Ryan Isn’t Folding on Border Tax, Says He’s Talking About It

(Bloomberg) -- House Speaker Paul Ryan tiptoed closer to President Donald Trump’s tax agenda Wednesday and said he’s working on changes to his border-adjusted tax plan that’s been a friction point in Republican efforts to rewrite the U.S. tax code.

Ryan said he agrees that immediately imposing the border-adjusted tax in its full form would be “too disruptive,” and it needs to be changed to assuage widespread opposition among retailers and other industries. And he noted that Republican leaders are discussing whether it’s possible to move forward without the controversial proposal.

“Of course, that’s the kind of conversation we’re having,” Ryan said during an event sponsored by Axios, a new media company. But even as he declared his open-mindedness, the House Speaker signaled that those discussions may be lengthy and difficult.

That’s because the border-adjustment plan would generate an estimated $1 trillion in new revenue to help pay for other tax cuts. Without it, Ryan said, Republicans would have to raise revenue by taking away loopholes to broaden the tax base.

“That’s the kind of conversation we’re going to have all summer long,” Ryan said.

Trump’s opposition to the border-adjustment proposal came into sharper focus this week. Treasury Secretary Steven Mnuchin told members of the conservative House Freedom Caucus that he and the president are inclined to oppose it, according to people familiar with the conversation who asked not to be identified because the meeting was private. Senate Majority Leader Mitch McConnell told Bloomberg News on May 16 that the border-adjusted tax’s prospects among senators were “rather bleak.”

Exports Excluded

On Wednesday, Ryan said he agrees with Mnuchin that the measure needs to be revised. In a tax-overhaul blueprint released last year, Ryan and other House leaders proposed replacing the U.S. corporate income tax with a 20 percent levy on U.S. companies’ domestic sales and imports. Exports would be excluded. That border-adjusted feature would function as a tax on the U.S. trade deficit, Ryan says.

Retailers and other import-reliant industries have lobbied hard against the proposal, saying it would raise their tax burdens and consumer prices on a range of everyday goods. Retailers have said they oppose a border-adjusted tax in any form. Supporters say the tax would strengthen the dollar against other currencies, evening out the effect on prices.

Trump’s White House had been divided over the proposal, with advisers including strategist Steve Bannon backing it, while Mnuchin and Gary Cohn, Trump’s top economic adviser were opposed. Mnuchin’s remarks to lawmakers on Tuesday signaled a harder line.

Still, Ryan said Wednesday that he’d spoken with Mnuchin -- and that the Treasury secretary said he doesn’t support the border-adjusted tax “in its current form.” Ryan said he agrees with that point of view and wants to look at ways to revise the proposal, including creating a phase-in period for it.

Mnuchin told the House Ways and Means Committee Wednesday that he’s been meeting with its chairman, Kevin Brady, almost every week and that he’s mentioned his “concerns” about the border-adjusted tax. “We’re looking forward to potential changes that Chairman Brady may look at,” he said.

Permanent Changes

To make any tax changes permanent, Congress will have to craft a tax package in which rate cuts are paid for by other revenue raisers. That’s because Senate Republicans, who control only 52 seats in their chamber, plan to approve the legislation with no Democratic votes. The procedure they plan to use requires that any changes that add to the federal deficit in the long run have to be only temporary.

Ryan repeated a frequent theme among Republican tax writers in Congress that they and the White House agree on 80 percent of the ingredients for a tax overhaul. He listed some key points of that agreement: lower businesses’ tax rates as much as possible; end the global taxation of U.S. corporate profits by moving to a “territorial” system; work toward allowing companies to immediately deduct their capital expenses. The White House and congressional leaders also agree on simplifying the individual tax code and moving from seven graduated tax rates to just three.

But hammering out the remaining 20 percent -- that is, figuring out how to pay for the lower rates -- won’t be easy. Ryan said the beauty of his border-adjusted approach is that it functions essentially as a tax on the U.S. trade deficit. Moving away from it as a revenue raiser would mean looking at loopholes “inside the domestic U.S. business economy to take those things away to lower those rates,” he said. “That’s the trade-off, and that’s the kind of conversation we’re having.”

In the meantime, Ryan said, discussions among leaders in the House and Senate and the White House will focus on “how do we blend these approaches, how do we phase things in, what do the alternatives look like?”

Ryan said overhauling taxes is one of the top items on congressional leaders’ agenda now. “We’re spending a great deal of time on that.”

To contact the reporter on this story: Anna Edgerton in Washington at aedgerton@bloomberg.net.

To contact the editors responsible for this story: John Voskuhl at jvoskuhl@bloomberg.net, Alexis Leondis