The GOP’s responsible taxman

As a former White House budget director, Sen. Rob Portman still cares about deficits. But as a pro-trade Ohio Republican, he’s every bit as anxious to enact long-sought corporate tax reforms to spur industrial investment back home and lift worker wages.

Where to draw the line is the big question. And amid all the crosscurrents among Republicans these days on rewriting the tax code, Portman best captures the search for a path that gives tax writers flexibility without abandoning all deficit discipline.

Toward this end, Portman has worked for months behind the scenes with staff from the Senate Finance and Joint Taxation Committees. He hopes to have something to show by June or early summer but cautions that his goal even then is to outline the potential for consensus — not to exclude competing options.

“We’re not trying to do our own thing,” he said in an interview. “It’s not a Portman effort and I don’t want it to be, because I want it to get done. I don’t want it to be: `Here’s my great idea, everyone needs to come on board.’ What I’m trying to do is build consensus on it.”

From a deficit standpoint, the end product will surely be less strict than the baseline used by Congress in enacting the landmark 1986 tax reforms under President Ronald Reagan. But if that breaks the logjam in Congress, it’s a risk worth taking, Portman argues. Moreover, the revised standards could yet become a bulwark against the potentially budget-busting tax cuts put forward by the Trump administration.

“They are creating this very pro-growth proposal which gets people excited,” Portman said of the White House and Treasury. “Then we have to come in and backfill as I see it, and how you get as close to that as possible.”

He added, “There’s a way to take what I would consider to be a more traditional pro-growth approach which some would think sounds less exciting but it’s about what’s doable. That would be lowering the rates and broadening the base. You do have to slim down some of the existing preferences in the code and get the rate down. I believe it can be done in a neutral basis.”

Portman begins by ditching the “current law” budget baseline customarily used to score tax bills and substituting it with one that reflects “current policy.”

That’s a looser standard since it assumes that expiring tax breaks over the next 10 years will simply be extended. By doing so, Portman gains $420 billion-$460 billion beyond what was available to former House Ways and Means Committee Chairman Dave Camp (R-Mich.) when he wrote a major tax reform bill in 2014 that never got off the ground.

Portman’s next step is to reinvest this windfall in precisely the sort of business tax breaks that will yield higher economic growth scores from the Joint Tax panel. By doing so, he hopes to at least double their value, giving him $1 trillion-plus in money to smooth the edges of the Camp bill.

Likely targets are Camp’s base broadening provisions which impacted the amortization of research and development expenses, LIFO accounting methods for business inventory, and taxes impacting the insurance industry.

Portman, like most Republicans, is eager to deploy “dynamic scoring,” in which potential economic growth is factored into official analyses of legislation, which can offset the cost of a proposal.

Depending on the scores he gets back from Joint Tax, Portman would like to lower the corporate rate below the 25 percent target set by Camp. But he still anticipates a five year phase-in to hold down costs. And in his comments, Portman shies away from the ambitious capital gains tax cuts and business write-offs championed by Camp’s successors on the Ways and Means panel.

It’s a two-step process — adopting a current policy baseline and making fuller use of dynamic scoring — which “provides more breathing room for tax reform,” Portman said. But having drawn this line, he would go no further.

“I don’t think we have to, to do pro- growth reform,” he said, adding, “I do think the deficits are a serious issue.”

That’s very different from the White House which is pitching a proposal with massive tax cuts— including a 15 percent corporate tax rate. Treasury Secretary Steven Mnuchin has said the administration’s plan would “pay for itself” through faster economic growth, a claim scoffed at by many independent analysts.

Yet at the same time, Portman’s critics would say his budget piety is so much hokum: that he is rationalizing more than being rational.

Deficit hawks argue that shifting to a current policy baseline only adds to the damage already done by the 2015 tax extenders bill which made permanent many tax breaks without finding revenue offsets to reduce the deficit impact. And when the Joint Tax panel used dynamic scoring on its estimates of the Camp bill, the range of results from different economic models was so wide that critics questioned the whole exercise.

Republicans counter that much more has been learned since then and that some macro-economic score from Joint Tax will surely figure in whatever tax bills emerge from the House and Senate.

Moreover, all of Portman’s spadework, together with younger colleagues on Finance, is being done with the full knowledge of Chairman Orrin Hatch (R-Utah). And as a practical matter, Hatch stands to be helped by Portman’s budget-writing credentials if the chairman is to convince the Senate to give his tax writers more leeway.

