US: BAT’s Legislative Track

Published on February 17, 2017

We would still give the controversial border adjustability feature of the anticipated House Republican corporate tax reform bill no better than one in three odds of ever becoming law, and these days, we are not entirely sure a nod from President Trump will necessarily boost those odds as much as we might have previously thought.

Our political odds are nevertheless still better than the probabilities probably given by most on Capitol Hill, but less than what seems to be assumed in the stock market.

*** We see the Trump factor in asymmetrical terms to the fate of the BAT. His support or at least the absence of a firm no will not necessarily help overcome the odds in finding BAT votes on Capitol Hill. But a clear no by the White House will all but ensure that BAT is, in political terms, a Dead Tax Walking. Either way, the President’s State of the Union address on February 28, and the release of National Economic Council Chairman Gary Cohn’s promised outline of the President’s budget and tax priorities, due perhaps the day before, may be when the President’s stance on the BAT finally comes into view. ***

*** House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady are, however, not necessarily assuming a clear endorsement and active support from the White House, and determined to press ahead, in effect, doubling down on the inclusion of border adjustability, without which Ryan has asserted “there can be no corporate tax reform. Brady, for his part, is telling his colleagues a vote the BAT is  an up-or-down resolution on “economic nationalism,” a rhetorical phrasing crafted to align with the populist message coming out of the White House. ***

Here are updates to our last report on the BAT’s legislative prospects  (see SGH 2/8/17, “US: Clearing the Tax Reform Logjam”):

* House Timeline and Tactics

Ways and Means Chairman Brady is not expected to unveil a final version of a corporate tax reform bill until some time in mid to probably late March. Ryan is still intending to pursue the two step strategy of moving a “first phase” of the Obamacare replacement bill in March and no later than April, and to then move on corporate tax reform in April and no later than May. In an ideal world, the Obamacare bill clears the House and goes to the Senate by Memorial weekend, and tax reform before the July recess.

If Brady does include border adjustability — and there is still every indication he will, regardless of how the White House comes down on the issue — we understand it is still likely to include “preemptive moderations,” primarily comprising extended transition times to soften the harshness of its impact on key economic sectors like the oil and gas and retail sectors.

Those “moderations” are also intended to help secure votes along the entire length of the legislative path, whether to move it out of Committee to the House floor vote, and even to increase its feasibility in the Senate.

They will almost certainly be needed. While the Ways and Means is one of the two “stacked” committees ensuring firm control by its chair and the Speaker, we understand that not all its Republican members are on board; three of whom, for instance, have intentions to run for the Senate or Governor in their home states and are reluctant to fully embrace what may prove to be a wildly unpopular law and will need these sweeteners.

One politically clever strategy that we understand to be taking shape to win BAT support is to potentially tailor transition times or exemptions to appeal to union workers and even some union leadership for support in congressional districts and states with a large auto sector industry like Michigan and Missouri. The thinking is that, down the road, it could help the BAT vote with vulnerable Democrats facing tough re-election battles in 2018.

To boost its prospects in the eventual floor vote in the House, there is some thought Speaker Ryan may also push for the Rules Committee to issue instructions that any amendments to strike or alter the BAT portion of the corporate tax reform bill must identify offsetting revenues or be ruled out of order. The thinking is this would force the onus for finding additional offsetting revenues on to those members pressing for the changes.

It still means, however, a very tough procedural vote on the House floor before the vote on the actual bill. And we are told that is where most of the lobbying firepower seeking to derail BAT will be focused; by not voting against the actual bill itself but the rules, the theory goes, it will make it easier for wavering Republicans to defy their leadership. And while Ryan is hoping to pick off a handful of Democratic votes, the grip on discipline by Minority Leader Nancy Pelosi and Minority Whip Steny Hoyer is thought to be pretty firm on this vote.

In other words, it is far too early for either Ryan or Brady, or Majority Whip Steven Scalise to know exactly where the House votes are, or even whether the 218 majority votes are within range.

* Finding additional offsetting revenues

But by far the real cross of gold the Republican leadership must shoulder is finding the necessary offsetting revenue that might be lost in the moderations given to win enough political support to secure the necessary votes for BAT.

The commonly touted $1 trillion to as much as $1.3 trillion in tax revenues through border adjustability is probably pretty inflated, but even then, whatever extended transitions and other moderations are necessary will cut into its key benefit of generating so much tax revenue to pay for the cuts in the corporate tax rate to 20%.

