House Republican leaders’ controversial border adjustment tax is dead, and as a result, their plans to dramatically overhaul the tax code could soon be too.
The border adjustment tax, or BAT, is a proposal to tax imports instead of exports, reversing the way the United States currently taxes goods crossing its borders. House GOP leaders, namely Speaker Paul D. Ryan and Ways and Means Chairman Kevin Brady, have pushed for the tax as a way to discourage U.S. companies from moving operations overseas and to raise roughly $1 trillion in revenue to partially offset an ambitious corporate tax rate cut.
But without the BAT, Republicans may not have a way to pay for that proposed rate cut — from 35 percent currently to 20 percent under the House GOP plan or as low as 15 percent under President Donald Trump’s blueprint. And if they don’t fully offset their tax cuts within the 10-year budget window, the cuts cannot be considered permanent under the reconciliation rules they plan to use to advance their tax bill.
As a consequence, Republicans would be left with temporary tax cuts, and would likely curb fewer deductions and credits than they would have under a full, permanent overhaul. Ending the labyrinth of existing tax breaks and permanently lowering tax rates is critical to a true tax overhaul, the likes of which Ryan and GOP tax writers have been dreaming of for years. Anything less would represent a failure of their promise to simplify the tax code.
Needless to say, a lot was riding on the now-dead border adjustment tax.
Opposition to the BAT has been slowly boiling since January, when Republicans, in control of both Congress and the White House for the first time in a decade, began talk of enacting the first major rewrite of the tax code since 1986. The BAT proposal was floated last June in the House GOP’s “A Better Way” blueprint, but opposition was relatively muted until Donald Trump — in a surprise to many even within his own party — won last fall’s presidential election.
Now the resistance is at full steam. At least 30 of the 238 House Republicans have publicly expressed opposition or serious concerns about the BAT, more than would be needed to defeat a measure on the floor. In the Senate the opposition is proportionately higher, with at least 18 of the 52 Republicans in the chamber saying they have significant reservations about the idea.
The administration also appears opposed to the idea. Treasury Secretary Steven Mnuchin has publicly raised concerns about the BAT. But in private meetings with lawmakers, he’s taken it a step further and said that Trump does not support it.
Opposition from the Senate and the White House would have been an obstacle but not a death knell had the House planned to take the lead on the tax overhaul. But since the health care debacle, the Republicans’ plan has been to come up with one unified tax bill that reflects support from all three corners of the GOP power structure. So House GOP leaders cannot move forward with the BAT without broader support that does not exist.
While those factors alone are enough to declare the BAT dead, perhaps the more significant reason the proposal has faltered is the failure of its proponents to mount a serious defense against opponents’ concerns. Among the issues critics have raised is a belief that the BAT would increase consumer costs on a wide array of imported goods and that it could hurt U.S. relations with trading partners.
The only real counterargument Ryan and Brady have offered is that the proposal would be tweaked to include transition measures and other provisions designed to prevent such effects. But they have yet to provide details on how to accomplish that — something that, if they were to do now, would likely be too little, too late.
Had Ryan and Brady presented a detailed plan for limiting the negative effects of the BAT months ago, they might have had a shot at saving it. The only reason they are still clinging to a belief that they can get the BAT through is that its opponents have yet to offer alternative revenue raisers.
But the lack of an alternative is not reason enough for hesitant lawmakers to support the BAT. When it comes to overhauling the tax code, policymakers have shown for years that they’d rather sit idly by than back controversial revenue-generating proposals that could raise taxes on a wide swath of individuals or businesses.
And there’s the rub. Any proposal that can raise roughly $1 trillion, like the BAT, will affect a lot of people. Such a colossal sum of money has to come from someone’s pockets.
So the question is where can GOP leaders look to raise money that won’t turn off a significant number of their lawmakers? The answer: maybe nowhere.