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Freedom Caucus Sets Up Battle With Leadership Over Taxes

Conservatives seek to attach welfare cuts to tax overhaul in exchange for budget deal

The Freedom Caucus, led by Chairman Mark Meadows, outlined Friday its principles for a tax overhaul. (Bill Clark/CQ Roll Call File Photo)
The Freedom Caucus, led by Chairman Mark Meadows, outlined Friday its principles for a tax overhaul. (Bill Clark/CQ Roll Call File Photo)

House Republican leaders are negotiating a tax overhaul with their counterparts in the Senate and the White House, but another group of GOP lawmakers is signaling it too must be included in any deal.

House Freedom Caucus leaders are laying out their ideas for overhauling the tax code that, together with a related proposal for getting a budget deal, is likely to set them up for a fight with GOP leaders and tax writers.

Most of the four “principles” for a tax overhaul that Freedom Caucus Chairman Mark Meadows and three other caucus members unveiled at a Heritage Foundation event Friday are not major deviations from the House GOP leaders’ framework though there are some notable differences.

But perhaps more striking were the ideas the Freedom Caucus members made clear they were not pushing — a revenue neutral bill and the inclusion of the border adjustment tax, both linchpins of leadership’s plan.

The caucus members also offered a wildcard idea of adding a welfare overhaul to the yet-unwritten reconciliation instructions for a tax rewrite, something they argue would perhaps convince them to accept a larger topline spending figure in the fiscal 2018 budget resolution.

Amid all of those ideas is an urgency to move quickly. “We should have a real proposal that we start debating before we leave at the end of July,” Meadows said. “But if not, we’ve already taken a formal position: We believe that we need to stay in through August until we get it done.”

The North Carolina Republican suggested that lawmakers move the ball closer to that goal post by agreeing to four principles within the next four weeks.

Four principles

The Freedom Caucus’s four principles for a tax overhaul are:

  • lower the tax rate for both corporations and small businesses to 20 percent;
  • accelerate the time frame under which businesses can write off certain expenses;
  • allow for a voluntary repatriation of offshore earnings over 20 months at a reduced tax rate of 8 percent,
  • double the standard deduction for individuals.

House Republican leaders’ “A Better Way” plan does call for lowering the current 35 percent corporate tax rate to 20 percent but proposes a 25 percent rate for small business organized as passthrough companies, which are taxed at individual rates that currently top out at 39.6 percent.

Leadership’s plan would also allow businesses to write off the full cost of certain investments in the tax year that they’re incurred — something the Freedom Caucus is open to with modifications to account for businesses that borrow money for investing rather than use cash — and nearly double the standard deduction for individuals.

The biggest gap between the two proposals is on repatriation of offshore earnings.

GOP leaders’ plan would institute a mandatory tax on existing offshore earnings of 8.75 percent for cash assets and 3.5 percent for nonliquid assets. Unlike the Freedom Caucus proposal, which seeks to incentivize companies to bring offshore earnings back to the U.S. in exchange for a lower tax rate, leadership’s plan would require U.S.-based companies to pay the repatriation tax regardless of whether they bring their offshore money home.

No border tax

While the differences between the Freedom Caucus’s four principles and leadership’s framework are not minor, they could be worked through. But the red line the caucus has drawn against the border adjustment tax is more problematic for House leadership.

“There is not consensus for the border adjustment tax,” Meadows said. “The sooner we acknowledge that and get on with a plan that actually works and actually can build consensus, the better off we’ll be.”

The border adjustment tax, or BAT, is a proposal to tax imports instead of exports, reversing the way the United States taxes goods crossing its borders. House GOP leaders, namely Speaker Paul D. Ryan of Wisconsin and Ways and Means Chairman Kevin Brady of Texas, have pushed for the tax as a way to discourage U.S. companies from moving operations overseas and to raise roughly $1 trillion in revenue to partially offset an ambitious corporate tax rate cut. But the idea has faced steep opposition from within their own party — Meadows and others have argued, that it’s politically unfeasible to pass.

“I think it’s lost a lot of momentum,” said Rep. Warren Davidson, a Freedom Caucus member. The Ohio Republican said he could actually live with the BAT as part of a larger tax overhaul but the problem is that leadership still has not offered a proposal on how to implement it.

Ryan and Brady have shown no interest in letting go of the BAT but say they’re open to better ideas for raising revenue and preventing tax base erosion, which could be triggered by a flood of U.S. taxpayers, primarily businesses, moving to lower tax jurisdictions.

Even if Congress could cut the corporate rate from 35 percent to 20 percent, as House GOP leaders have proposed, or 15 percent, as President Donald Trump has called for, the United States would still have a higher tax rate than some other developed nations.

The Freedom Caucus members did not specify an alternative to the BAT for preventing tax base erosion, but they said the revenue is not needed because they don’t adhere to the principle that an overhaul needs to be revenue neutral, which would require the same amount of tax money to continue flowing into the Treasury as under current law.

“What is not in those principles is this concept of revenue neutrality,” said Ohio Rep. Jim Jordan, a caucus member and former chairman of the group. “Letting families keep more of their money is not a cost to government. It is a freedom.”

Temporary tax cuts?

Since Republicans are planning to use the budget reconciliation process to advance their tax bill, the measure must be deficit neutral for the tax overhaul to be considered permanent. GOP leaders say temporary tax cuts that would expire at the end of the 10-year budget window — like the George W. Bush tax cuts whose expiration led to the 2012-2013 fiscal cliff — is not an option, but the Freedom Caucus isn’t ruling that out.

“Some of the tax cuts could be temporary so you don’t need to get full deficit neutral, but we’re hoping to get close to that,” Jordan said.

An idea that Jordan proposed that could help achieve the needed savings is adding a welfare overhaul to the reconciliation instructions for the tax bill. The Freedom Caucus is looking at taking an official position, suggesting that as a possible trade-off to them supporting a budget deal with larger topline spending number for fiscal 2018, Jordan said.

“Right now a budget cannot pass in the House of Representatives,” he said.

Absent a budget deal along those lines, House Republicans will struggle — like they did last year — to pass a budget resolution, Jordan said. House Republicans need to pass and reconcile a budget resolution with the Senate to execute the GOP’s procedural strategy for advancing a tax overhaul. An agreement on the topline spending number is also needed for appropriators to begin moving fiscal 2018 spending bills.

“If someone can come up with a better idea than the one we’re putting forward … we’re all ears,” Jordan said. “But no one can. So we think that’s the key in the short term to do all the things we promised the American people.”

Meadows said Jordan’s welfare overhaul plan would result in roughly $400 billion in savings, and with that and the tax ideas the Freedom Caucus is discussing, a deficit neutral reconciliation bill is possible. “It should get us there,” he said, noting, though, that temporary tax cuts represent a “fallback plan.”

The divisions among House Republicans about how to approach a tax overhaul are complicated by the fact that GOP leaders are striving to come up with a single, unified plan that also has the support of the Senate and White House. The gaps among the Republican power structures are fairly wide.

“Right now on tax reform there’s disagreement in the House, there’s disagreement in the Senate, there’s disagreement between the House and the Senate and there’s disagreement with the administration,” Texas Sen. Ted Cruz said at a Faith and Freedom Coalition conference in Washington on Thursday. “Other than that, we are all on the same page.”

Joe Williams contributed to this report.

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