As scandal after scandal plagues the White House, House Republicans were living in an alternate reality Thursday — moving forward with their legislative agenda as if nothing happened.
The House Ways and Means Committee, which writes the nation’s tax laws, hosted its first hearing of the year on tax reform, assembling a group of business leaders to testify about the best way to overhaul the tax code and grow the economy.
Not only did House Republicans ignore all the White House drama, they also basically ignored President Trump’s proposed tax plan during the 3.5-hour hearing. Instead, GOP members focused on the blueprint they’ve been pushing for nearly a year, the one that includes a border-adjusted business tax.
After opening remarks, Chair Rep. Kevin Brady (R-TX) immediately zeroed in on one of the most publicized parts of the GOP plan, which involves reforming the business income tax into one that is more territorial.
“The House blueprint calls for a shift from an onerous business income tax to a simpler US-based cash flow system,” he said.
The focus on the GOP blueprint signals that House Republicans may not be taking Trump’s tax plan so seriously. The one-page White House tax reform proposal, which the administration unveiled last month, called for lowering the corporate and business taxes to 15 percent, expanding the standard deduction for all taxpayers, and eliminating most itemized deductions. Though Democrats on the committee criticized Trump’s plan during the hearing, Republicans were mostly silent.
Brady did, however, praise the president for “leading the charge for bold tax reform,” but the details of the hearing suggested he is not taking Trump’s recommendations literally. Congressional Republicans have bemoaned that the scandals in the Trump White House are taking time away from their agenda. The hearing suggested that one way they’re dealing with the problem is to move forward as if Trump — or his scandals or his tax plan — largely doesn’t exist.
Republicans still want their border adjustment tax
During Thursday’s hearing, it became clear that House Republicans are still attached to what they call the destination-based cash flow tax, which rewards companies that invest in the United States and export goods abroad.
The Republican tax plan would adjust the corporate tax code in several ways. It lowers the corporate tax rate to 20 percent. Businesses would no longer need to pay income taxes on overseas profits, but they could no longer be able to deduct interest as a business expense. Businesses would be able to fully write off their capital investments, such as new machinery, the same year they make the purchase.
The most controversial part of the plan is the border adjustment of the 20 percent income tax. Essentially, it taxes goods based on where they end up, not where they are produced. So the revenue a company makes from selling something abroad is not subject to tax, but money it spends on goods imported from abroad is taxed.
This aspect of the House plan has sparked criticism because businesses that rely on cheap imports — a lot of big-box retailers — would be hit hardest. On the other hand, US manufacturers have a lot to gain, as they could sell their products abroad tax-free. Either way, it has been the key provision House Republicans have proposed to raise some revenue to pay for their tax cuts. The conservative-leaning Tax Foundation believes it will raise $1 trillion over the next 10 years. President Trump doesn’t like the tax, though US Treasury Secretary Steve Mnuchin has signaled that the White House would work with Congress to fix it.
Most of the business leaders who testified were all for the destination-based tax system, particularly those in manufacturing, like Zach Mottl, an executive at Atlas Toolworks, which makes tools at a factory outside Chicago.
“I think consumption tax is a good focus. Why are we taxing income? We want income; let’s tax other things,” he said.
John Stephens, the chief financial officer for AT&T, seemed more interested in lowering the corporate tax rate, though he didn’t bash the border tax.
“Quite frankly, the provisions of a lower rate and incentive to invest in capital would be the most effective way to increase our investment and hire more people and generate more jobs,” he told the committee. That’s the real answer for economic growth. (As a side note, AT&T is one of the companies lobbying the most heavily on tax reform, according to lobbying disclosure reports.)
About the elephant in the room
House Republicans seemed more interested in talking about the economic growth they envision their tax plan would create, and less interested in how to offset the cost. But Rep. Sandy Levin (D-MI) wanted to know what business leaders thought about how to pay for tax cuts. The White House has implied that drastic tax cuts will essentially pay for themselves as a result of the economic growth that would follow — a scenario that most economists think is too optimistic.
“None of you … have talked about the impact on the deficit and how we pay for corporate tax reform. Are you concerned about this, or are you among those who says, ‘Let it flow; if the deficit increases, it will essentially bring about economic growth’? Are you worried about paying for corporate tax reform?” he asked the panel.
“Certainly we are,” says Stephens of AT&T. “That why we talked about trade-offs. In comprehensive reform, there will be trade-offs. We understand that, and it’s something we are going to have to work through, so we come up with a complete and workable package.”
David Farr, the CEO of Emerson Electric, echoed his view: “Yes, I am concerned about the deficit as an individual taxpayer and as CEO, so I look for trade-offs back and forth to make sure we do this right for the economy on a balanced basis. So I think it’s very important.”
Calculating the cost of cuts will be crucial to the success of tax reform. The easiest route for Republicans, politically, is to get a bill passed through budget reconciliation, which only requires a simple majority in the Senate. For a permanent tax cut, the legislation would have to be revenue-neutral and not add to the deficit after 10 years. Lawmakers could skirt this rule by declaring the cuts would “sunset” after a period of years, in order to minimize their budgetary impact — and then plan to renew them later.
Brady took the opportunity to highlight that the House GOP plan balances the budget and avoids adding to the deficit, while taking into account some economic growth.
In other words, House Republicans still think their plan is the best plan to rewrite the tax code.