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Republican lawmakers dropped the controversial border adjustment tax, a move that signals willingness to work together within the GOP but leaves members of Congress without a plan to coalesce around.
Abandoning border adjustment, which taxes imports but not exports, means Republicans in the House, Senate, and White House will have to agree on additional revenue raisers and base erosion measures. The border adjustment tax would raise more than $1 trillion, according to estimates, and encourage companies to make products in the U.S. A central goal of the GOP-led effort to overhaul the tax code is to significantly lower rates and move to a territorial system, where income is taxed in the country where it is earned.“It’s important to set that aside, so that we can unify on tax reform,” House Ways and Means Committee Chairman Kevin Brady (R-Texas) told reporters after releasing a joint statement with the Senate Finance Committee and Trump administration about the process for tax reform. “I’m confident we are getting close to a solution that addresses that problem of U.S. companies moving profits and jobs overseas. We still have work to do.”
The high-level statement is the result of meetings between Brady, Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) , House Speaker Paul D. Ryan (R-Wis.), Senate Majority Leader Mitch McConnell (R-Ky.), Treasury Secretary Steven Mnuchin, and National Economic Council Director Gary Cohn. The group has been planning to put out a tax plan in September.
Border adjustment had been a central feature of the House GOP tax plan for more than a year, but failed to garner support among Senate Republicans and administration officials. Retailers, oil refiners, and billionaire political donors Charles and David Koch heavily opposed the tax.
“Kevin Brady is not a my-way-or-the-highway kind of guy,” Ways and Means member Carlos Curbelo (R-Fla.) told reporters. “This was our decision. This was something we brought to the table to show our willingness to come together and make this a reality.”
Lawmakers will now need to agree on a framework, including revenue raisers, for overhauling the tax code. Brady said that discussion will be done in conjunction with the Senate and administration officials. The five-paragraph statement broadly outlined a vision to implement tax policies that lead to economic growth and job creation.
A former Senate tax staffer noted that besides declaring the border adjustment tax is now dead, the group did not address other areas of disagreement like full expensing and a lower rate for passthroughs.
The document referenced “unprecedented expensing,” a downgrade from the full and immediate expensing that had been part of the House GOP tax plan. Koch Industries Inc. and members of the House Freedom Caucus, a group of conservative and libertarian members, have been critical of full expensing, saying they would prefer lower rates. The statement didn’t mention the interest deduction for businesses, which the House blueprint would have eliminated.
Ways and Means and Finance Republicans will head to late President Ronald Reagan’s ranch in California Aug. 16 to talk through the plan’s details, Brady said. Rep. Richard E. Neal (D-Mass.) and Sen. Ron Wyden (D-Ore.), the ranking members for the two tax-writing committees, criticized the majority for excluding Democrats from the process.
“This is a far cry from the last time Congress overhauled our tax code in 1986,” Wyden said in a statement. “Republicans worked with Democrats from the get go and knew that a long-term, bipartisan solution was necessary to create jobs and grow the economy.”
Lawmakers will likely look to scale back capital expensing provisions, curb rate reductions, and pass on repealing the estate tax in order to make up for some of the lost revenue, according to a tax lobbyist who was granted anonymity to protect client sensitivities.
It’s unclear if the House will even need to pass a revenue-neutral bill. The statement said a comprehensive, permanent re-write of the code is a priority, but it’s uncertain that the House will be able to pass the fiscal year 2018 budget, which contains the reconciliation instructions for tax reform.
House Freedom Caucus members have said they want to see tax reform details before agreeing to the budget. Eliminating border adjustment is a good step, but might not be enough to sway members of the Freedom Caucus, the group’s former chairman Rep. Jim Jordan (R-Ohio) told Bloomberg BNA.
Without the streamlined Republican-only path that reconciliation provides, GOP lawmakers wouldn’t be bound to a revenue-neutral bill, but would have to work with Democrats to get 60 votes in the Senate. In that scenario you’re looking at a “tax extenders on steroids bill,” said Henrietta Treyz, managing partner and director of economic policy research at Veda Partners.
This could include a small corporate rate cut to about 30 percent, she said. Bonus depreciation could be expanded and some expiring tax provisions could be extended, she said. This likely wouldn’t be paid for, she said, meaning that it would add less than $1 trillion to the deficit over a decade. There’s a “meaningful uptick” in urgency to do something by the end of the year, Treyz said.
“There is still a great deal of confidence, even though there is evidence that maybe there shouldn’t be so much confidence, given the experience of health care,” Robert Willens, president of the tax and consulting firm Robert Willens LLC in New York, said. Investors “don’t necessarily think the bill will be comprehensive, but this statement today is a positive statement.”
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