Trump and GOP leaders agree to drop border-adjustment tax from reform

Reporting from Washington —  The Trump administration and congressional Republican leaders have ditched a controversial border-adjusted tax proposal as part of an effort to present a united front for a broad tax overhaul.

But in resolving one divisive issue, their joint statement of tax-reform principles released Thursday raised more questions about what their tax plan would look like, including the size of the cuts they will seek and whether the package would attempt to avoid increasing the federal deficit.

The border tax idea, essentially a consumption tax that exempts profits from exports, was a major part of the plan that House Republican leaders had been pushing for a year. Because it would generate large amounts of money — estimated at more than $1 trillion over the next 10 years — it could help offset deep reductions in the current 35% corporate income tax rate.

Trump has called for a cut to 15%, and the House GOP plan had envisioned a rate of 20%.

Without the border adjustment, “we’re going to be more in the 25% level,” said Marc Goldwein, a senior vice president for the nonpartisan Committee for a Responsible Federal Budget.

The statement Thursday may have acknowledged as much in saying that the goal is to reduce tax rates “as much as possible.”

At the same time, the statement said there now exists a “shared vision for tax reform,” noting that the aim would be to “protect American jobs and make taxes simpler, fairer and lower for hard-working American families.”

Other than dropping the border tax idea, the 594-word statement added little that was new. But it made clear that Republican leaders would seek to lower taxes for small businesses as well as big ones, allow for “unprecedented capital expensing” and devise a tax system that would encourage U.S. companies to bring back jobs and profits that are parked overseas.

In addition, the statement said they would seek to make the tax changes permanent, and it suggested that Republican leaders would try to pass tax-reform legislation through regular congressional committees this fall.

That could imply that Republicans will not rely on the so-called budget reconciliation process, which would allow them to pass a bill through the Senate with only Republican votes.

Budget reconciliation avoids the need to find 60 votes in the Senate, which would require getting some Democratic votes. But it also imposes certain procedural requirements that the Republicans may prefer to avoid.

The statement was signed by House Speaker Paul Ryan (R-Wis.) and Senate Majority Leader Mitch McConnell (R-Ky.), as well as the heads of the Senate Finance and House Ways and Means committees. Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn represented the White House.

Congressional Democrats reacted coolly to the statement and warned that the GOP would not be able to succeed on taxes unless they worked cooperatively with them.

“It’s disappointing that Republicans are moving forward with a rewrite of our tax code by excluding Democrats from the process,” said Richard Neal (D-Mass.), ranking member of the Ways and Means Committee.

“We all agree that the tax code isn’t working for middle-class families,” he said. But he added: “If Republicans continue this partisan process, they are doomed to repeat the same mistakes they have made trying to upend our healthcare system.”

Business groups, including the U.S. Chamber of Commerce, welcomed the news that Republican leaders in Congress and the administration were on the same page and would soon begin the work to lower taxes.

“For the first time, we are seeing joint efforts and agreement among the administration and House and Senate Republican leadership about the direction that tax reform must take,” said Mark A. Weinberger, chair of the Business Roundtable’s tax and fiscal policy committee.

Big retailers, who, along with oil refiners, were among the biggest opponents of the border-adjusted tax, were thrilled to learn that the proposal was being scrapped.

The border-tax plan is also called a destination-based tax because taxes are determined by where goods and services are sold. Currently companies are taxed on profits, regardless of where goods and services are sold or made.

Under a 20% border-adjusted tax, for example, a company that imports all of its goods would face a 20% tax on sales of those goods in the United States. But an American exporter of goods would be exempt from taxation. A business that produces and sells only in the United States could reduce its tax bite because it would be able to deduct domestic labor expenses.

Trump was lukewarm to the idea. He said it was too complicated, although he liked the prospect that imports would be more expensive and help his goal of reducing the nation’s trade deficit. Economists said that it would have little effect on the deficit in the long run.

Backers of the border tax liked the tax partly because it would sharply reduce incentives for multinational firms to relocate headquarters outside of the United States, a common practice to shift profits overseas to avoid paying U.S. income taxes.

With that proposal now off the table, it remains to be seen how the tax plan would discourage offshoring and lead to a repatriation of profits to the United States, as well as address the thorniest question of all: how the plan would pay for its tax cuts without causing the deficit to balloon.

Kyle Pomerleau, who directs federal projects at the Tax Foundation, said: “Without the border adjustment, lawmakers will need to carefully consider how to design a territorial tax system that eliminates many of the perverse incentives in our current system, but also prevents base erosion.”

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