Phase-In Could Help Border Tax, but Complicate Budget and Currency Math

House Ways and Means Committee Chairman Kevin Brady (R-Texas). (Rob Kunzig/Morning Consult)

A gradual phase-in may be the best political hope for the border adjustment tax provision surviving negotiations between the White House and Republican lawmakers, but a long transition could complicate revenue impacts and currency reactions.

An easing-in process for the controversial provision, a centerpiece of the House GOP proposal that would tax imports and exempt exports, could limit its effect as a revenue-raiser that offsets expensive aspects of the blueprint, according to Washington policy analysts.

The White House tax outline, introduced last month, does not include a border adjustment provision. Administration officials are discussing revisions with House Republicans, Treasury Secretary Steven Mnuchin said at the time.

A House GOP tax aide offered no update on timing for legislation, but said Ways and Means Committee Chairman Kevin Brady (R-Texas) has been talking regularly to administration officials and Senate counterparts about all aspects of the plan.

A White House spokeswoman did not immediately respond to a request for comment.

“I don’t know what compromises there are, other than phase-in,” Marc Gerson, who served as tax counsel to the House Ways and Means Committee under former Chairman Bill Thomas (R-Calif.), said in an interview last week.

The border adjustment tax is seen as a significant revenue raiser. If lawmakers choose to phase in the provision gradually, they may need to pair it¬†with a more tapered application of the corporate rate reduction that’s a component of the House plan, said Gerson, who’s now vice chairman of the tax department at Miller & Chevalier in Washington.

A gradual phase-in “allows companies to get used to the idea,” said Kyle Pomerleau, director of federal projects at the Washington-based Tax Foundation, in an interview Wednesday. “It also alleviates some concerns about price changes.”

But it would have its downsides, he said. A phase-in process could cut the resulting revenue in half over the first 10 years, compared to immediate implementation of the provision, Pomerleau said, though he noted that revenue could be made up elsewhere.

“There are other aspects of the plan that you could phase in and out at different degrees to make up for that missing revenue,” he said. For example, he suggested, lawmakers could achieve more revenue by limiting the amount companies can write off on old investments under the House GOP’s full and immediate expensing provision. Alternatively, transition rules could limit the amount that businesses can deduct on old loans under a proposed elimination of interest deduction.

A more significant concern of a border adjustment phase-in is its potential impact on currency markets, Pomerleau said. While the provision is expected to strengthen the U.S. dollar, if currency markets immediately anticipate that effect but the tax code hasn’t caught up to the expectation yet, businesses could face a complicated short-term transition.

With a gradual phase-in, it’s possible that “you’ll have a few years where the border adjustment isn’t 20 percent, but the value of the dollar is reflecting that 20 percent border adjustment,” Pomerleau said.

Importers could see a short-term benefit of more buying power without an immediate tax hit from the border measure, but exporters could in turn be hurt in the short term. U.S. exports wouldn’t be as attractive to foreign nations, and exporters wouldn’t immediately be exempted.¬†Importers have been wary of the border adjustment provision, while exporters largely support it.

All these potential calibrations depend on what reaches the Senate, and what ultimately becomes law. The negotiations along the way will require trade-offs.

“None of this is perfect,” Pomerleau said.

Morning Consult