Bad Week for the Import Tax

Prospects for the boldest proposal in House Speaker Paul Ryan's tax plan are dimming as members of Congress fan out over the country for the Memorial Day break.

House Republican leaders insisted this week that their proposal for a destination-based corporate tax is undergoing a revamp and that they will push ahead with it in negotiations with the Senate and the White House. The idea of a border-adjusted tax, first outlined in June, is meant to keep U.S. companies from fleeing the country by taxing them only for sales in the U.S.

Yet opponents of border adjustment, especially industries that fear higher taxes on imported materials, saw the possibility of total defeat of the idea this week, and say they are not interested in a revision of the plan meant to address their concerns.

Speaking to reporters Thursday, House Ways and Means Committee Chairman Kevin Brady said business fears about the border-adjusted tax could be allayed with a "generous transition" plan in the tax reform legislation.

The biggest fear for retailers, oil refiners and other businesses that import materials is that, with border adjustment, they would lose the ability to deduct the cost of imports from their taxable income. In theory, they would be no worse off under border adjustment because the value of the dollar would increase relative to other currencies, meaning that the greater purchasing power of the dollar would offset the tax increase on imports.

Retailers, however, have not been willing to bet that a currency appreciation will spare them a tax hike. Companies such as Walmart and Best Buy formed a coalition that has aggressively opposed the House GOP proposal, as has the group of political nonprofits associated with Koch Industries, which owns a refining business.

There is little indication that those groups are interested in seeing a revised version of the border adjustment, after a week in which more Republicans came out against it.

"Phasing in a harmful policy doesn't make it less harmful, and the longer it takes Washington to let this go, the harder real reform is going to be," said Nathan Nascimento, vice president of policy for Freedom Partners, a Koch-affiliated political nonprofit. "It's time to drop the [border-adjusted tax] and start unifying Americans around comprehensive reform."

Yet the Retail Industry Leaders Association, a trade group of retailers, said their stance remained that they could not support the tax reform proposal until the border-adjustment was off the table.

"I don't think there is any kind of transition that we would be comfortable" with, said an energy industry source, adding that this week's Republican defections on the border adjustment made it seem less necessary to bargain over the proposal.

In particular, several prominent members of Brady's committee came out against the proposal at a hearing Tuesday.

Rep. Erik Paulsen, a Minnesota Republican who rooms with Brady, announced at the hearing that he could not support border adjustment. Other members of the committee expressed doubts.

Elsewhere, in appearances before Congress and with the media, Treasury Secretary Steven Mnuchin continued to explain that the administration has problems with the idea and is leaving it up to House Republicans to come back to the table with an improved proposal if they want it included in reform.

In comments made to the KPMG Global Energy Conference Wednesday, reported by the energy industry publication Rigzone, former House Speaker John Boehner said that the border adjustment "is deader than a doornail."

That same day, in an interview with Axios, Ryan acknowledged that the White House had doubts about the plan and added that "of course" tax reform could be passed without border adjustment.

The problem, though, is that in addition to protecting U.S. companies, the border adjustment would have raised a lot of money — about $1 trillion over 10 years, according to one outside estimate — that could be used in the reform to lower tax rates further. It raises that money because the U.S. imports more than it exports.

If border adjustment does fall out of the plan, Ryan said, "you'll have to do more base-broadening within the domestic economy." That is, Republicans will have to take away more tax breaks, credits and deductions from American groups to ensure that the tax plan doesn't add to the deficit.