GOP may try mixed tax-over­haul plan

Per­ma­nent and tem­po­rary changes be­ing con­sid­ered.

Austin American-Statesman - - MORE OF TODAY’S TOP NEWS - By Anna Edger­ton Bloomberg News

Repub­li­cans seek­ing to pass a ma­jor tax over­haul that doesn’t add to the fed­eral deficit are dis­cussing a kind of com­pro­mise: mix­ing per­ma­nent re­vi­sions with tem­po­rary rate cuts for in­di­vid­u­als and busi­nesses.

Of­fi­cials on the House and Se­nate tax com­mit­tees are talk­ing with the White House about a hy­brid ap­proach that would com­bine last­ing tax code changes to de­ter off­shore profit shift­ing by cor­po­ra­tions with lower rates for a num­ber of years, ac­cord­ing to three peo­ple fa­mil­iar with the dis­cus­sions.

Mix­ing and match­ing pro­pos­als — mak­ing some per­ma­nent and oth­ers tempo- rary — could be a po­ten­tial work­around for GOP lead- ers who want to use a bud­getary process known as rec­on­cil­i­a­tion to pre­vent Se­nate Democrats from block­ing tax leg­is­la­tion. That course lim- its the scope of the over­all bill be­cause it re­quires that any tax changes that add to the na­tion’s long-term defi- cit would have to have an ex­pi­ra­tion date.

The com­bined ap­proach has emerged as ad­min­is­tra­tion and con­gres­sional staff eval­u­ate the ef­fects of var­i­ous pro­pos­als, said the peo­ple, who de­scribed it on the con­di­tion of anonymity.

Crit­ics cau­tion that tem­po­rary changes won’t spur the level of eco­nomic growth that Pres­i­dent Don­ald Trump and con­gres­sional lead­ers have tar­geted.

“It’s the best of both worlds,” said Daniel Clif- ton, a for­mer tax lob­by­ist who was in­volved in the tax­cut ne­go­ti­a­tions un­der for­mer Pres­i­dent Ge­orge W. Bush in 2001. “But if you’re a purist for tax cuts or a pur- ist for tax re­form, it’s go­ing to be nei­ther.”

Bor­der tax out

A hy­brid plan isn’t a new idea, but it may be gain­ing trac­tion now that the con- tro­ver­sial bor­der-ad­justed tax on im­ports has been elim­i­nated from tax nego- tia­tions. The BAT was esti- mated to gen­er­ate more than $1 tril­lion in rev­enue over a decade. With­out it, tax writ­ers are forced to find other rev­enue rais­ers to off­set rate cuts — if they want per­ma­nent changes.

White House ad­vis­ers, along with top con­gres­sio- nal lead­ers, said last month their plan “places a pri­or­ity on per­ma­nence,” but some have in­di­vid­u­ally sig­naled some open­ness to shorter-term changes. Trea­sury Sec­re­tary Steven Mnuchin summed it up at a hear­ing in May: “Per­ma­nent is bet­ter than tem­po­rary, and tem­po­rary is bet­ter than noth­ing.”

House Speaker Paul Ryan has been more re­sis­tant, push­ing es­pe­cially for a per­ma­nent cut in the cor­po­rate in­come tax rate, ac­cord­ing to one of the peo­ple fa­mil­iar with the ne­go­ti­a­tions.

“Con­sis­tent with our joint state­ment, we are plac­ing an em­pha­sis on per­ma­nence but no de­ci­sions have been made yet,” Natalie Strom, a White House spokes­woman, said in a state­ment.

Spokes­men for Se­nate Ma­jor­ity Leader Mitch McCo- nnell and Se­nate Fi­nance Com­mit­tee Chair­man Or­rin Hatch, R-Utah, said the tax com­mit­tees will be work­ing this fall to de­velop tax leg­is­la­tion. Hatch’s of­fice added that the goal is a pack­age that will pro­vide more relief to the mid­dle class, in­crease U.S. wages and job growth, and en­sure Amer­i­can busi­nesses can com­pete in global mar­kets.

Cuts could cost $5T

The one-page out­line of a tax plan that the White House re­leased in April called for cut­ting the cor­po­rate in­come tax rate to 15 per­cent — down from the cur­rent 35 per­cent. It also would con­dense the ex­ist­ing seven in­di­vid­ual in­come tax rates to three, cut the top rate to 35 per­cent from the cur­rent 39.6 per­cent and dou­ble the stan­dard de­duc­tion. Over- all, the plan might cost as much as $5 tril­lion over 10 years, ac­cord­ing to an es­ti­mate from the non­par­ti­san Com­mit­tee for a Re­sponsi- ble Fed­eral Bud­get.

