By Richard Rubin
WASHINGTON -- The boldest ideas for changing the nation's tax
code are either dead or on political life support, as the
Republican effort in Congress to reshape the tax system moves much
more slowly than lawmakers and their allies in business had
hoped.
The clear winner, so far, is the status quo.
Republicans, who control both chambers, are scouring the tax
code, searching for ways to offset the deep rate cuts they desire.
But their proposals for border adjustment -- which would tax
imports -- and for ending the business interest deduction and
making major changes to individual tax breaks for health and
retirement have all hit resistance within the party. The only big
revenue-raising provision with anything close to Republican
consensus is repealing the deduction for state and local taxes, and
that idea faces objections from blue-state lawmakers in the
party.
The GOP's dreams have collided with interest-group lobbying and
the tax system's reality. Politicians all profess to hate the tax
code, but they don't agree on exactly what they hate. Voters gripe
about complexity but are wary of losing cherished breaks that are
woven into the economy.
"Eventually you run out of ways to pay for your promises," said
Alan Cole, an economist at the Tax Foundation, which favors a
simpler code with lower rates. "There aren't any free, obvious
sources of money where you can just do the thing and nobody gets
mad."
Republicans are still hunting for ideas to soften the revenue
loss from their proposed tax-rate cuts, and party leaders say they
will finish a historic tax-code revision by year's end. President
Donald Trump said on Twitter late Sunday that the process was ahead
of schedule and " moving along...very well."
But a fruitless revenue quest may lead the GOP to second-tier
options. And they won't be able to rely on generating lots of
revenue from economic growth, because congressional scorekeepers
are likely to make conservative estimates.
One possibility is a temporary tax cut that would expire to
comply with rules preventing long-run deficits.
"Permanent is better than temporary, and temporary is better
than nothing," Treasury Secretary Steven Mnuchin told the House
Ways and Means Committee last week.
Another path is settling for a 25% corporate rate instead of the
20% backed by House Republicans or the 15% proposed by Mr.
Trump.
"I hope we don't have to," said Rep. Kevin Brady (R., Texas),
chairman of the House Ways and Means Committee.
Republicans started 2017 with high tax-policy ambitions, seeing
an opportunity to use unified control of government to achieve a
long-running party goal. They hoped for a quick repeal of the 2010
Affordable Care Act and a fast pivot to taxes.
Instead, the health bill moved slowly, and during that debate,
Republicans talked briefly about limiting the favored status for
employer-sponsored health insurance, the largest tax break for
individuals. That idea collapsed. Now, the tax bill isn't written
and must wait for the health bill and budget.
Republicans are working off the blueprint Mr. Brady released in
June 2016. They saw what it took the former chairman, Dave Camp
(R., Mich.), in 2014, to get to a 25% corporate tax rate. And they
saw how his proposed bank tax and stretched-out depreciation cycles
made his plan flop on arrival.
Their plan relies on big changes, each raising about $1 trillion
over a decade. Each percentage-point reduction in the 35% corporate
tax rate cuts federal revenue by about $100 billion over a decade,
and independent analyses show economic growth can't cover all the
costs of rate cuts.
One proposed change that has met wide resistance is border
adjustment, or taxing imports and exempting exports.
Big retailers such as Target Corp. and Wal-Mart Stores Inc.
launched a lobbying campaign to portray border adjustment as an
existential threat to their businesses and a price increase for
consumers.
Senate Republicans, parts of the Trump administration and some
House Republicans now say they agree, imperiling the idea and
leaving the House GOP plan $1 trillion in the hole. Without an
alternative there is no clear way to prevent companies from seeking
out lower tax rates abroad.
Jason Pye, director of public policy at FreedomWorks, which
supports conservative activists, said Republicans need to make a
yes-or-no call soon on border adjustment.
"Early on, nobody knew what the hell it was. Now, everybody has
a general concept and they don't like it," he said.
Mr. Brady hasn't given up on border adjustment, in part because
of the lack of a Plan B. Senate Republicans haven't coalesced
around a plan, and the Trump administration has released only one
page of goals.
"If someone's got a better solution," he said, "bring it."
Next up is the interest deduction for businesses. Republicans
would deny the deduction while letting companies write off capital
costs immediately.
Mr. Mnuchin told lawmakers he prefers to leave the interest
deduction alone. He cited concerns of firms that rely on debt
financing, including small businesses and the real-estate industry.
Keeping the deduction also would leave a $1 trillion hole over 10
years. A cap instead of repeal is possible, which would soften the
impact but yield less money.
The Trump administration has taken more items off the table. The
president promised to protect the tax breaks for mortgage interest
and charity, though his proposed expansion of the standard
deduction would limit such benefits for many middle-income
households.
The administration also ruled out a carbon tax and a value-added
tax and said it wouldn't touch 401(k) retirement plans. Under
questioning from Sens. Sherrod Brown (D., Ohio) and Bob Casey (D.,
Pa.) last week, Mr. Mnuchin seemingly took more tax breaks off the
table.
He said the administration wasn't considering changing last-in,
first-out accounting, the New Markets Tax Credit that provides
assistance in struggling areas and the low-income housing tax
credit. He said he would prefer to retain the tax exemption for
municipal bonds.
People's assets -- from their homes to their retirement plans --
are closely tied to tax preferences, and that makes voters and
industries resistant to change, said Lily Kahng, a tax-law
professor at Seattle University.
"Once you extend some kind of tax preference to people, it
becomes almost like an entitlement and people are really protective
of it," she said.
The tax system is part intentional and part path-dependent. The
existing rules were created -- by previous Congresses -- for a
reason, and choices made decades ago are hard to unwind.
"It's not like the current tax code was designed by cruel, mean,
evil people who wanted to make things as unfair and complex as
possible," Mr. Cole said. "They were actually doing their
best."
Rewriting the tax code is a process, Mr. Brady said. "If you
expect that process to be smooth, and beautiful," he said, "it's
not."
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
May 29, 2017 20:00 ET (00:00 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.