As expected, President Trump’s first speech before a joint session of Congress last night did not include any new details on the Administration’s plans for tax reform, but his remarks did include some references to tax reform, including a reference to a border adjustment tax for imported goods. Does that signal an upcoming endorsement of the House Republican’s destination based cash flow tax (DBCFT)? That remains to be seen, but it is fair to say that the DBCFT is not dead yet, and could still turn out to be the least worst alternative, given its revenue raising potential.

Some lawmakers, including Republicans in the Senate, have recently been distancing themselves from the DBCFT and momentum for the proposal seems to have stalled. Last week, we examined potential alternative paths that the Senate might take to tax reform. However, the DBCFT has the potential to raise enough revenue to reduce the corporate tax rate while achieving budget neutrality. Some third-party analyses have found that the DBCFT (as proposed by the House Blueprint) would raise more than $1 trillion of revenue in the first decade (for example, here and here). In the DBCFT, House Republicans have found a solution to the problem of delivering lower rates with revenue neutrality, and they may not give up on it so easily.

Why Would the DBCFT Raise So Much Revenue?  Under current federal income tax law, U.S. companies are, very generally, taxed on revenues from customers located anywhere, but non-U.S. companies that are not engaged in a U.S. trade or business are not taxed on revenues generated from selling products to U.S. customers. As we discussed in more detail here, the DBCFT would impose tax on revenue generated by U.S. companies only from customers located in the United States, excluding from the tax base revenue generated from customers abroad (i.e., revenue from exports). But the DBCFT would also impose tax on all imports entering into the United States for sale to U.S. customers.

Currently, the United States imports significantly more than it exports. As long as that remains true, the additional revenue from tax imposed on imported goods will outweigh the lost revenue from no longer taxing exports. A recent paper by Elena Patel and John McClelland of the Treasury’s Office of Tax Analysis finds that, with current trade flows, the DBCFT would expand the tax base by 50%.

That Raises the Trillion Dollar Question – Can Lawmakers Reduce Rates in a Revenue Neutral Manner Without the DBCFT?  Previous proposals for corporate tax reform from both sides of the aisle have suggested paying for a rate reduction by closing loopholes and getting rid of deductions and preferences in the corporate code. However, while this “base-broadening” approach is familiar (“1986-style tax reform”), it loses supporters when the details of specific base broadeners are included in the proposal.

For example, House Ways and Means Chairman David Camp (R-MI)’s 2014 discussion draft took exactly this approach. The plan, which identified enough specific base broadeners to lower the corporate rate to 25%, was initially praised for its ambition and scope. But, soon after release, it was overwhelmed by pressure from industries that benefitted from the loopholes, deductions and preferences placed on the chopping block. The financial industry opposed the proposal’s bank tax, funds came out against the taxation of carried interest as ordinary income, and the real estate industry fought to preserve the mortgage interest deduction and tax preferences for REITs in their current forms. Camp’s proposal stalled in committee without ever being brought to a vote. Camp’s fellow Republicans did not even include it in the House’s budget a few months later. (When asked about Camp’s proposal, House Speaker John Boehner (R-OH) famously responded with “blah, blah, blah blah.”)

Non-DBCFT Base Broadeners.  Base broadening in 2017 (without the DBCFT) would likely recycle ideas from Camp’s plan and other past plans. One target for lawmakers in this round could be the deduction for state and local taxes, which would have been eliminated in Camp’s plan. Because this benefit goes primarily to taxpayers in heavily Democratic states (which tend to have the highest state and local taxes), Republicans may be less susceptible to pressure to preserve the deduction. We would also expect to see some sort of deemed repatriation of offshore earnings (even as a one-time revenue raiser, a deemed repatriation could have a lot of “juice”–$138 billion according to the Tax Policy Center). Lawmakers could also go in the opposite direction of the DBCFT and increase depreciation periods or require capitalization and amortization of expenses that are currently immediately deductible (such as research and experimentation costs). Policymakers on both sides of the aisle have also discussed eliminating “last-in, first-out” accounting for inventory and putting further limits on interest deductions for multinationals (or eliminating the deductibility of interest entirely, as is suggested by the House Blueprint). This is just a sampling of potential revenue raisers: Congress has many options, but none of these options will be easy.