GOP Lawmaker Floats 5-Year Phase-In of Border Adjustment Tax -- 2nd Update

The top House Republican tax legislator floated a five-year phase-in to his controversial "border adjustment" idea on Tuesday in a bid to blunt mounting opposition to the concept.

The phase-in offered by Rep. Kevin Brady (R., Texas) is a response to critics who worry about the disruption that border adjustment could cause for companies, supply chains and consumers. It is a sign that Mr. Brady continues to press ahead with border adjustment and refine details of that plan rather than drop the proposal as some Republicans are urging.

"This reflects really the input we've gotten, the feedback we've gotten, " Mr. Brady, the chairman of the House Ways and Means Committee, said at the annual meeting of The Wall Street Journal's CFO Network. "A very gradual five-year phase in really resolves the major challenges."

Mr. Brady and House Speaker Paul Ryan are trying to advance their tax-policy vision in the face of unified Democratic resistance to tax cuts and steadily growing Republican concerns. They are aware of the objections and are talking to GOP senators and the White House. But until someone else presents an alternative, Messrs. Brady and Ryan see their plan as viable, and they are fleshing it out.

Mr. Brady also said his plan would include targeted rules for the financial services, insurance, communications and digital-services industries.

"It's hard to determine where...the border begins in the cloud," he said.

Mr. Brady's proposal for a 20% top corporate-tax rate includes border adjustment, which exempts exports from U.S. taxation but denies companies the ability to deduct import costs.

Under the phase-in suggested by Mr. Brady, only 20% of import costs would be nondeductible in the first year of the new tax system, stepping up steadily each year until it reaches 100% in the fifth year. The tax exemption for exports would phase in on a parallel schedule. Mr. Brady said he was sensitive to long-term contracts and agreements denominated in dollars and wanted to give companies time to adjust.

The phase-in likely isn't enough to soften or halt the opposition to border adjustment.

"Chairman Brady's proposed five-year transition does nothing to change the harmful impact on consumers, it only delays the political consequences for lawmakers," said Joshua Baca, a spokesman for Americans for Affordable Products, a coalition of border-adjustment opponents. "It is past time for Chairman Brady to read the writing on the wall and sideline the Border Adjustment Tax so that our tax code can be reformed; otherwise, his actions serve no other purpose than to severely undercut a once-in-a-lifetime opportunity."

Opponents warn that taxing imports would drive up consumer prices and they doubt that currencies would adjust to offset the tax changes as quickly and smoothly as some economists project.

If the currency did adjust quickly, with the dollar rising as much as 25%, importers would get a windfall benefit in the early years from cheaper foreign products and then lose that edge as the border adjustment takes effect.

Border adjustments aren't new. They're a core feature of value-added taxes around the world. But no country has tried the border-adjusted corporate tax that Republicans are proposing, and the plan, if it ever became law, could trigger retaliation from other countries and a challenge at the World Trade Organization.

The issue has fractured the U.S. corporate world into competing coalitions with companies such as Eli Lilly & Co. and Oracle Corp. backing border adjustment and firms like Macy's Inc. and Best Buy Co. opposing it.

The idea has steadily lost support since Mr. Brady first pitched it in June 2016. It now seems nearly impossible for border adjustment to pass the Senate, and there's even opposition from several Republicans on Mr. Brady's committee.

The disagreement over border adjustment is one of several major obstacles standing in the way of Republicans' goal of rewriting the tax code this year. They still express public confidence despite a lack of unity on this item and other major proposals to offset the budgetary effect of tax rate cuts.

But Mr. Brady and House Speaker Paul Ryan (R., Wis.) have clung to border adjustment for several reasons. First, it would generate up to $1 trillion over a decade to offset rate cuts, though the phased-in approach would lower that number. According to the Tax Foundation, a conservative-leaning group, the phase-in would lower the revenue from border adjustment to $1.027 trillion from $1.244 trillion.

And second, border adjustment plays an important role in the way the U.S. taxes foreign income. Republicans and large corporations generally want what's known as a territorial system, in which the U.S. would stop taxing its companies' foreign income.

But that has to be paired with some rule to prevent companies from shifting their U.S. profits to low-tax jurisdiction. Otherwise, much of the corporate tax base could flee.

In the Ryan-Brady plan, border adjustment serves that function. That is because taxes are based not on where profits are earned, which is a definition that companies have learned to manipulate. Instead, taxes are based on the location of consumers, which is harder to move.

Republican senators and the Trump administration haven't offered an alternative plan.

Mr. Brady said he also hoped that border adjustment would encourage companies to shift their supply chains back to the U.S.

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

(END) Dow Jones Newswires

June 13, 2017 14:24 ET (18:24 GMT)