(Bloomberg)—Republican leaders said on Thursday that the proposed border-adjusted tax won’t be part of negotiations on how to overhaul the U.S. tax code—delivering a victory to retailers’ groups that had strenuously opposed the measure.
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A statement Thursday from the so-called Big Six—which includes House Speaker Paul Ryan, Ways and Means chairman Kevin Brady, White House economic adviser Gary Cohn, Treasury Secretary Steven Mnuchin, Senate majority leader Mitch McConnell and Senate Finance Committee chairman Orrin Hatch—said due to the unknowns associated with the border-adjusted tax, the group “had decided to set this policy aside in order to advance tax reform.”
“And 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 said.
Ryan and Brady, who spent more than a year championing the border-adjusted tax, had been telling Republicans prior to the statement’s release that the concept would no longer be part of tax-legislation negotiations, according to four people familiar with the ongoing discussions who asked not to be identified because the talks were private.
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While the decision will clarify some issues related to Republican leaders’ attempts to enact the first comprehensive tax overhaul in more than 30 years, it leaves a key challenge: How to balance desired tax-rate cuts with new sources of revenue. The BAT, as Ryan’s concept was known, would have raised more than $1 trillion over a decade, according to estimates. The joint statement contained little clues about that path forward.
Brady told reporters Thursday it was a “significant” day for tax reform, but added that tax writers “still have lots of work to do.” Asked about any other concrete decisions the group had made in recent months, Brady demurred, citing unspecified “progress” toward a unified tax solution.
Camp tax plan
The statement Thursday set a goal for formulating a plan that “places a priority on permanence”—a signal that the group still wants a tax bill that balances new revenue against its tax-rate cuts.
But without the BAT’s revenue, it will be more difficult for Republicans to make the kind of historic tax cuts for businesses and individuals that President Donald Trump has promised—and to keep them permanent. Under the congressional budget rules that GOP leaders plan to use to pass the legislation with a simple majority in the Senate, any tax changes that would add to the long-term deficit would have to be only temporary.
Now, congressional tax writers will have to consider multiple ways to raise revenue from different industries by closing loopholes, similar to provisions in a tax plan put forth by former Representative Dave Camp in 2014, said a Republican aide, who asked not to be named because the discussions are private.
The border-adjustment concept had been under attack by retailers and other industries that rely on imported goods, with a powerful campaign saying the tax would raise prices for working Americans on everyday goods. A group funded by Koch Industries Inc. unveiled a plan in February to derail the proposal.
“We’re greatly encouraged to see leaders put this harmful provision behind them and start to unify around a positive vision for tax reform,” Tim Phillips, president of Americans for Prosperity, one of the groups backed by billionaire industrialists Charles and David Koch, said in a statement.
The BAT had also been criticized by conservative Republicans, including House Freedom Caucus Chairman Mark Meadows, who had called for assurances it would be eliminated before proceeding with a 2018 budget resolution—an essential first step to getting a tax overhaul passed without Democratic support.
Eliminating the border-tax proposal is “a prudent decision that will help move forward tax reform that works for all Americans,” said House Freedom Caucus spokeswoman Alyssa Farah.
Marc Gerson, a tax lawyer at Miller & Chevalier, said without a border-adjusted tax, the question for lawmakers was now how low tax rates could realistically get.
The joint statement also called for “unprecedented capital expensing” — a change aimed at allowing businesses to accelerate their write-offs for new investments. Ryan and Brady have proposed immediate, full deductions for such capital expenses; it wasn’t immediately clear if the new language represented a step back from their position.
The omission “may be a concession to the notion that there’s now less revenue available for that,” said Gerson.