Indeed, after years of being cast as a policy wonk on the periphery, Portman has the opportunity now to make his presence felt in the Senate. He is secure in a second term, having handily won re-election by defeating a former Democratic governor and running well ahead of Donald Trump in Ohio. And beginning with his tax-writing days in the House, he’s shown an appetite for policy and ability to work Democrats.

Next to Trump’s brand of populism, Portman suffers from seeming an elite outlier: part of the Ivy League, globalist, corporate brand of Republicans. But the same 61-year-old lawmaker was early to recognize and speak out on the opioid crisis impacting many working class families at home. And Portman insists now that his support of corporate tax reform is more about worker wages than his allies in the board room.

“The conundrum we are in is where you have the economy growing slowly but wages growing even more slowly, and [therefore] a gap,” he said. “I’m excited about tax reform because there is an opportunity here to help overcome one of our biggest challenges: not just the growth in the economy being relatively low… but flat and even declining wages when you take into account inflation.”

“This is not about the boardroom,” Portman said. “The board room has done fine by the way. Inversions or being taken over by a foreign company doesn’t hurt the CEO’s. They all have nice golden parachutes or they stay on. It is about workers in my view and our ability to have more investment here rather than somewhere else. Not just by foreign companies but by US companies.”

In truth, there is an increased recognition among economists that the burden of corporate taxes falls on labor — not just capital as assumed in the past. The real argument has moved to the next step: how big is labor’s share and how much will workers truly gain from the drive now to reduce rates?

Kevin Hassett, Trump’s choice to chair the Council of Economic Advisers, is aggressive in arguing that labor will benefit significantly. And Portman takes heart from Hassett’s appointment.

Nonetheless, other economists remain more skeptical. Scorekeepers at the Treasury and the Congressional Budget Office confine labor’s share to closer to 20 to 25 percent for example, and that throws some cold water on Portman’s argument.

But the bigger question mark going forward is how far Portman can go to somehow bridge the 2014 Camp tax reform bill with the newer 2016 House Republican blueprint shaped by Speaker Paul Ryan (R-Wis.) and the current committee chairman, Rep. Kevin Brady (R-Tex.) — himself a transplant from the Midwest.

At one level, many would argue that the Camp bill is as gone from Congress and the tax debate as the former chairman himself. On the other, there is a residue of respect for the fact that Camp alone put his ideas in legislative language and not simply a few pages of talking points.

“I was not necessarily crazy about the Camp proposal but Camp was a real tax person,” said H. David Rosenbloom, director of the International Tax Program at the New York University of Law. “Camp knew what he was doing, and he comes up with a global approach to this, he comes up with a real serious proposal and what happens? [Former Speaker John] Boehner said it is blah, blah, blah. I think the shadow of Camp hangs over anything that happens now.”

Ways and Means tax staff are working to translate the Ryan-Brady approach into legislative language as well. The stated goal is get the corporate rate down to 20 percent, a full five points lower than Camp. And the plan would allow companies to deduct the cost of a new machine, for example, in just one year — much faster than the current depreciation schedules.

It’s more of a cash-flow approach, and in tandem with this change, the House blueprint proposes a new destination tax of sorts — one that will fall on products coming into the U.S. while favoring those going out. The revenues generated from this “border adjustment tax” or BAT would help pay for the reduced corporate rate. But Brady argues it is even more important from a policy standpoint: to level “the playing field” by taking taxes out of business location decision-making.

This is no small matter because well-intended reforms can also make the U.S. system more vulnerable to base erosion and profit-shifting. The shared goal is to move the U.S. more toward a “territorial” system in which income earned by American companies outside the U.S. is exempt from U.S. taxes. But that can create incentives to shift operations or profits overseas without some backstop being added.

Portman himself seems leery of a BAT, given the political fallout it has triggered as well as major policy concerns raised by tax pros like Rosenbloom. But in line with his consensus building he is careful not to dismiss it outright.

“The BAT is going to have a tough time getting the votes needed in the House and in the Senate,” Portman said. “It’s not that I don’t have a preference, I do. But I am most interested in finally getting something done so I’m not trying to rule out their ideas.

“I’m just trying to figure out what’s the consensus idea that meets the principle of making the code more competitive so we stop losing jobs and investment overseas and we can begin to see wage growth. Those would be my big issues.”

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