US lawmakers stake out position on border adjustment tax

by Sam Olchyk and Arthur Norman

The border adjustment tax, a key piece of the US House Republican Blueprint and a vital revenue raiser, was subject to more scrutiny during a May 24 House Ways and Means Committee hearing on the recently released FY2018 Budget Proposal for the Department of Treasury and tax reform.

Rep. Tiberi (R-OH) became the fourth Republican Ways and Means Committee member to publicly side against the border adjustment tax. He said that the economic growth assumptions accompanying the tax’s revenue projections seem “a little optimistic.”

Rep. Doggett (D-TX) questioned whether the border adjustment tax would “pose a risk to the economy” and pushed Treasury Secretary Mnuchin to elaborate on the steps the administration plans to take to fix it.

Secretary Mnuchin has recently commented that he believes there are issues with the border adjustment tax but declined to offer alternatives at the hearing. Instead, he stated that he will continue to work with Chairman Brady on the issue. He stated that it is not the job of the Administration to fix the tax and that the Administration’s intent is to allow Chairman Brady to review ways to alter it.

Not all of the commentary on the border adjustment tax was negative. Reps. Roskam (R-IL) and Rice (R-SC) came to the defense of the provision. Rep. Roskam noted that the border adjustment tax would lead to positive outcomes by preventing base erosion and incentivizing intellectual property to be located in the United States rather than abroad.

Rep. Rice noted the fact that all of the United States’ trading partners currently employ a border adjustment of some form and that the country’s “antiquated” system has been a “direct and foreseeable” driver of wage stagnation in themiddle class for the past thirty years.

Rice added that even US Trade Representative Robert E. Lighthizer has noted that the lack of a border adjustment poses a serious disadvantage to exporters.

“The more I’ve learned, the more I’ve recognized that this is a necessary component if we want to rebuild the middle class,” stated Rice.

Sec. 385 regulations

In response to questioning from Rep. Renacci, Secretary Steven Mnuchin stated that he did not know when the Treasury’s review of the Sec. 385 regulations was going to be complete.

Pass-throughs, business deductions 

Rep. Buchanan (R-FL) continued his advocacy for parity in the rates for pass-through businesses. He asked Treasury Secretary Steven Mnuchin to commit to supporting tax parity between the two business structures.

While Secretary Mnuchin did not commit to that policy, he did say that the Administration is advocating for a “business tax” that would treat business income earned similarly regardless of the organizational structure. He added the “business tax” would come with rules to keep “rich people” from using the pass-through label as a loophole.

Rep. Renacci (R-OH) was the only member to ask Secretary Mnuchin about his stance on maintaining the business interest deduction.

Secretary Mnuchin noted that he supports keeping the interest deduction but that all options are still on the table. He also added that he supports eliminating all deductions on the individual side except for the mortgage interest deduction and the charitable contribution deduction.

— Sam Olchyk chairs Venable LLP’s Tax and Retirement Policy Practice Group in Washington DC. He can be reached at solchyk@venable.com

— Arthur Norman is a Legislative Policy Analyst at Venable LLP.  He can be reached at anorman@venable.com.


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