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Border Tax Dropped as GOP Leaders Pivot to Tax Reform Bill

White House, Republicans Confident Effort to Rewrite Tax Code Will Yield Results but Timing Uncertain as Govt. Facing Fiscal Deadlines
August 3, 2017
National Economic Director Gary Cohn, left, Treasury Secretary Steven Mnuchin speak at a White House briefing on April 27, 2017.
National Economic Director Gary Cohn, left, Treasury Secretary Steven Mnuchin speak at a White House briefing on April 27, 2017.
After failing in their latest attempt to pass heathcare reform, GOP leaders and the White House have shifted their attention to another ambitious goal: rewriting the 75,000-page U.S. Tax Code, and one that has major implications for commercial real estate owners, tenants and investors.

Last week, a group of influential lawmakers and administration officials issued a joint statement renewing their vow to adopt the first sweeping tax reform legislation since the Tax Reform Act of 1986.

Tellingly, the only new detail offered about the plan that President Donald Trump and the GOP majority hope to push through Congress this year is that the legislation won't include a controversial provision imposing a 20% tax on imported goods and services to the U.S. from Mexico, China and other countries, a proposal that was fiercely opposed by major retailers.

While GOP leaders are hopeful they have a better chance of successfully moving tax reform legislation than they did with healthcare reform, Congress is facing crucial deadline to raise the debt ceiling and approve government funding before the federal budget expires Sept. 29. As has occurred in the past, failure to meet the deadlines could result in a partial government shutdown and potential disruption in global financial markets.

Dropping the BAT

The goal of the so-called border-adjustment tax (BAT) proposal was to recoup tax revenue expected to be lost as a result of corporate and personal tax cuts outlined in previous GOP and administration reform plans.

The group of administration officials and members of Congress known as the "Big Six," which has been meeting for several months to seek consensus on an approach to tax reform, formally scrapped the BAT provision in its July 27 statement, however.

"While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform," according to a joint statement by the group, which includes House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), House Ways and Means Committee Chairman Kevin Brady (R-TX), Senate Finance Committee Chairman Orrin Hatch (R-UT), Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn.

Dearth of Details on Reform Legislation

Beyond dumping the BAT, the statement offered few details about specific provisions that would be included or excluded from the legislation, including those near-and-dear to the real estate industry such as the fate of 1031 like-kind exchanges and preserving the deduction of interest in favor of full immediate expensing by companies.

Despite the lack of new details, Real Estate Roundtable President and CEO Jeffrey DeBoer called the GOP leadership statement on tax reform "an important step forward."

"The Roundtable looks forward to continuing to work with Congressional tax writers as they develop the details on tax reform that will encourage greater job creation and sustainable economic growth," DeBoer said.

National Economic Council Director Gary Cohn and Treasury Secretary Steven Mnuchin met with real estate professionals Monday for a listening session on tax reform concerns. Cohn told the group that White House and GOP leaders hope to have a tax bill ready for submission toward the end of this month's traditional Congressional recess.

In the intervening weeks, interest groups plan to spend millions of dollars in advertising to pitch voter to promote tax cuts. The American Action Network has budgeted $20 million, and $5 million in August alone on social media, TV and radio advertising.

The Big Six called for a plan that permanently reduces tax rates as much as possible, allows unprecedented capital expensing and "creates a system that encourages American companies to bring back jobs and profits trapped overseas," according to the group's statement.

"We are now confident that without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers while protecting American jobs and the U.S. tax base."

The BAT provision drew fire from retailers and carmakers as well as commercial real estate analysts, who argue that the tax increase could among other impacts, influence the expansion or relocation decisions of certain cost-sensitive tenants and other occupiers of commercial space.

Massive Lobbying Effort Doomed BAT

After initially included in House Speaker Paul Ryan's tax reform blueprint last year, the Trump Administration signaled in early April that it was backing away as Wal-Mart, Home Depot and other retailer warned the tax would drive up costs for blue-collar and middle-class consumers and cause further damage to the retail industry.

Retailers and conservative advocacy groups mounted a massive lobbying campaign to kill the provision. The National Retail Federation immediately applauded the removal of the border tax from the plan.

Retailers already pay the highest effective corporate tax rate of any sector of the U.S. economy, said federation President and CEO Matthew Shay. Ending importers’ ability to deduct the cost of merchandise purchased from other countries could cost average American families up to $1,700 a year in higher consumer prices, the group estimated.

"By removing this costly element of reform, the way has been cleared for swift action on a middle-class tax cut that will put more money in the wallets of the American taxpayer," Shay said.

Proponents argue that the border tax could create jobs by spurring manufacturing in the U.S. However, real estate industry leaders asserted during a panel discussion at the ICSC's RECon trade conference in Las Vegas in May that that the tax would hurt the economy and have a sweeping negative impact on both retail operators and consumers, with sharp increases in the costs of goods imported from China and Mexico.

Current White House strategy calls for Congress to complete a makeup of tax reform legislation and start hearings after Labor Day, with the goal of pushing a bill through the House in October and the Senate in November. Congress may try to use budget reconciliation procedures to fast-track consideration of the measure by requiring a simple-majority vote rather than the 60-vote threshold required in Senate votes.

Tight Schedule Leaves Little Time for Tax Talks

The House and Senate are currently scheduled to convene at the same time on just 12 days before the deadline. U.S. Treasury Secretary Steven Mnuchin pressed Senate leadership this week act quickly on raising the debt limit, but conservative fiscal hawks are demand that any raising of the debt ceiling be tied to federal spending cuts, which could jeopardize support from Democrats.

Moreover, two key senators, Sen. Orrin G. Hatch (R-UT), who heads the Senate panel on taxes, and Majority Leader Mitch McConnell, made statements this week indicating the GOP hasn't reached a consensus on how to proceed with tax reform.

Hatch said he's seeking a more deliberative and bipartisan process that includes meetings with Democrats and public hearings. McConnell quickly countered that Republicans plan to move forward without help from Democrats if necessary.

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