Top congressional Republicans and the Trump administration agreed to drop a plan to tax imports and exempt exports as part of their strategy to rewrite the U.S. tax code.
Border adjustment, as it was known, was a central part of the strategy of House Republicans, but it was already politically imperiled because of objections from retailers and GOP senators.
Dropping the idea was part of a broad statement of principles released by Republicans for tax policy on Thursday. Party leadership is hoping to create momentum to advance a tax overhaul in the fall, though the statement left many crucial questions unresolved even after months of debate on the subject among party members and Trump administration officials.
President Donald Trump has set a tax overhaul as a top legislative priority.
The new document included less detail than the president's campaign plan, the House GOP's June 2016 blueprint or the one-page offering from the White House in April. For instance, it makes no mention of a specific corporate tax rate or rates for individuals. It also doesn't mention staples of GOP plans such as a higher standard deduction or estate-tax repeal, perhaps a sign that the statement doesn't cover the breadth of where the party may yet go.
"While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform," read the joint statement issued Thursday afternoon.
The principles show broad unity around the idea of reducing corporate and individual tax rates "as much as possible." They also call for faster write-offs for capital expenses, an idea meant to promote investment.
The principles don't address some of the tough trade-offs inherent in the tax code rewrite they are undertaking, such as finding deductions to eliminate to help pay for reduced rates. The statement also doesn't include a target for revenue, making it unclear whether Republicans are proposing a net tax cut or the revenue-neutral plan they have previously discussed. The statement emphasizes permanent tax changes, which provide a fiscal constraint because they don't allow bigger deficits after a decade.
Republicans face some hard decisions when they return from recess in September, including making the plan fit within budget constraints. The principles offer no specific tax rates and leave many of the toughest choices to the House Ways and Means and Senate Finance committees.
"We are confident that a shared vision for tax reform exists, and are prepared for the two committees to take the lead and begin producing legislation for the president to sign," the statement said.
The document stems from meetings held by the so-called Big Six: House Speaker Paul Ryan (R., Wis.), Senate Majority Leader Mitch McConnell (R., Ky.), House Ways and Means Chairman Kevin Brady (R., Texas.), Senate Finance Chairman Orrin Hatch (R., Utah), Treasury Secretary Steven Mnuchin and White House economic policy chief Gary Cohn.
The statement says Mr. Trump "fully supports these principles and is committed to this approach."
"Hey, every step forward is progress, right?" said Rep. Pat Tiberi (R., Ohio), a senior Ways and Means Committee member. "This is about everybody trying to be closer to coming together."
Now, as the senior negotiators sell the plan publicly, the pressure turns up on members of the tax writing committees who will have to turn these principles into detailed legislation.
"There's still much work to be done to actually having a real statute that the Ways and Means committee can actually mark up," said GOP tax lobbyist Kenneth Kies. "It is a must-do piece of legislation if they want to do well in the midterm elections. To me, it's real simple. It's going to get done one way or the other."
Republicans' had pursued border adjustment for two reasons: One is that it could have raised $1 trillion to pay for lower tax rates. Second is that by taxing based on the location of consumption, it could have prevented companies from shifting profits abroad. They had been reluctant to back down without a Plan B. Thursday's statement said, without offering detail, that there is a "viable approach for ensuring a level playing field" without border adjustment.
One possibility would be building off an idea Mr. Hatch has been working on for years, letting companies deduct part of their dividends.
Sandy Kennedy, president of the Retail Industry Leaders Association, cheered the decision.
"Today's announcement is an important victory for American families and businesses who desperately need tax reform and who would have been harmed most by the border-adjusted tax," she said.
What else will be in that ultimate bill remains unclear. The Republicans' ambitions are large. They want to lower corporate and individual tax rates, remove taxes on U.S. companies' foreign earnings, repeal the estate tax and simplify the tax system.
But they face political and procedural constraints. They are trying to pass the tax plan using the special fast-track rules known as reconciliation, which is filled with trap doors and special rules.
Even before they can move a reconciliation bill, Republicans must adopt a budget first. House Republicans are divided over their budget and the Senate Budget Committee hasn't released its version yet.
The reconciliation bill can't increase budget deficits beyond the 10-year budget scoring window.
Even if it meets those tests, Republicans will have narrow margins because Democrats are extremely unlikely to provide any votes for a bill that repeals the estate tax and lowers tax rates on high-income households and corporations.
"If Republicans continue this partisan process, they are doomed to repeat the same mistakes they have made trying to upend our health-care system," said Rep. Richard Neal (D., Mass.) the top Democrat on the Ways and Means Committee.
In the House, Republicans from New York and New Jersey are already balking at the GOP plan to repeal the deduction for state and local taxes. Any three senators could band together to force changes because Republicans have just a 52-48 majority in that chamber.
Although Ways and Means Committee members have spent years working through drafts of tax legislation, many rank-and-file lawmakers or new members haven't necessarily grappled with the trade-offs.
"Big complicated tax bills do take a while," Mr. Kies said. "We're at the top of the first inning."
Write to Richard Rubin at email@example.com
(END) Dow Jones Newswires
July 27, 2017 16:11 ET (20:11 GMT)