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As Tax Debate Heats Up, Lawmakers Struggle to Think of a Plan B

February 17, 2017

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WASHINGTON—An uncomfortable question looms over the tax debate in Congress: What’s Plan B?

[Richard Rubin| February 17, 2017 |Wall Street Journal]

Border adjustment, a pillar of House Republicans’ tax proposal, is taking a beating. Big retailers are lobbying aggressively against the concept, which would tax imports and exempt exports. Senate Republicans have expressed views ranging from skepticism to hostility. Even some House Ways and Means Republicans are wary.

With Democrats sidelined, just three GOP senators could kill the House tax plan; already, more than that oppose border adjustment.

Despite that daunting math, border adjustment isn’t dead, and that is partly because Republicans haven’t developed palatable alternatives that avoid huge budget deficits or prevent the corporate tax base from fleeing abroad.

Border adjustment is essential to overhauling the tax code and encouraging investment in the U.S., and House Republicans are going to keep pushing, Rep. Kevin Brady (R., Texas), the plan’s chief architect, said Thursday.

“Without that, our tax code tells companies, go somewhere else, leave America. That’s a bad policy,” Mr. Brady told reporters. “The result will be likely higher tax rates for job creators from the smallest to the largest.”

In Mr. Brady’s plan, border adjustment serves two purposes that can’t be easily replicated, experts say. First, it would raise an estimated $1 trillion over a decade to help pay for cutting the corporate tax rate to 20% from 35%. Second, border adjustment reshapes the U.S. tax base around domestic consumption, making it harder for companies to escape U.S. taxes by putting their manufacturing, intellectual property or headquarters outside the country.

Any plausible Plan B—whether from Mr. Brady or importers lining up against him—must grapple with those two challenges.

“It would be kind of like ripping the page off and starting the essay all over again,” said Ray Beeman, a former House GOP tax aide now at Ernst & Young LLP.

One alternative would revive legislation that Dave Camp, then chairman of the Ways and Means Committee, proposed in 2014. That plan featured a 25% corporate rate, but it forced companies into longer depreciation schedules, included a bank tax and drew opposition from Republicans and multinational corporations.

Mr. Camp’s plan gave Mr. Brady and House Speaker Paul Ryan of Wisconsin the path to border adjustment—as a way to cut rates without the painful trade-offs that bedeviled Mr. Camp.

Another option would be to cut taxes and worry less about budget deficits. Messrs. Brady and Ryan say their goal is to craft a proposal that wouldn’t increase the budget deficit—after assuming economic growth and excluding the costs of repealing Obamacare taxes. They haven’t produced a full bill or estimates showing how their math adds up.

Deep tax cuts face tougher Senate procedural hurdles that would likely require them to expire after 10 years.

Sen. David Perdue (R., Ga.), a former retail executive, said lawmakers should scrap border adjustment, focusing on lower tax rates and banking on economic growth to make up revenue shortfalls.

“Trust the free enterprise system. Get this tax structure simplified, competitive with the rest of the world and then watch this economy grow,” he said. “I think they’re underestimating the power that this is going to have.”

As a group, though, Senate Republicans haven’t coalesced behind a plan.

“What I want to do is succeed. And success means 51 votes in the Senate and a presidential signature over something that makes America more competitive,” Majority Leader Mitch McConnell (R., Ky.) said in an interview this week. “Surely we can do better than the status quo.”

Even without their own alternative, senators’ objections to border adjustment echo in the House, where Republicans may get nervous about taking a tough vote on something their own party would shoot down.

“It’s going to be up, it’s going to be down, it’s going to be on, it’s going to be off,” Mr. Ryan told reporters Thursday, previewing what he called the “drama” ahead. “Tax reform is going to happen.”

Still, Republicans may start feeling heat from conservative activists.

Americans for Prosperity, the advocacy group supported by industrialists Charles and David Koch, said Thursday that it is activating a “grassroots army” against border adjustment and targeting Ways and Means members.

Republicans are also waiting for President Donald Trump to shape the debate. The president, who has been ambivalent and noncommittal on border adjustment, says he will roll out a tax plan within weeks.

During the campaign, Mr. Trump was more focused on tax cuts than on paying for them, and he was vague on international tax rules.

“Anybody who hasn’t staked out a plan yet still has that opportunity to say, let’s create our own idea, including the president,” Mr. Beeman said. “I don’t know if he’s necessarily bound by what he put together for the campaign.”

The tax plan with border adjustment would create a strong incentive to locate manufacturing jobs in the U.S., said Jeff Bornstein, chief financial officer of General Electric Co. GE backs the House proposal because it cuts rates and matches how other countries tax their companies’ foreign earnings.

“What I have not heard back is one suggestion about what a viable alternative is—not a single idea,” Mr. Bornstein said. “If there’s another idea that accomplishes everything that we as a country need out of tax reform….I’m wide open.”

Retailers, however, are focused on killing an idea they view as an existential threat without proposing their own alternative.

“We are eager to contribute to that discussion,” said Brian Dodge of the Retail Industry Leaders Association, “once the border adjustable tax, as we know it, is off the table.”


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