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‘Big 6’ Tout Tax Reform Unity, Drop Border Tax

Posted on July 28, 2017 by Jonathan Curry Luca Gattoni-Celli Asha Glover

The “Big Six” group of senior Republicans presented a united front July 27 with a joint statement of tax reform principles that jettisoned the controversial border-adjustable tax championed by House GOP leaders while declaring the congressional taxwriting committees ready to begin drafting a bill.

“We are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base,” the statement reads. “While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform.”

The border adjustment was integral to the destination-based cash flow tax proposed in the House GOP “A Better Way” tax reform blueprint. The joint announcement effectively ends the heated debate over the provision.

The statement — attributed to House Speaker Paul D. Ryan, R-Wis.; House Ways and Means Committee Chair Kevin Brady, R-Texas; Senate Majority Leader Mitch McConnell, R-Ky.; Senate Finance Committee Chair Orrin G. Hatch, R-Utah; Treasury Secretary Steven Mnuchin; and National Economic Council Director Gary Cohn — specifies several areas of agreement and was widely interpreted by political observers as an attempt by GOP leaders to show unity and progress on tax reform amid their protracted struggle to undo the Affordable Care Act.

The joint statement calls for reducing tax rates on both individuals and businesses “as much as possible,” and carving out a special lower rate for small passthrough businesses. The Big Six said their goal is a plan that “allows unprecedented capital expensing [and] places a priority on permanence” — but stopped short of committing to it.

Explaining the joint statement’s use of “unprecedented expensing,” Brady said, “That means that expensing is an enormously pro-growth provision. You get some of the greatest bang for the buck in growth from allowing those businesses to have a zero tax rate for new investment. Unprecedented expensing means that we recognize the growth aspects. We’re pushing towards more than it is in the tax code today, and as far as we can, because that drives productivity, wages, and economic growth.”

Asked if that signified a move away from the full expensing provision touted by Republicans, Brady said, “No, there’s no cap there. Our goal in the negotiations are unprecedented expensing.”

More broadly, the framework reiterates the goals of simplifying the tax code and providing tax relief for “hard-working American families,” while adding that the corporate tax rate should be lowered enough to make it competitive with foreign countries. Tax reform should also implement a tax system that encourages companies to repatriate profits, it says. The statement doesn’t specify any agreement on what the new individual or corporate tax rates should be, though earlier in the day, Vice President Mike Pence said in a speech to the National Federation of Independent Business that the White House still wants to reduce the corporate rate to 15 percent.

Regarding the new tax reform timeline, the statement says that the Big Six believe they have enough “shared vision” on tax reform for the two taxwriting committees to “take the lead and begin producing legislation.”

“Our expectation is for this legislation to move through the committees this fall, under regular order, followed by consideration on the House and Senate floors. As the committees work toward this end, our hope is that our friends on the other side of the aisle will participate in this effort,” the group wrote in the statement.

Republicans still intend to pass tax reform using the budget reconciliation process, a spokesperson for Ryan's office told Tax Analysts.

Border War Battle Scars

During an on-camera press briefing, White House press secretary Sarah Huckabee Sanders deflected a question about whether tax reform would increase the budget deficit. However, she added, “As you saw from the statement, the border adjustment tax was taken off the table, and that's another big step forward in the process.” 

The border-adjustable tax for months split the business community and GOP lawmakers, even on the House Ways and Means Committee, despite the support of Brady and Ryan.

Brady still stood behind the provision, telling reporters that he was “convinced border adjustability is the best solution for keeping jobs in America, bringing them back from overseas, and helping lower taxes for local businesses.” But he added that ultimately, “in order for us to unify, it was important to set it aside for now.”

Upper-chamber Republicans were less divided by the border tax — and less supportive. House taxwriters “know it’s not going anywhere,” Hatch told Tax Analysts July 26. “They say that privately; they know it’s not going anywhere.”

In a release following the joint statement, Ryan’s office said the Big Six “agreed to move forward without [the border-adjustable tax] once we determined there is a viable alternative.” However, despite the attempt to display unity, it was unclear whether a specific alternative was actually identified and agreed to.

Brady said the negotiating group has been “actively exploring” a viable alternative to the border-adjustable tax. “I’m confident that we’re getting close to a solution that addresses that problem of U.S. companies and profits moving overseas,” he said.

“We’re going to let the statement stand for itself,” the White House said when asked about a viable alternative to the border tax. In a July 17 interview at the White House, a senior administration official told Tax Analysts that tax reform discussions were focusing heavily on anti-base-erosion measures — an area that supporters of the border tax proposal have emphasized.

Ways and Means member Patrick J. Tiberi, R-Ohio, said he was never a big supporter of the border-adjustable tax and that the provision’s elimination moves Republicans closer to an agreement on comprehensive tax reform. Without the border-adjustable tax, Republicans might consider ways to lower corporate tax rates to stop corporate inversions and job losses, Tiberi told Tax Analysts.

Finding a way to end base erosion is also important to committee member Kenny Marchant, R-Texas, who said the border-adjustable tax was not supported by oil companies located in his congressional district. He acknowledged that without the tax, Republicans will either have to find $1 trillion in spending reductions or scale back their tax reform plans.

