Correction to Tax Bill Article

By Richard Rubin Features Dow Jones Newswires

House Republicans built their tax plan around a new system for taxing companies, an assumption that hundreds of billions of dollars in tax increases in the 2010 Affordable Care Act would be gone already and confidence that the GOP could muscle important legislation through Congress on party-line votes.

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All three of those pillars collapsed in 12 hours overnight Thursday when party leaders formally abandoned a key piece of the House tax plan and the Senate narrowly rejected a plan to dismantle parts of the ACA and fulfill the Republican Party's repeated campaign promise.

The developments bring new urgency to Republicans' efforts to revamp the U.S. tax system, now the party's best chance to deliver a major legislative victory before the 2018 midterm election.

"If you can't do health care, which we thought we agreed upon, I'm not sure how you're going to get a tax-reform bill through," said Rep. Joe Barton (R., Texas). "But hope springs eternal."

The party's leaders remain optimistic, and there are reasons to think a tax overhaul could be easier than health care. Republicans have more common ground, ideologically, and they won't be quite as bedeviled by Senate rules complicating passage of nonfiscal legislation. And the White House has been articulating clearer principles and showing deeper, more consistent interest.

The so-called Big Six -- a team of negotiators from the Senate, House and Trump administration -- released a set of principles Thursday that entailed lower tax rates and simplification of the tax code while omitting the House's "border adjustment" plan for taxing business income. A border-adjusted tax would have exempted exports while taxing imports.

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The Business Roundtable, a group of corporate leaders that had largely sat on the sidelines because its members were divided on border adjustment, announced a multimillion-dollar ad campaign on Friday aimed at making the case that lower corporate tax rates would boost economic growth. Conservative groups that had criticized border adjustment, including those tied to the billionaire Koch brothers, are working more closely with the administration. Representatives from the groups are holding a public event in Washington on Monday to promote the tax plan alongside Treasury Secretary Steven Mnuchin and White House Legislative Affairs Director Marc Short.

However, not far beneath that newfound unity are some tough realities.

In the coming months Congress may take another stab at a health-care overhaul, and lawmakers will soon confront deadlines on spending and the debt limit that will distract them. Congress hasn't rewritten the tax code in 31 years because the task is hard, demands unpleasant trade-offs and sows divisions that are often more parochial than partisan. For example, some Republicans oppose tax breaks for renewable energy, but representatives from states with wind and solar energy disagree.

Distrust lingers between senators and House members. And while Republicans may agree on the broad strokes of tax policy -- such as lower rates and lighter taxes on U.S. companies' foreign income -- they are bound to divide on the details.

"It's going to take patience to do the right thing," said Rep. Mike Bishop (R., Mich.) "If you want to get it right, you've got to take your time to do it. I'm not equipped with this kind of patience. It's a learned thing."

President Donald Trump says he wants to prioritize taxes for middle-class families, but his plan features tax cuts for businesses and high-income households. In an interview this past week, he knocked down speculation of a top ordinary income-tax rate exceeding 40%. "That was not right," he said. "That was not a correct statement."

Republicans don't agree on whether they are aiming for tax cuts or for a plan that would be revenue-neutral. They probably need an answer to that question before voting on a tax bill, because that decision must be baked into the congressional budget. A budget unlocks the so-called reconciliation procedures that would allow the Senate to pass a tax bill with only Republican votes.

"They can't have spent all these years pontificating about deficits and debt and then embrace huge tax cuts that only contribute to debt," said Rep. Richard Neal (D., Mass), the top Democrat on the House Ways and Means Committee. He and Senate Minority Leader Chuck Schumer (D., N.Y.) urged a bipartisan approach on taxes. Mr. Schumer has warned that a partisan tax bill would end in the same place as the failed Senate health-care bill.

The positive reaction to the Big Six's statement of principles Thursday from retailers, manufacturers and technology companies papers over the many hard choices that have been postponed until the fall. A tax system like the one Republicans envision, in which deductions vanish to pay for lower tax rates, will yield new winners and losers, and not every group will be happy.

"They have to recognize that whatever plan they come up with, the moment it hits the desk for a markup and goes public, there's going to be controversy over something," said economist Douglas Holtz-Eakin, president of the center-right American Action Forum. "The famous line of Mike Tyson applies here. Everyone has a plan until they get hit. And they're going to get hit."

The health-care overhaul was supposed to repeal taxes on health industries and investment income. With those taxes remaining, Republicans must decide whether to include those provisions in the tax bill or set them aside.

Rep. Kevin Brady, chairman of the House Ways and Means Committee, said Friday that he didn't want to import provisions to repeal the Affordable Care Act's taxes into the upcoming tax bill because that would make it harder to lower other tax rates.

Republicans also need to find a replacement for border adjustment, which would have raised about $1 trillion over a decade to pay for lower rates and discouraged companies from shifting profits abroad. Thursday's statement hinted at an emerging "viable" option.

"As I've always said, without border adjustment it means you're going to have a lot higher rates, and I think it makes it complicated to solve the overseas issues," said Rep. Devin Nunes (R., Calif.).

With border adjustment gone and some other major changes proposed by the House looking less likely, the GOP tax effort may be more concentrated on tax rates and simplification, said Rep. Kenny Marchant (R., Texas). That's still a tall order, he said.

"It looks to me at this point the Senate needs some very straightforward-type stuff to vote on," Mr. Marchant said.

Rep. Tom Reed (R., N.Y.) said the health-care failure showed the need to be open to what he called "Plan B."

"Maybe we look at a situation where it's 51 senators, regardless of what party they're from, and we put a coalition together of the governing who want to solve problems," he said. "And to me that could be a winning combination rather than just going shirts and skins."

--Natalie Andrews contributed to this article.

Corrections & Amplifications

This article was corrected at 3:52 p.m. ET because the original version incorrectly stated Chuck Schumer was the majority leader.

Chuck Schumer (D., N.Y.) is the Senate minority leader. "Health-Care Collapse Points to Challenges in GOP's Upcoming Tax Effort," at 3:29 p.m. ET, incorrectly stated he was the majority leader.

(END) Dow Jones Newswires

July 28, 2017 16:06 ET (20:06 GMT)