Senate Republicans eyeing alternative tax reform plan

Senate Republicans are exploring alternatives to Speaker Paul Ryan’s (R-Wis.) tax reform package, which hinges on a border adjustment tax proposal that is deeply unpopular in the upper chamber.

Finance Committee Chairman Sen. Orrin Hatch (R-Utah) says he won’t proceed until the House bill hits a dead end, but senators are laying the groundwork for a new direction, expecting the House plan will either fail or require substantial revisions.

Senate Majority Leader Mitch McConnell (R-Ky.) this week pushed back the timeline on tax reform, warning it’s unlikely to be finished by the August recess as the Trump administration hopes.

{mosads}McConnell is giving the Senate more time amid a strong backlash from his conference against the House proposal to enact a 20 percent across-the-board tax on imports. 

“I don’t think it’s going to pass over here. There’s not a lot of enthusiasm for it. We’re already working on what we’d like to do,” Hatch said of the so-called border adjustment tax.

Hatch told the U.S. Chamber of Commerce last month that his committee “is considering various proposals, and things are moving forward rather rapidly at this time.”

Sen. Roy Blunt (Mo.), a member of the Senate Republican leadership team, says he expects the Senate Finance Committee will mark up a tax reform bill.

“Sen. Hatch’s view is that the Senate should mark up a bill, and I assume that’s what happens,” he said.

It’s a contrast from the Senate GOP’s strategy for passing healthcare reform. Lawmakers expect McConnell to bring the House healthcare bill — should it pass the lower chamber — directly to the Senate floor, bypassing committee.

Ryan argued in a meeting with Senate Republicans last month that the border adjustment tax would be necessary to raise $1.2 trillion to lower individual and corporate tax rates without adding to the federal deficit. 

The budgetary impact of the tax package is crucial, because Senate Republicans plan to use special procedural rules known as reconciliation to pass it with a simple majority vote and avoid a Democratic filibuster. Legislation cannot add to the deficit outside the customary 10-year budget window and be eligible for this procedural protection. 

But a growing number of Republicans have broken with Ryan on the border tax. They warn it will drive up the cost of imported products and American-made goods built with imported components.

Sen. John Boozman (R-Ark.), who is not a member of the Finance Committee, spoke for many members of the GOP conference when he said the border adjustment tax is going nowhere.

“As we go forward with the border adjustment tax as it stands, I think it will be very difficult to get the votes to pass,” he said.

Sen. Jeff Flake (R-Ariz.) joined the growing chorus of criticism when he declared on the floor this week that the border tax “could make everyday consumer products more expensive at the very places that middle-class families shop the most.” 

“Household staples could be pushed out of reach for those who can least afford it,” he said.

Flake says Senate Republicans should find other ways to pay for tax reform. He wants the Finance Committee to return to the long-stated goal of broadening the tax base and closing loopholes.

“That’s been the mantra the whole time. That’s Republican orthodoxy right there,” he said.

Hatch, however, says that while broadening the tax base and closing loopholes is a popular catchphrase for reform, it isn’t easy to accomplish.

Picking what tax breaks to end is like walking through a political minefield: Every break has a constituency that will fight hard to keep it on the books. 

The more tax breaks policymakers target to raise revenue to lower the individual and corporate rates, the greater the number of interest groups that will fight the proposed reform.  

Tax policy experts say it would be difficult for Republicans to change a variety of popular business and individual tax breaks, such as the research credit or the mortgage interest deduction, without political cover from Democrats. 

When Congress last overhauled the tax code in 1986, it was a bipartisan effort, but McConnell noted in an interview with The Hill earlier this year that “it’s a different era” and cooperation from across the aisle is unlikely. 

The Senate’s easiest option would be to concentrate more narrowly on corporate tax reform, such as Hatch’s long-discussed proposal to eliminate the double taxation of companies. Under current law, class C corporations are taxed on both the profit they earn and the dividends they return to shareholders.

Hatch favors corporate integration whereby Congress would create a standard business tax for businesses of various structures.

Another option would be to focus on a tax break to incentivize companies to return an estimated $2.5 trillion in profits stashed overseas back to the U.S. economy. Companies have kept those profits in foreign countries to avoid U.S. taxes.

President Trump could be motivated to get behind a tax break or holiday to encourage the repatriation of business profits because it would align with his vision of encouraging domestic investment and manufacturing.  

McConnell, however, has not been a fan of splitting corporate tax reform from individual tax reform. He argues that businesses that file taxes under the individual code — S corporations and limited liability companies — make up a huge chunk of the economy. The so-called pass-through businesses employ about 50 percent of the private-sector work force, according to the Tax Foundation. 

Nevertheless, Hatch is optimistic he’ll be able to come up with a plan soon.

“Our hope is to have a tax reform proposal in one form or another to discuss publicly in the near future,” he told the U.S. Chamber of Commerce last month. 

Hatch told The Hill Thursday, however, he will try to wait for the House as long as possible. 

“We’re not ready to roll anything out right now. We’re waiting for the House. It’s good politics and good friendship to recognize that money bills have to originate in the House,” he said.