Congressional Republicans and the Trump administration, under pressure to deliver on what they hope will be the crown jewel of their economic agenda, appear close to formally jettisoning the controversial border tax proposed by House Republicans while still presenting a plan in two months that would include permanent changes to the tax code.
But whether they can dump the border tax — which would hit imports but not exports — and still meet the ambitious goals set out by President Donald Trump and House Speaker Paul Ryan remains a daunting challenge. Ryan and House Ways and Means Chairman Kevin Brady were counting on the tax, formally called a "border adjustment," to raise more than $1 trillion to fund rate cuts without swelling the deficit.
Negotiators at this point want to deliver or at least get close to Trump’s proposed corporate tax rate of 15 percent, which is contrary to outside analysts who expect the rate will have to settle significantly higher. (The corporate rate is currently 35 percent.)
If the White House gets its way and kills the 20 percent tax on corporate imports proposed by Ryan and Brady, analysts say they’ll almost certainly have to aim higher on corporate rates — more in the 25 to 28 percent range, which means companies could still be enticed by lower tax rates in other countries.
That would minimize the impact of tax reform, a reason why, despite vocal critics both in and outside government, some version of the border adjustment remains part of the discussion.
Asked how they could kill the border tax, push down rates significantly and still have the proposal not add to the deficit over ten years, one senior congressional source close to the matter said: "Very, very carefully."
A senior administration official working on tax reform said while the border tax will not be part of any final plan, negotiators are working on ways to raise revenue and reduce erosion of the U.S. tax base. This person expressed confidence a deal would be reached by September. The biggest question, the official said, is whether Congress can agree on a budget resolution that would set the stage for passing tax reform this year.
When asked whether border adjustment, which he recently offered to phase-in over five years, is dead, Brady said, “We’ve invited solutions forward, whether from the Senate or the White House, and we’re working together on this. We’ve got to solve this problem” of businesses parking revenue overseas “to do tax reform effectively in the 21st century.”
Jettisoning border adjustment could also mean not going to full, immediate deduction (or "expensing") of large purchases for small businesses, a key benefit House Republicans have promised. Without border adjustment the budgetary price tag attached to expensing, which some economists argue would be more beneficial to growth than lower corporate rates, would be too high to keep it from adding to the debt.
The White House’s current public position is that tax cuts will pay for themselves through economic growth, though the bipartisan Joint Committee on Taxation, which helps run the economic and budgetary modeling of whether legislation meets the legal requirements for a budgetary maneuver Republicans need to use to pass reform, has warned that isn’t the case.
Though the administration knows everything has to go through Ryan, Brady and House Republican leadership, White House officials and Treasury Secretary Steven Mnuchin have begun meeting directly with other members of the House on tax reform.
On Wednesday, Rep. Mark Meadows (R-N.C.), chair of the staunchly conservative House Freedom Caucus, met with White House officials on the subject. Meadows is closer to the administration’s position of cutting rates and jettisoning border adjustment, but said that regardless of what direction the principals land on, they have to get moving sooner rather than later.
“It’s important that we go ahead with the president’s tax reform plan and put it on the table and let’s debate that and make sure that we’re debating that in real terms by the end of July,” the North Carolina Republican said.
Meadows and his predecessor Rep. Jim Jordan (R-Ohio) are both vocal opponents of border adjustment, though Meadows acknowledged the caucus, which often leverages its votes with Republican leadership for changes to major legislation, is split on the provision.
“I think there are a number of our Freedom Caucus guys who are for border adjustment and some that are against,” Meadows said, a split that also reflects the differing opinions of economists, conservative groups and industries on the key part of the Ryan-Brady plan.
Also bending the ears of Republicans on tax reform are former Trump campaign economic advisers Larry Kudlow and Stephen Moore, who favor tax cuts without offsets. Going down that path would mean tax cuts would have to be temporary under the budget rules Senate Republicans plan to use.
“Of course a permanent cut is better than a temporary cut. I’d love to see it done, but you can’t do it in two months,” Moore said, using the administration’s deadline for reform of the tax code.
The issue is a major sticking point for Ryan and Brady, who have insisted tax reform must be permanent to have the biggest economic boost. The White House initially seemed willing to just drop rates and move on, even if it meant the cuts could expire. But now senior officials say they believe rate cuts should be permanent.
As part of any final plan, the White House wants to move to a territorial tax system in which overseas income of U.S. companies is no longer taxed in the United States. “You can’t go to a territorial system for a few years and then switch back,” the senior administration official said. “So it has to be permanent.”
Whether a narrowing of the divide between House and Senate Republicans and the White House is possible in the next two months, as National Economic Council Director Gary Cohn has promised, remains to be seen. Lobbyists and congressional staff continue to see the end of the year as a more realistic goal, and a Senate Finance Committee Republican staffer recently pointed to the first quarter of 2018 as the likely end of a window to pass tax reform, given the difficulty of passing major legislation in an election year.
For the time being, the Ryan-Brady plan is the script everyone is working from.
Several senators are at work on a less ambitious alternative, using portions of the 2014 tax reform effort drafted by then-Ways and Means Chairman Dave Camp (R-Mich.). But that plan, including some of the provisions they’re weighing, faced the same stiff opposition from parts of the business sector that border adjustment now faces. And senators working on it have yet to produce anything as concrete as the blueprint the House has used as its tax reform template for the last year.
The one-page document outlining highly ambitious tax goals that Cohn and Mnuchin presented this spring was met with skepticism by many House Republicans, even those opposing or on the fence about the Ryan-Brady plan. One House Republican leadership aide characterized it as barely worth the time it took to read.
Cohn and Mnuchin’s relative inexperience on the politics of tax reform, and the way Washington works, has also irked Republicans. In early meetings on Capitol Hill, Cohn said a carbon tax, value-added tax, and elimination of the mortgage interest deduction could all be on the table — all three political nonstarters.
Congressional Republicans and tax lobbyists also see a president who isn’t firmly engaged on the issue, in stark contrast to the public engagement Ronald Reagan used to gather momentum for the last comprehensive overhaul of the tax code, in 1986.
Even Moore acknowledged that Trump will have to up his engagement both to the public and to members of Congress if the effort is to get off the ground.
“Trump is going to have take the lead on this,” he said.
Meanwhile, Ryan will have to make sure he can summon enough Republican votes to approve a budget that the basic outlines of reform will be attached to. That puts more pressure on all of principals to agree on a path forward in July, when the House will aim to pass the budget.