Border Adjustment Dropped from GOP Tax Plan

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Bowing to the demands of major retailers, whose claims were buoyed by conservative activists like import-reliant Koch brothers, the White House and Republican Congressional leadership officially confirmed late last week in a joint statement what had long been rumored: a border adjustment tax will not be used as a pay-for in the tax reform program Republicans hope to pursue this fall.

In the joint statement, the so-called “Big 6” (Speaker Paul Ryan (R-WI), Chairman Kevin Brady (R-TX), Finance Committee Chairman Orrin Hatch (R-UT), Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn) stated: “While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform.” In an interview yesterday, Chairman Brady said that he still thinks border adjustment is the best solution for keeping jobs in America, but that “… in order for us unify, it was important to set it aside for now.”

As the border adjustment tax proposal was estimated to raise between $1 trillion and $1.2 trillion in revenue that could be used to lower tax rates, law makers will have to identify alternative revenue sources if they wish to lower tax rates without increasing the deficit. Apart from abandoning a border adjustment tax, the joint statement did not address such key issues as the level at which tax rates should be set, whether businesses would continue to be able to deduct their interest expenses and how best to incentivize US companies from moving their operations overseas. Instead, the joint statement simply pledged Republican support for the principles of reducing rates, simplifying the tax code and using the tax system to improve economic growth.

The joint statement reveals that the parties’ expectation is for ” … legislation to move through the committees this fall, followed by consideration on the House and Senate floors.” While the joint statement authors express the hope that Congressional Democrats will join them in this effort, and suggest some openness to pursuing tax reform on a bipartisan basis unlike the just-failed Republican effort to repeal Obamacare, it should be noted that Republicans once again plan to use the reconciliation process in their pursuit of tax reform – a process that can have the effect of reducing the need for bipartisan cooperation. Moreover, given the very contentious course of dealing in recent years in the Ways & Means Committee and the Finance Committee, it does not yet seem that a foundation has been laid for bipartisan cooperation on tax reform issues.