For House Speaker Paul Ryan (R-WI), slashing tax rates is second in importance only to repealing and replacing the Affordable Care Act.
A House GOP “Better Way” plan unveiled by Ryan last year would reduce the number of individual tax rates from seven to three at substantially lower levels, nearly double the standard deductions while closing many loopholes, slash investment income taxes and lower the top corporate tax rate from 35 percent to 20 percent.
But the centerpiece of Ryan’s tax plan – and what sets it apart from President Trump’s approach -- is a “border adjustment” tax the speaker wants to slap on all imported goods, including materials used in U.S. manufacturing, while exempting all exported goods.
The controversial measure has seriously split the business community and its allies on Capitol Hill. Proponents see it as a major incentive for more domestic investment and expansion, while opponents warn that it would drive up retailers’ import costs and force them to raise prices for consumers.
The plan has drawn fire from car dealers, toy manufacturers, oil refiners and others. And on Thursday, Americans for Prosperity, a libertarian group founded by the Koch Brothers, formally launched a campaign to defeat the measure targeted at members of the House and Senate tax writing committees, who will be wrestling with the issue later this year.
Also on Thursday, Senate Majority Whip John Cornyn (R-TX), the number two Republican in the Senate, may have delivered the crowning blow by telling reporters that the border tax idea “is on life support” and that he didn’t see GOP votes in the Senate lining up behind it.
“The hard reality is the border tax is on life support, and given the imperative of 51 senators and 218 House members and one president, I think we need to look for other options,” Cornyn said. Trump has said he would unveil a tax plan of his own within several weeks, but has yet to take an official position on the border adjustment tax.
Without the border adjustment tax provision, Ryan’s overall tax cut for individuals and businesses would collapse. That’s because it is estimated to raise more than $1 trillion over the coming decade, which is the amount that will be needed to offset the massive tax cuts and take down the current corporate tax rate from 35 percent to 20 percent.
Ryan, a former chair of the House Ways and Means Committee and an ardent proponent of the first major rewriting of the federal tax code since 1986, delivered a ringing defense of the border adjustment tax and his overall tax reform proposals during a news conference on Thursday.
“This is existential to our economy, and we know this,” Ryan said. “And so we’re going to get tax reform done and there’s going to be a whole bunch of drama.”
But the border adjustment idea is proving to be a tough sell. And even Trump, who is eager to push through a major tax cut this year to make good on one of his most important campaign promises, has said that Ryan’s plan may be “too complicated” to sell to Congress and the public.
According to a Tax Foundation analysis, the border adjustment would “eliminate the ability for companies to deduct the cost of imports,” while at the same time eliminating the tax on income attributable to exports.
“This would shift the current corporate income tax from an origin-based tax—one that applies to the production of goods and services in the United States—to a destination-based tax—one that applies to the consumption of goods and services in the United State,” according to the analysis.
As The Wall Street Journal recently noted, the border adjustment tax would also transform the business tax system “so that companies selling goods and services in the U.S. largely couldn’t escape taxes by putting their addresses, intellectual property or jobs outside America in low-tax countries.”
Scott Hodge, president of the conservative leaning Tax Foundation, said in an interview Friday that it is far too soon to write off the border adjustment tax idea, but that without it, Ryan and other House GOP leaders would have a hard time coming up with an alternative.
“It’s a very key element of the plan … and because it’s new, it’s going to naturally be the focus of a lot of attention,” Hodge said.
“I wouldn’t say it’s either dead or even on life support,” he added. “This is the natural process of things with major tax reform.”