Ad­min­is­tra­tion of­fi­cials have dis­puted that num­ber, but even com­ing up with half of it — by rais­ing new rev­enue, clos­ing out de­duc- tions and other ben­e­fits or cut­ting fed­eral spend­ing — would re­quire a del­i­cate balancing act that has be­dev­iled ne­go­tia­tors in the past.

Trump has re­peat­edly em­pha­sized that one of his main ob­jec­tives is to pro­vide the mid­dle class with a tax cut. He’s un­der pres- sure to de­liver, es­pe­cially af­ter an­other prom­ise — to re­peal the 2010 Af­ford­able Care Act — ran aground in Congress.

Mak­ing in­di­vid­ual tax cuts tem­po­rary would help with the math. Just a re­duc­tion of 1 per­cent­age point to the cur­rent top rate of 39.6 per­cent would cost $106 bil­lion in tax rev­enue over the next decade, ac­cord­ing to a cal­cu­la­tion by Scott Green­berg, a se­nior an­a­lyst at the Tax Foun­da­tion.

Tem­po­rary cuts could be ex­tended even­tu­ally. That’s what hap­pened in 2010 as part of a deal be­tween Re­pub­li­can law­mak­ers and for­mer Pres­i­dent Barack Obama over tem­po­rary tax cuts en­acted un­der for­mer Pres­i­dent Ge­orge W. Bush. And other pro­pos­als af­fect­ing in­di­vid­u­als, such as calls for elim­i­nat­ing the al­terna- tive min­i­mum tax and the es­tate tax, could be phased in slowly to avoid an imme- di­ate de­cline in fed­eral reve- nue, or even stay in place if they’re too costly, said two of the peo­ple.

Cor­po­rate pres­sure

The cor­po­rate side is more com­pli­cated. Some busi­ness groups say changes af­fect­ing cor­po­ra­tions must be per­ma­nent be­cause ex­ec­u­tives need cer­tainty be­fore they can com­mit to hir­ing new work­ers or build­ing more fac­to­ries in the U.S. — a nec­es­sary step for achiev­ing the White House’s goal of 3 per­cent an­nual eco­nomic growth.

But some com­pa­nies would pre­fer a lower rate — no more than 25 per­cent — even if it’s just for 10 years, said one of the peo­ple fa­mil­iar with the tax dis­cus­sions.

It’s not clear how long a tem­po­rary cor­po­rate rate cut could last with­out ad­ding to the deficit. A study that Ryan re­quested from the Joint Com­mit­tee on Tax­a­tion showed that cut­ting the cor­po­rate rate to 20 per­cent for just three years would re­sult in lost rev­enue more than a decade later.

A study by the Tax Foun­da­tion found that low­er­ing the cor­po­rate rate to 15 per­cent for just 10 years would ini­tially boost growth, but that as com­pa­nies braced for the higher rate to re­turn, the ex­pan­sion would be slower in the sev­enth year than if there hadn’t been a cut at all. A tem­po­rary cut would be more likely to ben­e­fit share­hold­ers, ac­cord­ing to that June re­port, while a per­ma­nent cut’s ben­e­fits would trickle down to work­ers.

Ter­ri­to­rial sys­tem

Mean­while, there is broad agree­ment that rules to shift the U.S. tax code to a ter­ri­to­rial sys­tem, in which most for­eign prof­its would be ex­empt from U.S. taxes, must be per­ma­nent, Clifton and three oth­ers briefed on the plan said. Cur­rently, the U.S. taxes busi­ness in­come no mat­ter where it’s earned — though busi­nesses can de­fer taxes on off­shore in­come un­til they re­turn it to the U.S. Those features of the tax code spur com­pa­nies to shift their prof­its off­shore and leave them there.

GOP of­fi­cials are dis­cussing how to pair a ter­ri­to­rial sys­tem with an­other mech­a­nism to pre­vent such profit-shift­ing, the three peo­ple said.

Other tax pro­pos­als — such as a costly one that would al­low com­pa­nies to fully deduct their cap­i­tal spend­ing from in­come im­me­di­ately in­stead of over years — are be­ing eval­u­ated to see if they should be made tem­po­rary or per­ma­nent. Al­low­ing full and im­me­di­ate ex­pens­ing on a tem­po­rary ba­sis could en­cour­age com­pa­nies to ac­cel­er­ate their in­vest­ment plans — and help get the growth the White House is bank­ing on.

J. SCOTT AP­PLE­WHITE / ASSOCIATED PRESS

House Speaker Paul Ryan (left) and House Ma­jor­ity Leader Kevin Mc­Carthy, R-Calif., leave a news con­fer­ence in Wash­ing­ton this past May. Ryan has been push­ing for a per­ma­nent cut in the cor­po­rate in­come tax rate.

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