McConnell promises revenue-neutral tax reform but says border adjustability can’t pass Senate

Senate Majority Leader Mitch McConnell, R-Ky., said last week that he was committed to revenue-neutral tax reform, but warned that the Senate could not pass a bill with the House’s border adjustability proposal. The statement puts him at odds with both the House and the White House over key elements of tax reform.

The House still appears committed to salvaging its controversial proposal to make business taxes border adjustable. As laid out in last year’s blueprint for tax reform, the proposal would disallow deductions on the cost of imports while excluding export receipts from income. Retailers and other major business sectors have lined up against it, and President Donald Trump and his top economic advisors have been dismissive. But House Republicans are using the proposal as a revenue raiser to pay for other elements of its tax plan, including a significant reduction in rates, and are reluctant to abandon it.

House Ways and Means Committee Chair Kevin Brady, R-Texas, has set a May 23 hearing to discuss the proposal. The committee may discuss options to make it more palatable, such as a partial border adjustment, exceptions for some products or a gradual phase-in. If changes to the proposal can’t salvage its prospects with the White House or Senate, Brady could be forced to change key elements of the blueprint to keep it revenue-neutral.

White House officials have suggested that tax reform doesn’t need to be revenue neutral and could instead be fashioned as a net tax cut. So far, Brady and House Speaker Paul Ryan, R-Wis., have resisted this idea, and McConnell’s comments align him with the House.

One of the complications with a net tax cut is the budget reconciliation process. To avoid the 60-vote procedural hurdles in the Senate, Republicans either need to use budget reconciliation or find at least eight Senate Democrats to cross the aisle and vote with them. Budget reconciliation generally precludes legislation that loses revenue outside the 10-year budget window. The administration has suggested a sunsetting tax cut, much like the 2001 and 2003 tax cuts. But House Republicans released a letter from the Joint Committee on Taxation indicating that a temporary corporate rate of longer than three years would still lose revenue outside of the 10-year budget window because of carryover issues.

There may be options to get around these budget rules. Republicans could extend the budget window to 20 years or more, change the scoring rules as members of the Joint Committee on Taxation or simply abandon 60-vote procedural hurdles like they did for the latest Supreme Court nominee. All of these options carry potential political costs and congressional Republicans have so far not publicly endorsed any of them.

Dustin Stamper
Director, Washington National Tax Office
T +1 202 861 4144

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