleckman said. Cutting the top individual tax rate to 33 percent and the corporate rate to 20 percent through the blueprint are among the priciest proposals, he said.

The lion’s share of the blueprint’s benefits accrue to the top of the top income bracket, and ideas from Trump are similarly skewed, Stein said.

“I think a lot of people who supported him would expect him to look out for the interests of ordinary Americans,” Stein said.

What’s the Role of Politics in All of This?

Burton acknowledged that Republicans would try to court Democrats into playing a role, but said it remains too early to predict whether bipartisanship would shape the final outcome.

While some House Republicans favor fast-tracking their tax plan through the filibuster-proof process called reconciliation, which allows simple majority passage if certain budget limits are met, some Senate Republicans might prefer to attract Democratic support to create more politically durable legislation.

Freezing out Democrats and offering top income earners massive tax cuts in the process would seem to fly in the face of populist sentiments that emerged in Trump’s election, Stein said, citing a Tax Policy Center distributional analysis that showed 99.6 percent of the blueprint’s benefits flowing to the top 1 percent.

“Wow!” he said. “It’s hard to imagine a less appropriate response to that backlash than giving tax cuts to the top.”

Timing remains uncertain, but all indications suggest action to advance these known and unknown tax changes will be well under way when Trump is sworn into office on Jan. 20.

“They’ve been working on it for a while, and I think you’ll see draft legislation early in the next Congress,” Burton said. “I don’t think they’re going to dillydally. They’re serious.”

To contact the reporter on this story: 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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