House GOP Tries to Keep Border-Adjusted Tax Alive

By Richard Rubin Features Dow Jones Newswires

The tax idea that has sparked a monthslong corporate lobbying battle got its moment in the spotlight Tuesday, but its political future still looks dim.

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Backers of border adjustment -- taxing imports while exempting exports -- are trying to rebuild support for the idea, which has come under attack from corporations, some antitax conservatives and Senate Republicans.

The proposal now sits in limbo, where House Republicans insist that it's essential to a major rewrite of the U.S. tax code, but where the political obstacles seem nearly insurmountable. The Trump administration has been ambivalent and has said it can't back the plan in its current form. "It doesn't create a level playing field," Treasury Secretary Steven Mnuchin said Tuesday at a separate event in Washington.

Senate Majority Leader Mitch McConnell (R., Ky.) said last week that it probably couldn't pass the Senate.

Still, border adjustment is a crucial piece of the House GOP tax plan for two important reasons, and those features have kept House Republicans such as Speaker Paul Ryan (R., Wis.) from abandoning it.

First, it provides about $1 trillion over a decade to pay for cutting the corporate tax rate to 20% from 35%. Second, by basing U.S. taxes on the location of consumers -- instead of profits -- the proposal would eliminate the benefits of the tax-avoidance games that companies have perfected over the years by booking and parking profits abroad. Under the House plan, the U.S. wouldn't tax foreign sales.

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"Companies will no longer gain by moving their headquarters to Bermuda, their manufacturing plants to China or their intellectual property to Ireland," Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee, said at the panel's first hearing on the subject Tuesday.

But the path forward for border adjustment looks murky at best as the GOP tries to finish a major revamp of the business and individual tax systems this year.

The proposal could even have trouble getting out of the Ways and Means Committee because of Republican objections. Rep. Erik Paulsen (R., Minn.) added his name to the list of opponents on Tuesday, saying he couldn't support border adjustment as outlined last year.

Without a clear decision on whether to back border adjustment or not, the Republican tax agenda is slowed. If and when Republicans jettison the idea, they would need to find another way to pay for corporate rate cuts and to protect the U.S. tax base from fleeing to low-tax countries.

Retailers and other importers have blasted the border-adjustment plan in the House GOP's tax blueprint. They warn that preventing them from deducting the cost of imports would drive up their tax rates and force them to raise prices. And legal experts have warned that the U.S. could lose a challenge to the tax at the World Trade Organization.

Brian Cornell, the chief executive officer at Target Corp., said the company's tax rate would more than double, to about 75% and the retailer would be left with only bad options.

"We'll put every tax benefit we currently receive on the table, every single one, in order to pass tax reform, to lower that rate," he said at the hearing. "However, we've concluded that the new border-adjustment tax would undermine the pro-growth principles in the blueprint."

Backers of border adjustment say those concerns are overblown. They contend that the dollar would rise to offset the tax change and blunt any effects on the prices of imports.

And they point out that almost every other country in the world has a border-adjusted tax. Those countries don't adjust their corporate income taxes, but their value-added taxes on consumption are border-adjusted.

Juan Luciano, chief executive officer of Archer Daniels Midland Co., the grain-producing giant, said border adjustment would help American farmers sell their crops abroad.

"The U.S. income tax system has no offset for exports," he said at the hearing. "This systematically disadvantages our own producers."

The House hasn't released a specific detailed plan yet with legislative language. Mr. Brady has said he'll work to make sure the transition to the new tax system is smooth.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

May 23, 2017 12:39 ET (16:39 GMT)