Border tax criticism clouds reform push

President-elect Donald Trump’s criticism of a Republican tax reform plan could complicate the effort to overhaul the tax code this year. 

In an interview with The Wall Street Journal, Trump expressed opposition to a part of the House GOP blueprint known as “border adjustment” that would tax imports and exempt exports from the corporate tax.

Congressional supporters of the idea see it as a way to prevent companies from moving jobs to other countries. But Trump called the proposal “too complicated” and suggested that it would not be needed in addition to tax cuts.

{mosads}“Under the border adjustment concept, if somebody is making a motorcycle or a plane in our country, they’re getting a credit for the plane they make before they send it over to wherever it’s going,” Trump told the Journal. “And you don’t need that plus lower taxes and everything else.”

It’s unclear how strongly Trump is against the provision.

Trump has shown a willingness to be flexible on taxes; Over the course of his president campaign, his tax plan moved closer to that of House Republicans. And Trump’s incoming White House chief of staff, Reince Priebus, has expressed interest in the border adjustment proposal in the past.

Trump also told The Washington Post that “we’re getting very close” to putting together legislation that cuts taxes.

But tax-policy analysts say that without the border-adjustment proposal, Republican lawmakers would have to find other ways to raise revenue and prevent companies from shifting profits overseas — no small task.

The border-adjustment proposal could raise a significant amount of revenue to offset the cost of tax cuts. Independent analyses have found that the provision could raise about $1 trillion over a decade.

Congressional Republicans have said that they want tax reform to be revenue neutral after accounting for economic growth. Revenue neutrality may be important if Congress wants to avoid a Senate filibuster and pass tax reform through budget reconciliation, since reconciliation bills can’t increase the deficit outside the 10-year budget window.

For Republicans to reach revenue neutrality without border adjustments, they would have to cut tax rates by less than they’ve currently proposed or put limits on additional tax preferences, such as the mortgage-interest deduction or the deductions for charitable contributions. 

Supporters of border adjustment say it plays another important function, helping to prevent an erosion of the tax base by ensuring goods sold to U.S. customers are taxed regardless of where a company has its headquarters.  

The House GOP plan moves the U.S. to a “territorial” system in which American companies’ foreign earnings would not be subject to U.S. tax. Absent the border adjustments, a territorial system could encourage companies to move their profits overseas, analysts said.

Trump isn’t alone in raising concerns about the provision. The proposal has also drawn criticism from business groups, particularly in the retail and oil industries, who are worried that the tax on imports would increase prices for consumers. 

The president-elect may feel that the border-adjustment proposal would disproportionately hurt the industries he most wants to promote, including energy, according to GOP strategist Ford O’Connell.

O’Connell said that Trump is providing a slight warning to lawmakers and hasn’t taken the border-adjustment proposal off the table, but his comments put “it at risk in the way that the House wants to craft it.”

Douglas Holtz-Eakin, president of the American Action Forum, predicted that House Republicans would move forward with tax reform legislation that includes border adjustability.

But he cautioned that history has shown  “you cannot do tax reform without substantial White House leadership.” 

“The president has to put political capital on the line,” Holtz-Eakin said.

Leaders on the House Republicans’ tax-reform effort remain committed to the border-adjustment proposal.

Rep. Kevin Brady (R-Texas) — chairman of the House Ways and Means Committee, which is leading the tax-reform efforts in the chamber — said that the provision would help end a preference for foreign goods over domestic goods that now exists in the tax code.

“It’s time to tax imports and exports equally in America, and end the ‘Made in America’ export tax,” he said.

GOP congressional staff and members of the incoming administration have been meeting regularly to discuss tax reform.

“Speaker [Paul] Ryan is in frequent communication with the president-elect and his team about reforming our tax code to save American jobs and keep the promises we’ve made,” AshLee Strong, Ryan’s spokeswoman, said. “Changing the way we tax imports and exports is a big part of that, and we’re very confident we’ll get it done.”

Tax-policy analysts have different views on whether the border adjustment proposal would be as complicated as Trump claims.

Kyle Pomerleau, director of federal projects at the conservative-leaning Tax Foundation, said that border adjustment is “actually one of the less-complicated ways to enact tax reform,” since it is just eliminating a deduction for imports and adding a tax exclusion for exports. He said that alternative ways to prevent companies from shifting profits overseas are more complicated.

Pomerleau also disputed claims that border adjustments would hurt retailers, saying that the U.S. dollar would get stronger, making it cheaper for businesses to buy imported goods.

But Chris Edwards, an economist at the libertarian-leaning Cato Institute, said, “Trump’s right: The border adjustment is too complicated.”

Companies would only be able to deduct parts and supplies that are purchased in the U.S. and would not be able to deduct parts and supplies they purchased from overseas.

As a result, companies would have to trace the source of everything they buy, which could lead to an “enormous paperwork burden,” Edwards said.

Grover Norquist, president of Americans for Tax Reform, predicted that Trump and House Republicans will be able to overcome their differences and come up with a bill, since they both want tax reform legislation that simplifies the tax code and boosts economic growth.

“It’s pretty easy for everybody to agree because you’re all moving in the same direction,” he said.