Senate Combs Past Proposals for Border Tax Alternative

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By Kaustuv Basu and Laura Davison

Senate Republicans are still looking at options for a replacement tax plan if a House blueprint collapses over opposition to a controversial import tax proposal.

Republican tax counsels are examining a variety of ways to expand the tax base to enable a lowering of rates in anticipation of future legislative activity, those familiar with the conversations said. The activity comes as Republican lawmakers and the U.S. business community remain divided on the impact of a 20 percent border-adjusted tax, a cornerstone of a House tax reform blueprint that could raise as much as $1 trillion over a decade and lower the top corporate tax rate to 20 percent.

Sen. Orrin G. Hatch (R-Utah) said in early March that the committee had started looking for alternatives to the plan, but that it was too early to talk about details. Last year, Hatch’s staff was working on a corporate integration plan that would eliminate tax on the dividends companies pay by allowing a deduction for those distributions. That proposal could remain in play as lawmakers eye alternatives, Hatch has said.

Political Capital

With political pressure from some senators, major retailers like Wal-Mart Stores Inc. and importers like Koch Industries Inc., it’s unclear how much political capital House Speaker Paul D. Ryan (R-Wis.) and Ways and Means Committee Chairman Kevin Brady (R-Texas) will have left to push a border-adjustment tax after the fight over repealing the Affordable Care Act, current and former congressional aides told Bloomberg BNA on the condition of anonymity so they could talk freely.

The plan could gain fresh impetus if President Donald Trump embraces border adjustability in a tax reform outline his administration is working on, or if the White House offers a new direction for a tax overhaul by suggesting an alternative idea. Also in the mix is what Trump might want to do with an infrastructure plan, because such a plan would affect trust funds, tax incentives and private activity bonds.

Senate discussions about replacement plans, meanwhile, revolve around conventional and familiar tax reform proposals. If lawmakers hope to pass legislation by the end of the year, there might not be enough time to draft and test new proposals.

Let’s Go Camping

“Those discussions are still pretty preliminary and non-specific,” a former aide said. “There also is sensitivity towards Speaker Ryan and Chairman Brady since they are understandably not interested at this point in talking about alternatives.”

Republicans staff members are currently poring over previous plans to see what elements might be palatable without meeting the fate of a tax overhaul plan promoted by former Ways and Means Chairman Dave Camp (R-Mich.).

Camp released a tax reform discussion draft in 2014 that lowered the corporate tax rate to 25 percent, by lengthening depreciation schedules and eliminating targeted tax breaks. The plan was seen by the business community as eliminating too many tax credits and deductions to only get a 25 percent rate in return.

“The Camp plan gives you a large menu. If you talk to veterans of that effort, there are things in there you can take another look at. There are also lessons to be learned from that exercise,” a Senate aide said. Any plan on the Senate side will likely have base broadening measures along with efforts to prevent American companies from moving abroad. “And anytime the corporate tax is in play, corporate integration is a tool that can be used to address some of the anti-competitive features and base erosion problems of the corporate tax system,” the aide said.

Although the search for a replacement plan in the Senate has been set in motion, Senate Finance Committee Republicans are waiting to see legislative language on the border adjustment tax, whether it is compliant with the international trade obligations and an explanation of how it will affect the business tax base.

The retail industry, meanwhile, continues to look at previous tax plans that have been made public, but its focus is on making sure the border adjustment tax is removed, a person familiar with the thinking of industry leaders said. “And until that is dead, that’s going to be our primary focus.”

Old Challenges.

Tax reform ideas that involve base broadening and rate reductions have been around for decades and come with a history of criticism.

Finding an alternative to border adjustment is particularly difficult because the mechanism serves two purposes: It is estimated to raise more than a $1 trillion over the next decade, and it is a way to keep corporate income and operations within the jurisdiction of U.S. tax authorities.

Some in the Senate are comparing the House GOP blueprint to a game of Jenga, which involves balancing small wooden blocks on top of one another, the Senate aide said. Border adjustability is a crucial block holding the blueprint together, the aide explained, and once you remove that, the whole plan could be adversely affected.

