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Brady Proposes 5-Year Phase-In of Border-Adjustable Tax

Posted on June 14, 2017 by Dylan F. Moroses

House Republicans could include a five-year phase-in for the controversial border-adjustable tax proposed in their “A Better Way” tax reform blueprint, House Ways and Means Committee Chair Kevin Brady, R-Texas, suggested June 13.

Brady said at The Wall Street Journal CFO Network annual meeting in Washington that after listening to industries’ “fair concerns” about the proposed tax, he believes that a gradual transition would “resolve the major challenges” companies could face.

The five-year transition would initially allow businesses almost full deductibility of the border-adjustable tax, which would decrease as the gradual increase occurs to the proposed 20 percent tax on imports, Brady said.

“We’ll be lifting the ‘Made in America’ tax on U.S. exports at the same rate,” Brady told the audience. “Businesses need plenty of time to assess their current supply chain and decide what, if any, can return to the United States. And they want plenty of time to see how the dollar adjusts and at what level,” he added.

He also explained that the Ways and Means Committee is looking at including additional considerations for specific businesses during the transition to a border-adjustable tax. “Our proposal will reflect the special circumstances of some of our services — financial services, shipping, communication, digital-type services, and insurance. Because as you know, it’s hard to determine where IT starts in the cloud . . . where the border begins in the cloud,” Brady said.

Less than a week earlier, Brady was adamantly opposed to providing any exemptions from the border-adjustable tax for some imported commodities.

Ways and Means Committee member Tom Reed, R-N.Y., told Tax Analysts that Brady’s remarks about creating special rules for some industries involves “recognizing the unique characteristics of the industries in play. It’s not because we’re picking winners and losers, but it’s about recognizing . . . the reality of the world and systems that are there today.”

Reed said he expects that the transition proposal would reduce the revenue raised by the border-adjustable tax, but he was unsure about the exact amount. 

Kyle Pomerleau of the Tax Foundation said in an analysis that a straight-line phase-in of the border-adjustable tax would reduce the resulting revenue from the tax by about $220 billion over 10 years.

Reed also said that the transition proposal would “address some concerns that a lot of industries have with their supply chains.”

“If you go to a more favorable tax structure — one that the [border-adjustable tax] is trying to promote — and have a five-year phase-in, then you have the ability to adjust those supply chains and hopefully bring back those supply chains home,” Reed said.

Taxwriters Want More Details

Several Ways and Means members told Tax Analysts the committee has already discussed the idea of a generous transition for the border-adjustable tax, but some were unaware of Brady’s morning announcement and unsure whether it would solicit more support among committee members, Senate taxwriters, or administration officials.

Committee member Erik Paulsen, R-Minn., said he was encouraged by Brady’s possible consideration of rules addressing industry and member concerns, but he stopped short of saying that it would lead to his support of the provisions, saying that “details matter.” Paulsen had voiced his concern with the border-adjustable tax at a hearing in May.

Brady’s proposal for a phased-in tax didn’t impress Democratic Ways and Means member Earl Blumenauer of Oregon. “I don’t think it helps him that much, and it doesn’t change the essentials,” Blumenauer said. “I’m trying to keep an open mind on this thing, but so far it is highly problematic.”

A Senate GOP aide downplayed the impact of Brady’s suggestion for a transition period, saying the House GOP plan hasn’t gained much traction among senators. However, he noted that consideration of the border-adjustable tax will continue until lawmakers come up with a replacement.

Ways and Means Oversight Subcommittee Chair Vern Buchanan, R-Fla., told reporters that he would  discuss the proposal with Brady during an afternoon committee majority meeting. He said that he supports phase-ins for all the committee’s tax reform ideas. “We can’t abruptly do a lot of this stuff; it’s got to be over, ideally, three to five years,” he added.

Fellow House taxwriter James B. Renacci, R-Ohio, said he was familiar with Brady’s idea for a five-year transition, but added that he was interested in seeing the details of the proposal. When asked if the transition would assuage industry concerns, Renacci suggested it may not be a one-size-fits-all solution, recounting a meeting with an Ohio business owner who told him that any transition period for a border-adjustable tax less than 20 years would be impossible.

Renacci said the details behind the transition proposal would determine whether he, and other committee members with concerns, would support the border-adjustable tax. 

Brady pointed to business executives he said told him they could “bring back significant parts of their supply chain” if tax reform included border adjustment. However, Americans for Affordable Products, a coalition of businesses opposed to the border-adjustable tax, criticized Brady’s suggestion in a statement, saying that the chair is “clearly not listening.”

“Chairman Brady’s proposed five-year transition does nothing to change the harmful impact on consumers. It only delays the political consequences for lawmakers,” Americans for Affordable Products spokesman Joshua Baca said.

Interest Deductions, International Deliberation

Brady said that some business deductions will remain under the tax reform blueprint for specific activities like purchasing real estate or paying utility costs. When describing a potential exemption for small businesses, Brady noted that some companies “don’t have access to capital markets,” but he did not elaborate on how that carveout would be implemented or which businesses would qualify. He said only that he foresees “an exemption for small businesses so that they can take advantage of both” full expensing and interest deductibility. House Republicans have been working on an exemption from the elimination of net interest expense deductions for small businesses, particularly those that rely on debt financing.

Brady said the blueprint’s deemed repatriation proposal includes a bifurcated rate of 3 percent-plus for brick-and-mortar businesses and 8 percent-plus for cash flow businesses that will repatriate their foreign earnings. He acknowledged that other stakeholders may have different thoughts about repatriation, but said that those ideas will be a part of lawmakers’ tax reform discussions.

David van den Berg and Stephen K. Cooper contributed to this article.

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