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Tax Reform Hearings May Signal Changes to Blueprint

Posted on April 19, 2017 by Dylan F. Moroses

A decision by the House Ways and Means Committee to hold hearings on tax reform indicates that the tax panel is willing to consider changes to the House Republican blueprint to win the support of more GOP members, according to several lobbyists and staff.

What those changes could be, however, remains unclear.

A Republican tax staffer told Tax Analysts that hearings are a means of getting more GOP Ways and Means members to support the proposal, suggesting that committee Chair Kevin Brady, R-Texas, does not yet have the votes to pass the proposal during a markup. “There are members who have serious reservations on border adjustment because they’re business people. It doesn’t seem to be setting in” with supporters, the staffer said.

Brady said in an April 18 Fox News interview that his committee would begin announcing hearings on the tax reform blueprint starting the week of April 24.

The staffer also said the Trump administration has indicated behind closed doors that it is ultimately unsatisfied with the approach House Republicans have taken with their tax reform blueprint, and plans to look for the Senate to lead the effort, highlighting its “bipartisan structure.” Several senators, both on and off the Finance Committee, have opposed the House Republican border-adjustable tax proposal.

A tax lobbyist and former Democratic staffer indicated that Senate Republican staff have begun to look at prior tax proposals. The question becomes whether Democrats “want to cooperate with something that would be a signature achievement for President Trump, or do they want to just hang back and see what happens without their participation?” the former tax staffer said.

Holding hearings contrasts with the failed approach Republicans took trying to repeal and replace the Affordable Care Act, when they unsuccessfully tried to gather support for the American Health Care Act. That legislation, drafted largely by leadership without member input, was pulled at the last minute from a House floor vote in March. William A. Signer of the Carmen Group said he ultimately expects “a bottom-up approach” on tax reform that will incorporate “hearings, member meetings, and meetings with outside groups to try and get a buy-in.”

One GOP tax lobbyist familiar with the situation agreed that the decision to hold hearings in Ways and Means was the result of the failures that occurred during the healthcare reform exercise. The former Democratic tax staffer told Tax Analysts that Republicans would likely avoid the same outcome by making sure there are enough votes among the entire conference to pass a tax reform bill, which could lead to changes before legislative text is released. The refocused attention on healthcare in the House also presents an opportunity in the Senate to move first on tax reform, the former staffer added.

A second tax lobbyist said the meetings Brady held with members and stakeholders the week of April 3 need to continue. “Brady is making the rounds with the right groups. It has to be weekly and not just this one week. Regular member engagement with [the Republican Study Committee] and Tea Party is key," the lobbyist said. 

The first lobbyist noted that the hearings may take place in the House Ways and Means Tax Policy Subcommittee. However, the former Democratic tax staffer suggested hearings could be held in the full committee to water down the GOP opposition within the smaller group “since there are several members on the Tax Policy Subcommittee, on the Republican side, who have a lot of reservations about the blueprint.”

The former Democratic tax staffer also expected hearings to cover both the border-adjustable tax and business expensing proposals included in the House GOP tax reform proposal.

Tax Policy Subcommittee Chair Peter J. Roskam, R-Ill., told reporters the week of April 3 that the hearings would focus on the broad themes included in the blueprint, though it was unclear whether the meetings would include discussion on specifics like the border-adjustable tax.

Roskam’s office did not respond to inquiries by press time.

Concessions Ahead?

The shape and scope of any concessions in the tax reform blueprint are still unclear, although there are several things Brady and company could do to appease naysayers. Brady has already made clear that the committee is looking at potentially addressing border-adjustable tax concerns within a transition period and that the provision would face significant changes.

Linda E. Carlisle of Miller and Chevalier Chtd. told Tax Analysts that the border-adjustable tax proposal, which has been the subject of public scrutiny for months, is a mechanism that could be reduced or changed to gather support. For example, she said, the 20 percent border-adjustable tax on imports could apply to only 20 percent of a company’s imports, which would bring in less revenue but would somewhat achieve the political goal of encouraging American manufacturing and, to a lesser degree than originally proposed, equalize tax treatment between imports and exports.

The former Democratic staffer suggested that accommodations could be made within a longer transition, with slow phase-ins and phaseouts before ultimately moving to the destination-based cash flow tax proposed in the blueprint to help businesses prepare for substantial changes to the code.

Carlisle said another option would be carving out products from the tax that cannot otherwise be cultivated or produced domestically, or specific resources like petroleum that may suffer from increased prices because of the policy change.

The second tax lobbyist suggested that carveouts could be a slippery slope: “Any major exemptions would make it non-WTO compliant, and if anyone gets a carveout, like agriculture, everyone else will want one. Plus, it hurts the revenue.”

Carlisle acknowledged the concessions could run afoul of WTO rules but said those challenges are “not as much of a determinative factor.” She said that if another country were to challenge the United States under the WTO, it would be about 10 years before the U.S. would have to react.

House Republicans have maintained their desire to pass tax reform legislation using the budget reconciliation process, a set of rules that requires any proposal to remain deficit-neutral within a 10-year window.

Signer noted the staunch opposition to the border-adjustable tax in the Senate. He pointed to its consumer impact, saying that companies investing repatriated earnings in the U.S. "will have every incentive to invest in automation and not workers if they include expensing and don’t do something to encourage domestic hiring. The playing field needs to be leveled between the two.”

Signer, former tax counsel for longtime Ways and Means member Charles B. Rangel, suggested as others have that the end tax reform product may be tax cuts instead of substantial changes. “Probably, with that prospect, the Senate will reach out to Democrats and include infrastructure. Senate wants regular order in order to make the cuts permanent, which is another reason they will reach out to Dems. Democrats will have a hard time not agreeing to an infrastructure/tax deal as long as they don’t cut ACA taxes needed to support subsidies and don’t cut the top rate,” Signer said in an email.

The first tax lobbyist said, “Brady has been clear about no carveouts since the beginning, but this is the first time I’ve seen them begin to look at carveouts for both border adjustment and interest deductibility.”

The former Democratic tax staffer also noted that “there is a lot of sympathy” for “smaller businesses that don’t have access to equity markets, particularly farmers” that would be affected by the full business expensing proposal that eliminates business interest deductibility.

Early this year, several Ways and Means Republicans told Tax Analysts that the committee was analyzing a potential carveout for small businesses from the proposal to eliminate the deductibility of net interest expenses.

Carlisle said the only way border adjustability would survive in a final tax reform bill is if “the White House rides that pony, and rides it hard.”

The second tax lobbyist expressed near certainty that the border-adjustable tax proposal would be scrapped in the Senate, “so they may be looking at [Wyoming Republican Sen. Michael B. Enzi's] international business [reform], only with infrastructure pairing to get Democrats on board, or something like that.” Enzi, Senate Budget Committee chair and a Finance Committee member, introduced the United States Job Creation and International Tax Reform Act in 2012. 

Follow Dylan Moroses (@Dmoroses3244) on Twitter for real-time updates.