Because of concerns about eroding the U.S. tax base, border adjustment can’t simply be replaced by raising $1 trillion from other sources, such as eliminating the research credit or lowering the mortgage interest deduction cap—as proposed by Americans for Prosperity, an opponent of the border-adjusted tax.

“Some are nice ideas in theory, but in practicality most options are just another sacred ox that you have to gore,” a tax lobbyist said. “For example, realtors are already skittish on tax reform. You’re telling me that they’re not going to light their hair on fire if you lower the mortgage interest deduction?”

Ray Beeman, a former tax counsel to Ways and Means Republicans, said the legislative process can be unpredictable and it might not be worth it to think too far ahead. “It’s probably a little premature to start seriously discussing alternatives to the blueprint until we are able to see all of the legislative fine print when the chairman is ready and able to proceed,” he said. “Once that happens, then it will be possible to have an informed discussion about whether the blueprint or something else is the right answer for tax reform.”

Ryan and Brady have told business groups that complain about the blueprint that tax reform will either include border adjustability or another unpopular plan, such as the bank excise tax or the option C base erosion rules from Camp’s tax plan that would establish a minimum level of tax on income worldwide, a Republican aide said.

Rep. Devin Nunes (R-Calif.), a Ways and Means member and a strong supporter of border adjustability, has said that House Republicans turned to a destination-based cash flow tax because attempts to pass more conventional plans went nowhere in the last decade.

Sensing Opportunity

Lawmakers are using the uncertainty of the House blueprint to peddle alternative ideas.

Senators, including Majority Whip John Cornyn (R-Texas) and Rob Portman (R-Ohio), have been encouraging Rep. James B. Renacci (R-Ohio) to push his tax plan, which includes a 7 percent border adjustable tax on goods and services instead of a corporate income tax, according to a Republican aide.

The Renacci plan, which closely mirrors a plan that Sen. Benjamin L. Cardin (D-Md.) has supported for years, doesn’t take border adjustability out of the negotiations, but it does alleviate one of the biggest criticisms of the House GOP proposal—that the plan won’t comply with World Trade Organization rules and could lead to retaliation from trading partners. The Renacci plan also doesn’t eliminate the estate tax, unlike the Republican blueprint.

Cardin told Bloomberg BNA that his tax plan is drawing more interest in recent weeks and that “given an opportunity to negotiate,” he and Renacci could resolve the differences between the two plans. Unlike the House GOP blueprint, neither Cardin’s nor Renacci’s plan includes a deduction for wages costs, which WTO rules don’t allow in consumption tax systems.

Shifting Liability

Sen. Ron Johnson (R-Wis.) is talking about an idea that would make the owners and shareholders pay the corporate tax, “rather than consumers and employees pay for it.”

“A true Warren Buffet tax. It is paradigm-shifting treatment,” Johnson told Bloomberg BNA. He also pointed out that the majority of U.S. businesses are limited liability companies, and it wouldn’t be difficult to implement such a plan.

Other ideas in the mix include a 2011 plan from Senate Finance Committee ranking member Ron Wyden (D-Ore.) and Dan Coats (R-Ind.), now a former senator, that would reduce the corporate tax rate to 24 percent while allowing businesses that have gross annual receipts of up to $1 million to write off equipment and inventory costs in the first year.

A plan from Alan Viard, a resident scholar of the right-leaning American Enterprise Institute, and Eric Toder, an institute fellow at the liberal Tax Policy Center, that would reduce the corporate tax rate to 15 percent while investment income from shareholders is taxed at ordinary income tax rates is also getting a look, those familiar with conversations said.

The plan suggests a 15 percent tax for retirement plans and nonprofits on interest earned, to offset gains on holdings because of the lower corporate rate.

And if all else fails, there is nothing to prevent Congress from opting instead to pass a smaller tax package that includes temporary tax breaks called extenders and some cursory rate cuts at the end of the year, a few lobbyists suggested.

To contact the reporters on this story: Kaustuv Basu in Washington at kbasu@bna.com and Laura Davison at ldavison@bna.com

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

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