The fight over a border-adjustment tax isn’t the only challenge for Republicans in their push for tax reform.
While much of the focus of the tax-reform debate has been over the border proposal, which would tax imports and exempt exports, groups are also pushing back on other parts of the House GOP’s plan.
The most controversial aspect of the blueprint has been its border-adjustment provision. Lobbying on the provision has been intense, with major businesses forming coalitions to advocate for and against the proposal.
Many GOP senators have expressed concerns that the border provision would lead to higher prices for consumers, while top House Republicans have defended it as a way to remove incentives for companies to move jobs overseas.
Republicans have also been debating whether tax reform should be revenue neutral and are trying to balance the legislative effort with other priorities.
For budgetary reasons, Republicans want to pass legislation repealing and replacing ObamaCare before they pass tax reform. However, the healthcare legislation House Republicans have offered has been facing pushback from many lawmakers in the party.
Beyond the legislative timeline, parts of the House GOP’s blueprint are facing pushback.
Notably, some business groups have criticized the proposal to do away with the deduction for businesses’ net interest expenses.
The Republican plan would eliminate that deduction, instead allowing businesses to immediately write off the costs of their capital investments. The plan would include special rules for financial services firms’ interest expenses.
“Allowing investments to be immediately written off provides a greater incentive to invest than is provided through interest deductions under current law,” the blueprint states. “Allowing both together would be distortive as it would result in a tax subsidy for debt-financed investment.”
But interest deductibility is important for many businesses because they use debt financing to help grow their businesses and manage their day-to-day operations.
A coalition of businesses and trade associations called the Businesses United for Interest and Loan Deductibility Coalition has been urging Congress to maintain the deduction for net interest expenses. The coalition says it supports tax reform that would grow the economy but argues that full expensing of capital investments is not an acceptable substitute for interest deductibility.
“Eliminating [interest deductibility] would create a new tax on business growth,” said Brai Odion-Esene, a spokesman for the coalition.
House Ways and Means Committee Chairman Kevin BradyKevin BradyTax reform an important part of pro-consumer energy policy GOP torn over what to do next Republicans vote to block resolutions on Trump's tax returns MORE (R-Texas) told reporters Tuesday that groups have been discussing ideas with the committee about the transition and design of the interest provision.
“I’m confident we’re going to have a very positive transition there for job creation,” he said.
In addition to eliminating the interest deduction, the House GOP blueprint proposes generally eliminating “special interest” business tax provisions, with the exception of the research and development tax credit.
Over the years, Congress has included various tax preferences in the IRS code to incentivize various business behaviors. There are tax credits for businesses relating to renewable energy, low-income housing and employment.
“Obviously the current code has a host of different credits and deductions, each with their own constituencies,” said Marc Gerson, vice chairman of the tax department at Miller & Chevalier and a former tax counsel to the Ways and Means Committee.
Groups who care about these tax preferences are discussing them with lawmakers, who will have to decide if any of the tax breaks are worth keeping, Gerson said.
On the individual side of the tax code, the House GOP blueprint discusses doing away with itemized deductions other than those for mortgage interest and charitable contributions. It also proposes eliminating “special interest” provisions but doesn’t provide further detail.
Groups are trying to help shape how tax reform legislation will deal with tax provisions that aren’t explicitly mentioned in the blueprint, which could also complicate matters for Republican lawmakers.
For example, the blueprint does not specifically discuss how the carried interest that fund managers receive would be taxed. Under current law, carried interest is taxed as capital gains, rather than at the higher rates for ordinary income.
During the presidential race, Trump repeatedly said he wanted to eliminate the carried interest tax break, and Office of Management and Budget Director Mick Mulvaney told CNN on Sunday that Trump still plans to do this. Many Democrats also want carried interest to be taxed as ordinary income, since the current tax preference largely benefits high earners.
But the private-equity industry and conservative groups are making the case that carried interest should continue to be taxed as capital gains.
More than 30 conservative groups, including Grover Norquist’s Americans for Tax Reform, sent a letter to Brady Speaker Paul RyanPaul RyanTrump's approval takes hit after failed GOP healthcare plan How the GOP’s ‘Access to Care’ bill cuts down states’ rights Tax reform an important part of pro-consumer energy policy MORE (R-Wis.) last week warning that higher taxes on carried interest would hurt pension funds, charities and colleges.
James Maloney, spokesman for a private-equity industry group called the American Investment Council, said that maintaining the current tax treatment of carried interest has “overwhelming support of both the House and Senate Republicans.”
Senate Majority Leader Mitch McConnellMitch McConnellScarborough: Bannon trying to ‘help his falling standing’ in WH Hatch: I may retire if Romney runs to replace me How the GOP’s ‘Access to Care’ bill cuts down states’ rights MORE (R-Ky.) said last week that a tax code overhaul is bound to make some groups unhappy.
“When you start moving the tax code around, it will have an impact, but your hope is that by getting as many preferences out and getting the rates as low as possible, it helps promote the kind of growth that we haven’t seen,” he said.
Brady said that when Congress seeks to undertake tax reform, “people always want to weigh in a significant way for their tax provisions that they favor.”
That’s “pretty traditional,” he added.
Brady also stressed his commitment to enact tax reform legislation this year to make the U.S. more competitive with other countries.
“We are moving full-steam ahead on tax reform,” he said.