Taxwriting Committees Taking Lead

Brady pointed out that despite dropping the border-adjustable tax, other goals have not changed, including getting permanent tax reform. “The statement makes clear that permanence is a high priority for our discussions. That means this tax reform has to move us toward a balanced budget, not away from it,” Brady said.

He also said that while congressional Republicans are working to get on the same page, his committee and the Senate Finance Committee will take the lead on writing legislation.

“It’s clear in the statement today as well that while we’re working toward a unified plan, the White House recognizes it is the Ways and Means Committee and Senate Finance that will ultimately be writing this bill,” Brady said.

Marchant dismissed recent speculation that lawmakers would abandon tax reform efforts and settle for a corporate tax cut bill passing Congress in late December. “It’s a little early” for that, Marchant told Tax Analysts. “I frankly think the American people would welcome with open arms a tax cut,” he said, citing potential cuts such as eliminating the alternative minimum tax and the estate tax, as well as reforming the IRS.

‘Like Finger Painting’

Despite the joint statement expressing hope that Democrats might participate in the tax reform effort, senior congressional Democrats dismissed the announcement, with Finance Committee ranking minority member Ron Wyden, D-Ore., deriding it as vague and unformed.

“Republicans are dripping tax ideas out like a leaky faucet with no specifics to back them up,” Wyden said in a statement. “This is a far cry from the last time Congress overhauled our tax code in 1986. 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.”

Ways and Means member and former top Democratic House taxwriter Sander M. Levin of Michigan agreed. “Today’s GOP announcement on taxes once again shows they have no real plan,” he said. “A few vague paragraphs isn’t even a ‘broad strokes’ proposal — it’s more like finger painting.” 

Other Democrats criticized the removal of the border-adjustable tax without a replacement for the revenue it would have raised.

Rep. Lloyd Doggett, D-Texas, ranking minority member of the Ways and Means Tax Policy Subcommittee, said the decision to drop the border-adjustable tax “created a trillion dollar hole in their plan,” adding, “The claim that his multi-trillion dollar tax cut will pay for itself is as incredible as the claim that Mexico will pay for President Trump’s border wall.”

Ways and Means member Linda T. Sánchez, D-Calif., questioned how Republicans would replace the lost revenue. “I asked that question specifically to Mnuchin,” Sánchez said, recalling a meeting the secretary had with committee Democrats earlier this year. Sánchez said Mnuchin answered with “vague generalities."

Sánchez, vice chair of the House Democratic Caucus, said Democrats are “frustrated” because they can’t respond to nonspecific Republican tax reform plans that may include pay-fors largely based on a “numbers game” rather than solid tax policy. “We should be having hearings, and we should be discussing the underlying policy of some of the things they want to do,” she told Tax Analysts.

‘Another Big Step Forward’

Many observers hailed the framework as evidence that tax reform was gathering steam, but some remained skeptical.

In a statement, Mark A. Weinberger of the Business Roundtable praised the joint statement as an “important development toward passage of tax reform” and evidence of momentum toward enacting reform this year. He also said that the new framework’s principles lay the foundation for a “globally competitive U.S. corporate tax rate and a modern international tax system.”

Retailers also cheered the news that the border-adjustable tax had been taken off the table. “By removing this costly element of reform, the way has been cleared for swift action on a middle-class tax cut that will put more money in the wallets of the American taxpayer,” National Retail Federation President and CEO Matthew R. Shay said in a statement.

And while some in the business community may not get the sense that reform is imminent from the statement, “I do think the statement serves the purpose of signaling to the public that they are working on a path forward and there is general agreement between the administration and congressional Republican leadership on the parameters for what tax reform should look like,” Jorge Castro of Castro Strategies LLC told Tax Analysts.

“There are still many hurdles to overcome in the coming months when it comes to tax reform — on a political, policy, and technical level — but the statement is surely a step in the right direction. It will also give members of Congress a rallying point for which to discuss with their constituents back home during the August recess,” said Castro, a former Finance Committee tax staffer.

What Progress?

Other observers questioned whether the joint statement signaled much of anything about the progress of tax reform efforts.

One tax lobbyist said that a more detailed unified framework was initially supposed to have been unveiled later in the August recess before lawmakers returned in September to begin drafting legislation. “That they released it early with so little substance tells me they are even farther behind than I suspected,” the lobbyist said.

Likewise, Steven M. Rosenthal of the Urban-Brookings Tax Policy Center said that the framework did little to suggest to him that much progress has been made. “A big nothing-burger,” he said of the joint statement, though he added that at least now the policymakers can declare the border-adjustable tax “officially dead.”

Rosenthal also dismissed the notion that the taxwriting committees would soon start to develop and draft legislation should be treated as a sign of progress. “What have the committees been doing for the last decade?” he mused.

Removing the border-adjustable tax from consideration may have helped advance tax reform for now, but it will soon create headaches for taxwriters when they begin to draw up legislation, according to Kyle Pomerleau of the Tax Foundation. Losing the $1.3 trillion in revenue the border adjustment would raise over a decade will make a 15 or 20 percent corporate tax rate “unlikely” and may force lawmakers to temper their expectations on that front, he said.

“This may be a step towards something concrete, but lawmakers still have a ways to go before there is something meaningful out there,” Pomerleau said.

Stephen K. Cooper contributed to this article.

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