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Tax Overhaul Not Immune to GOP Infighting

Border adjustment tax among issues that could cause intraparty stress

House Republicans may experience significant intraparty disagreements over their upcoming tax overhaul effort. (Tom Williams/CQ Roll Call)
House Republicans may experience significant intraparty disagreements over their upcoming tax overhaul effort. (Tom Williams/CQ Roll Call)

Republicans have said a tax code rewrite will be easier than the health care overhaul that continues to elude them. Whether or not that proves true, a few intraparty battles likely lay ahead on taxes.

The GOP is united around the goal of a tax code overhaul. Republican lawmakers used Tax Day on Tuesday to highlight their shared vision for cutting tax rates, simplifying the code and spurring economic growth.

But the policy changes that are needed to accomplish those goals will inevitably cause some heartburn, signs of which have already emerged before Republicans have even released a bill.

Border tax woes

One major stress point is the so-called border adjustment tax, or BAT, that is part of the House Republicans’ “A Better Way” blueprint for rewriting the tax code. The BAT would have the United States tax imports instead of exports, a reversal from the current tax system.

Proponents of the BAT argue it would put the United States in line with other countries, the vast majority of which tax goods entering their borders, not leaving it. Opponents say the BAT would drastically raise the prices consumers pay for imported products, negatively impacting the economy.

Speaker Paul D. Ryan and Ways and Means Chairman Kevin Brady have been conducting an ongoing education campaign to try to get their GOP colleagues to support the border adjustment tax. Despite their efforts, dozens of lawmakers have raised objections or concerns about the idea, with opposition particularly high in the Senate.

Even more intense is the lobbying on both sides of the issue.

“The extremes are so extreme,” a former Republican tax aide said.

According to the aide, analyses of the proposal have estimated that some companies would pay taxes at an effective rate of 0 percent while others could face effective tax rates of as high as 100 percent. (Effective tax rates are calculated based on the actual percentage of income a company or individual would pay in taxes after factoring in various deductions and credits.)

President Donald Trump will be key to whether the BAT lives or dies, veteran tax lobbyist Ken Kies said.

“We’re not going to seriously know where anybody really is until, and if, the president takes out a strong position in favor or against,” the Federal Policy Group managing director said.

If Trump supports the BAT, a tax bill that includes it could pass the House, Kies said. But if the president doesn’t back it, the BAT is dead and a tax overhaul could be too, he said.

The controversy over the border adjustment tax directly correlates to a second issue that could derail the tax talks: revenue.

Various estimates show the BAT could raise roughly a trillion dollars in revenue that could be used to help the GOP offset the cost of cutting tax rates. Without it or another significant revenue source, the GOP’s tax plan could drive up the deficit — the opposite of what Republicans have promised to do.

The 1986 tax overhaul, the last major rewrite of the code, succeeded, in part, because lawmakers agreed in advance that whatever bill they passed must be revenue neutral. That meant the same amount of tax dollars would continue to flow into government coffers regardless of taxes cut or raised.

The principle of revenue neutrality is one the GOP had long promised to uphold in a modern tax code rewrite, but as they get closer to having to produce a bill, that resolve appears to have weakened.

Some rank-and-file members have suggested that tax cuts do not need to be offset, because they’ll pay for themselves over time. GOP leaders agree to a certain extent, dismissing the merits of the conventional methods for estimating the cost of legislation. But leaders have still promised that a tax bill would be revenue neutral under so-called dynamic scoring methods that look at a broader set of economic factors.

Kies said conventional revenue estimates of the GOP blueprint have it costing $2.5 trillion to $3 trillion over 10 years. Removing the BAT would add another $1 trillion in costs, and that “may well be past the choke point” of how much deficit spending Republicans can swallow, he said.

Kies said he sees the BAT as the only potential “showstopper” to overhauling the tax code. But other sources, who requested anonymity to provide realistic analyses of proposals they help advocate or oppose, say there are other issues that could lead to Republican infighting.

Interest deduction

“Everything can be a potential tripwire because in reform you obviously have to nick a lot of sacred cows,” a former GOP aide said.

That aide, the aforementioned former Republican tax aide and a former House tax aide all cited the House GOP’s plan to effectively nix the ability of businesses to deduct interest expenses as another major issue.

“It’s simmering in potential to be almost as big as the BAT,” the former GOP aide said.

Paying off interest on borrowed money has always been considered an ordinary and necessary business expense that should be deductible like other more direct business costs, the former House tax aide said. “It’s been in the code basically forever. … To change that so dramatically, I think, is going to be disruptive in parts of the economy.”

GOP leaders argue that the trade-off for losing the interest expense deduction is a proposal that would allow all businesses to write off expenses including capital expenditures in the same tax year in which they’re incurred. (The current tax code has a hodgepodge of rules for when and for how long businesses can deduct these expenses.)  

But an existing expensing provision already allows many smaller businesses to immediately write off these kinds of expenses. Those companies look at the proposal to end the interest deduction and are “scratching their heads saying, ‘What’s in this for me?’” the former Republican tax aide said.

Kies acknowledged that the interest deduction proposal has gotten some attention but said, “You don’t see members saying, ‘I can’t vote for the bill if it’s got that in it.’”

Speed bumps

Another area where Republicans may disagree is the GOP blueprint’s proposal to end the deduction for state and local taxes.

This issue has long pitted lawmakers from low tax states like Texas, who favor ending the deduction, against those from high tax states like California and New York.

The proposal has received less attention, Kies said, because there aren’t that many Republicans left in blue states that the deduction tends to favor.

Even tax breaks that the GOP has promised to keep, like the deductions for charitable contributions and mortgage interest, could cause some pushback, the aforementioned former House tax aide said.

Currently, taxpayers can only claim those deductions if they use itemized deductions on their tax returns. To encourage a simpler filing process, Republicans plan to increase the standard deduction and effectively deter the use of the more complicated itemized deduction filing process.

That proposal could anger charitable groups and real estate agents, the former House tax aide said. But there’s already talk of altering the charitable and mortgage interest deductions to make them either above-the-line deductions or credits that could be claimed with the standard deduction, the former Republican tax aide said.

Still, not all of these issues are likely to derail a tax code overhaul.

“These may just be speed bumps more than anything,” the former tax aide said.

Even the most controversial of issues, such as the BAT, could potentially be watered down to become more palatable, the former Republican tax aide said, adding, “In tax, everything is a dial.”

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