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Congress, White House Trying to Get in Lockstep for Corporate Tax Reform

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Congress, White House Trying to Get in Lockstep for Corporate Tax Reform

While President Donald Trump pledged to soon introduce a plan to dramatically lower the tax burden on U.S. businesses, passing reform through Congress appears to be a more daunting task than originally thought.

At the center of tax reform is a controversial border adjustment tax, which has attracted legal scrutiny abroad and divided Republicans in the House and the Senate. In light of those differences, some policy experts say a vote on reform could take longer than Republicans and the president would have hoped for.

The Border Adjustment

The border adjusted tax was introduced in a tax reform blueprint by the House Ways and Means Committee, chaired by Rep. Kevin Brady, R-Texas. The tax is designed to limit American imports while encouraging American exports.

But the proposal has faced criticism that protecting American companies could distort supply and demand, ultimately raising the price tag that U.S. consumers will pay for goods. In a Feb. 3 speech, Brady said stronger exports will lead to a stronger dollar that will "re-establish" trade balances.

In other words, tax-exempt exports would theoretically increase foreign demand for U.S. dollars while import taxes reduce the outflow of U.S. dollars to other countries. Given supply and demand, the U.S. dollar should then hypothetically rise to a level that would give importers stronger purchasing power for inventory, thus offsetting any taxes those buyers would pay under the adjustment.

Critics also argue the tax, which effectively taxes at income instead of at consumption, violates a World Trade Organization "national treatment" clause prohibiting the treatment of imports less favorably than domestically produced goods. Depending on how WTO courts interpret the border adjustment tax, the U.S. could lose billions of dollars in litigation if other countries decide to file a case.

"I think the WTO consequences are very, very significant," said Jennifer Hillman, a former WTO appellate body member and current Georgetown Law professor. "I think at least the way it's currently structured there is no doubt on the imports side of the equation that the tax will be, as it's currently laid out, a violation of the WTO rule."

In the House

Henrietta Treyz, an economic policy analyst at Height Securities, said the WTO question "gets brushed off by Republicans with regularity," as representatives say they can write the language to avoid any challenges.

Treyz thinks there's a 75% chance the House passes a bill with the border adjustment, adding that House Republicans are adopting a "this is going to come hell or high water" attitude toward obstacles like the potential WTO dispute.

Tax Policy Subcommittee Chairman Peter Roskam, R-Ill., said in a speech at the Heritage Foundation on Feb. 6 that he's confident the House can pass reform within a year. Roskam added that House Speaker Paul Ryan — the former Ways and Means Committee chairman — fully supports the revenue neutral tax plan as-is and is willing to "create as much legislative space as entirely possible."

Brady said he also hopes to get reform done in 2017, adding that the House has tried to whip bicameral support for the bill by consulting 23 senators while drafting the blueprint.

In the Senate

But Republican colleagues in the other chamber don't appear convinced on the border adjustment tax. Senate Finance Chairman Orrin Hatch, R-Utah, said that while he doesn't see a "divide" on tax reform, he does have questions on who will ultimately bear the tax burden. Hatch, also the most senior Republican in the Senate, added that he had concerns over whether or not the border adjustment violates international trade obligations.

"At least a handful of senators have serious reservations about border adjustability, and that requires us to consider the bigger picture," Hatch said in a Feb. 1 speech.

Hatch isn't the only one with concerns. Sen. John Cornyn, R-Texas, tweeted Jan. 26 that he has "many unanswered questions" about the proposal while David Perdue, R-Ga., said Feb. 8 that the adjustment is a "regressive tax" that ultimately harms low-income and middle-income consumers. Mike Lee, Utah's other Republican senator, wrote a lengthy piece for The Federalist published Jan. 23 saying the border adjustment makes assumptions on international exchange rates that "could ravage huge swaths of our economy." On Feb. 15, Sen. Tom Cotton, R-Ark., expressed "serious concerns" about the tax and how it could raise prices on consumer goods sold at retailers like Wal-Mart, headquartered in his home state.

Hatch insisted in the speech that the Senate will have to embark on its own tax-reform process. Speaking on CNBC Feb. 8, Sen. Rob Portman, R-Ohio, said the Senate will likely have some reform on the table by "early summer."

"I think it should be done this year and can be," Portman said.

At the White House

Trump also doesn't appear to support the House's border adjustment, saying in a Jan. 16 interview with The Wall Street Journal that the adjustment is "too complicated."

"Anytime I hear border adjustment, I don't love it," Trump said. "Because usually it means we're going to get adjusted into a bad deal. That's what happens."

Trump promised to release a tax plan in the coming weeks, but Treyz expects that the plan will be broad and lacking specifics. Trump recently described his plan as "incentive-based," without offering any additional details. But Brady said the discussions with the White House are "exactly where I would hope they would be," estimating that about 80% of the president's plan aligns with the House plan.

"I see the common ground growing more and more each day," Brady said.

But Trump's relationship with the business community could make him more skeptical. On Feb. 15, Trump discussed tax policy with a number of CEOs of large retail companies, many of whom have teamed up to take a stance against a border adjustment tax, which they argue would increase the cost of importing consumer staples like clothing and food.

Tax cuts?

Richard Phillips, senior policy analyst at the nonpartisan Institute on Taxation and Economic Policy, said that unless the White House gets in lockstep with both the Senate and the House, it's unlikely any comprehensive reform will take place in the coming months or even in the coming years.

"There was a sense that there was a 99% chance of comprehensive tax reform that was going to pass by August, and I think that is not where those realities really are," Phillips said.

If the complications of the border adjustment tax continue, it's possible that Washington ends up trying a completely different strategy. Both Phillips and Treyz said it's more likely that Congress scraps tax reform and passes across-the-board corporate tax cuts — a move that previous administrations have done with relatively few issues.