There is some thought to make up for it through diverting all of the revenues gained through the capital repatriation windfall expected in the tax cuts and how foreign profits are treated. That, however, would mean leaving little to no to be diverted to fund new infrastructure spending.

Another source of revenue is a liberal dynamic scoring. Tax bills, however, are scored by the Joint Committee on Taxation, which does offer dynamic scoring, but for “information purposes,” while it is still the static scoring that counts. The only other way to square the circle might be very aggressive growth and inflation projections over the ten year baseline of the tax reform and budget.

There is, for instance, talk the Office of Management and Budget could apply an average real growth of 3.5% and and a 2.4% inflation to generate a higher projection of tax revenues that a 5.9% nominal growth assumption would bring. It is uncertain, however, whether its newly confirmed director, Mick Mulvaney, an avowed fiscal hawk, would abide by a stretching of the OMB projections, even if his boss, President Trump, would no doubt favor such an optimistic estimate.

* Gathering Momentum to Senate Opposition

To counter a mounting opposition to the BAT already gathering momentum in the Senate, Speaker Ryan made a pitch to the GOP Senators earlier this week on the House corporate tax reform plan with its linchpin border adjustability, pleading with them to “keep their powder dry” until they see the final version of the House bill.

It is a fair point, since there is no actual bill yet, nor will there be from Ways and Means Chairman Brady for probably another month. But if Ryan and Brady want to ensure there is still some political life for the BAT in the Senate, they may need to quicken the pace of their plans. At last count, there seems to be at least eight Republican Senators strongly opposed to the BAT or leaning that way.

Even if the tax reform meets the rules under reconciliation to only require a simple 51 vote majority, that level of GOP opposition in a 52 seat majority means Senate Majority leader Mitch McConnell probably would not even bring the BAT to floor debate. In addition, we would wonder if Senate Finance Committee Chairman Orrin Hatch would or could ever move a BAT bill out of his Committee.

Hatch, in fact, is promising to move forward with his own corporate tax reform bill, leaning towards a more bi-partisan tax reform legislation that would bring the Democrats on his Committee into shaping the scope and scale of the tax reforms. The Committee’s ranking Democratic member, Senator Ron Wyden, has a long trail of experience and expertise on tax reform.

But there are significant doubts Hatch will ever manage to move a major tax reform bill out of his Committee any time soon, and almost certainly not before a House bill is sent to the Senate, assuming Ryan can steer it through a contentious floor vote without much if any Democratic votes.

One best case scenario for the BAT, and indeed, for any corporate tax reform this year, is a House bill with some variation of the border adjustability making it to the Senate by the time of the July recess, followed by the start to a fierce cathouse fight over how to square the House bill with whatever Hatch and his Committee manages to come up with.

An extremely optimistic outcome would be a vote before the start of the August recess. More likely would be an extended battle into the fall. And whatever comes of that would still have to go back to the House or even more likely, to conference, to determine whether corporate tax reform can pass this year, if at all.

* Awaiting the White House Verdict

Both Brady and Hatch in any case will probably be beat to the punch on the BAT by White House National Economic Council Chairman Gary Cohn who has been tasked with drafting President Trump’s budget and tax plans, which is expected to essentially be an extended memo outlining the President’s priorities.

The President’s State of the Union address is set for prime TV time on February 28. Cohn’s budget/tax memo is expected the day before, though it still has to go through Treasury Secretary Steven Mnuchin and OMB Director Mick Mulvaney, neither of whom who have had much time to get up to speed.

But if Cohn fails to include border adjustability, then Ryan and Brady’s BAT linchpin will essentially be near death in political terms — and the latest word is that Cohn is lukewarm at the very most.

At least on one count, however, we do not really get the sense the White House turmoil is undermining the legislative prospects for the BAT. Indeed, there is a resignation on the Hill that Trump’s impact in the end may prove marginal at best.

No doubt the Capitol Hill Republican leadership would love a more vocal support from the President. But they have essentially already concluded they cannot wait for the signals from the White House, and are insisting they will map out their legislative strategy with or without the White House, and assuming a bare minimum of coordination with the White House. The more the tax reform legislation moves forward, the thinking goes, the more President Trump will support it, not the other way around.

That remains to be seen, however, as it is hard to see the White House simply straddling the fence for much longer, and it is equally hard to see how Ryan and Brady can push ahead if President Trump does finally come out against it.

So a lot is riding for Ryan and Brady, and for the fate of the BAT if the President makes any more definitive remarks on his position, or Cohn issues a favorable decree from the White House on the BAT by the end of next week.

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