By LINDSEY MCPHERSON and JOHN T. BENNETTUpdated 5:39 p.m. | The decision by the White House and Republican leaders to drop a controversial border adjustment tax proposal as they proceed with negotiations on how to rewrite the tax code provides more questions than answers about where their effort is headed.
The border adjustment tax, known as the BAT, would have reversed the current way the United States taxes goods crossing its borders by taxing imports but exempting exports.
The so-called Big Six, the principals from Congress and the administration who have been negotiating the developing tax package, announced Thursday in a joint statement they would “set this policy aside in order to advance tax reform” despite seeing some potential “pro-growth benefits.”
The Big Six are House Speaker Paul D. Ryan, House Ways and Means Chairman Kevin Brady, Senate Majority Leader Mitch McConnell, Senate Finance Chairman Orrin G. Hatch, Treasury Secretary Steven Mnuchin and White House chief economic adviser Gary Cohn.
The BAT was an idea Ryan and Brady were pushing, but the other negotiators appeared to oppose. Conservative and business groups, led by retailers and the billionaire Koch brothers and their political network, strongly lobbied against it, arguing it would increase prices on gas, clothing and other consumer goods.
“We had a healthy debate on that provision,” Brady told reporters Thursday. “But in order for us to unify, it is important to set it aside for now. Perhaps there will be study in future years on it.”
The decision to proceed without the BAT leaves two big questions: How will the overhaul plan discourage U.S. companies from moving operations offshore in search of lower taxes and how will tax writers make up the estimated $1.2 trillion in revenue the BAT would have raised?
“We’ve been actively exploring with the Senate and the White House a viable alternative, and I’m confident that we’re getting close to a solution that addresses that problem of U.S. companies and profits moving overseas,” Brady said, but the Texas Republican cautioned, “We still have work to do.”
Rates and revenue neutrality
The joint statement gave a subtle nod to the loss of the BAT’s presumed revenue in that the negotiators did not make any promises on how far they would lower tax rates, saying only, “The goal is a plan that reduces tax rates as much as possible.”
The House GOP’s “A Better Way” tax blueprint that incorporated the BAT would have lowered the current 35 percent corporate rate to 20 percent, while President Donald Trump has proposed a top rate of 15 percent without any commitment to offsets.
Brady acknowledged the loss of the BAT makes it harder to lower rates but he said Republicans will still go “for the lowest rates possible.”
Tax observers and analysts have estimated that without the BAT the corporate rate would likely end up closer to 25 percent, which is what Republican tax writers had been proposing under their tax blueprint.
One question the statement does appear to settle is whether tax cuts would be permanent or temporary. The Big Six say their goal is permanence, but notably, they call it a “priority" in the statement, which provides wiggle room should they not be able to meet the standards needed to achieve that.
Under the budget reconciliation process the GOP is planning to use to advance a tax overhaul bill, tax cuts could only be made permanent if the plan is deficit-neutral in and outside the 10-year budget window.
Republican tax writers have called for a plan that is revenue-neutral under dynamic scoring. Rank-and-file GOP members have questioned whether that is necessary and have expressed concern that a commitment to revenue neutrality was in effect a commitment to the BAT.
“The statement makes clear that permanence is a high priority for our discussions,” Brady said. “This tax reform has to move us toward a balanced budget, not away from it. And that is still our top priority to make this balance within the budget counting on economic growth within the 10-year period.”
The joint statement raises several other questions beyond where the rates will end up and what will replace the border adjustment tax.
One of those questions is the matter of business expensing. House Republicans’ idea to move to full, immediate expensing, which would allow all businesses to immediately write off the full costs of their business expenses in the tax year in which they are incurred, is not off the table, Brady said.
But the statement makes no commitment to going that far, instead promising “unprecedented capital expensing.” Some Republicans, such as Freedom Caucus Chairman Mark Meadows, have floated permanent bonus depreciation, a temporary provision that allows businesses to immediately write off 50 percent of certain business property expenses, as an alternative to full expensing.
“Unprecedented expensing means that we recognize the growth aspects,” Brady said. “We’re pushing toward more than what’s in the tax code today, and as far as we can, because that drives productivity, wages and economic growth.”
The statement did not address another controversial House GOP idea, eliminating the interest expense deduction. Brady said that remains on the table in the negotiations.
The Big Six announced the tax bill will move this fall under regular order, meaning the Senate Finance and House Ways and Means committees will hold hearings and take the lead in writing the legislation.
That is a departure from how GOP leaders have handled their attempts to repeal and replace the 2010 health care law. Neither chamber held hearings on their health care plans and McConnell crafted the Senate bill behind closed doors, bypassing the committees of jurisdiction.
The GOP leaders’ joint statement also extended an olive branch to Democrats to put their fingerprints on the coming tax legislation.
“Our hope is that our friends on the other side of the aisle will participate in this effort,” the Big Six said.
Rep. Richard E. Neal of Massachusetts, the top Democrat on the Ways and Means Committee, was skeptical.
“Tax reform needs to be built from the middle out, not the top down, and Democrats will be ready to work with Republicans to make this a reality — if they put aside the failed supply-side economics of the past," Neal said in a statement.
However, Republicans still plan to proceed under the reconciliation process, which would allow a plan to get through both chambers with only GOP support.
Much of the tax overhaul process is dependent on Congress adopting a budget blueprint. A fiscal 2018 budget resolution is awaiting floor consideration in the House. It sets limits on discretionary spending and provides reconciliation instructions for 11 authorizing committees — including Ways and Means — to meet deficit reduction goals. Ways and Means is also expected to produce the tax bill.
Though differences between the chambers — and with the White House — have greatly complicated the health care push, the administration and GOP leaders described themselves as “united in the belief that the single most important action we can take to grow our economy and help the middle class get ahead is to fix our broken tax code.”