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W&M Members Differ on Need for Border-Adjustable Tax Exceptions

Posted on June 9, 2017 by Stephanie Soong Johnston, Stephen K. Cooper

A generous transition period for the House GOP’s border-adjustable tax proposal is preferable to making exceptions to allow some imported commodities to bypass the controversial tax, the House’s top taxwriter said June 8.

“We have worked hard to steer away from exemptions to [the border-adjustable tax], but rather designs and transitions that accomplish the same thing going forward,” House Ways and Means Committee Chair Kevin Brady, R-Texas, told reporters, adding that granting exceptions would lead to “lifetime employment” for tax lobbyists. “And so, I’d strongly prefer not to go that route.”

Brady’s comments came in response to questions about a speech earlier that day by Ways and Means Committee member Tom Reed, R-N.Y., who said the tax panel was looking for input on allowing exceptions to the border-adjustable tax for nonnative commodities that must be imported.

“We don’t grow coffee. We don’t grow bananas, [so] that type of consideration is possible,” Reed said during a rapid-fire question-and-answer session following his keynote speech June 8 at a transfer pricing conference sponsored by Bloomberg BNA and Baker McKenzie.

Later, Reed told Tax Analysts that while he agreed with Brady that making exceptions could lead to picking winners and losers, the problem of imported commodities calls for a solution beyond a transition period. “How are you going to grow bananas in America? How are you going to raise cocoa in America? There are those issues that are legitimate based on the nature of what it is, that have to be dealt with,” he said.

Reed said stakeholders were raising these concerns but also offering potential solutions, none of which he would elaborate on. The border tax proposal has drawn criticism from industry groups and think tanks that predicted consumer prices will rise because of a tax on imported goods.

A new backgrounder briefing report from the Heritage Foundation released June 8 calls on lawmakers to move past the border-adjustable tax, which it calls a “significant economic gamble” that could change economic behavior in ways that may “undermine other parts of broader tax reform.”

In a statement, Brady said he disagrees with Heritage’s new policy positions, and notes that the organization called for a border-adjustable tax as part of its tax reform primer for 2016 candidates.

Support for VAT?

During the Q&A period, Reed also was asked whether a border-adjustable tax could start a trade war. “We recognize that’s a risk . . . but at the end of the day, want to put America in the most competitive position internationally,” he said. “To us, this is the best idea we were able to go and put on the table in a really concrete manner.” He also noted that the border-adjustable tax proposal would be country neutral, applying equally to all countries.

Addressing a question about whether Republicans are considering a VAT proposal, Reed noted that more and more members of the committee are starting to study the border-adjustable tax and are asking whether it would make sense to implement a VAT, as many other countries have done.

A VAT has never been a viable option in the past because of lack of committee member support, he said.  “We’re not ruling it out, but I will tell you that may be a bridge too far because of the nature of the history of folks taking positions on that,” he said.

Asked for his thoughts on a VAT, Brady told reporters that he was not open to considering it.

However, Reed noted that a VAT could make sense. “When the rest of the world is using a VAT as its primary vehicle, for us to introduce a new concept is something that comes with a price, and we recognize that.”

Tax Reform Timing

Reed expressed confidence that tax reform will get done, saying that Congress could get it “to the finish line” in the latter half of 2017 or in early 2018. He added that while he won’t rule out the possibility of a corporate tax rate reduction proposal, he hopes that the committee avoids that.  “Just doing a rate reduction only, to me, is not moving the needle,” he said. “You cause more uncertainty . . . which is highly problematic.”

Addressing the timing of tax reform, Brady said he still plans to have tax reform completed by 2017. He said legislative text will be released once a unified agreement between the White House and Congress is reached.

House Republicans will use the budget reconciliation process to pass pro-growth tax reform legislation in the House and Senate, he said. He added that the budget reconciliation instructions would include a number of revenue-neutral provisions, and final work is continuing with the House Budget Committee.