At a WSJ conference yesterday, House Ways and Means Committee Chairman Kevin Brady (R-TX) gave a few tantalizing hints as to the content of the much anticipated house tax reform bill. Most notably, Brady suggested that the bill would include a DBCFT that is phased in over a five-year transition period. This is intended to respond to a number of concerns, including the fear that currencies may not adjust immediately (click here for the Tax Foundation’s summary of the concerns alleviated by, and new concerns raised by, a five-year transition).
Brady also reaffirmed that certain industries (financial services, communications, insurance and digitally-focused businesses) would be subject to “special treatment” under the DBCFT. Whether this means a wholesale exemption for these industries or a unique set of rules to identify where transactions occur remains to be seen. Statements previously made to reporters indicate that Brady prefers a unique set of rules over a blanket carveout: “I always worry about that with exemptions, that that will be the new ‘Lifetime Lobbyist Employment Act’ going forward, so I’d strongly prefer not to go that route.” Other members of the House Ways and Means Committee have suggested that they would be open to providing exceptions from the general rules for imports for certain commodities not produced in the United States.
Brady also previewed a potential compromise on the proposed disallowance of net interest deductions, saying that he foresees allowing small businesses to take advantage of both full expensing and interest deductions, as small businesses “often don’t have access to capital markets.” The House Blueprint frames the denial of the deduction for net interest expense as a swap for full expensing, which begs the question whether Brady actually contemplates allowing small businesses to have both, or if small businesses would be required to elect one or the other (along the lines of President Trump’s campaign proposals). Brady also noted that interest deductions would be permitted for real estate purchases and utilities. This makes sense for purchases of land (which would not be eligible for immediate expensing under the House Blueprint), but raises a similar question about double dipping for real estate purchases that are eligible for immediate expensing under the House Blueprint (e.g., buildings).
Perhaps the biggest takeaway from Brady’s comments is that he seems committed to tax reform, not just tax cuts, and that his committee is likely to pursue tax reform that includes the DBCFT, at least unless and until an alternative revenue source is identified. Another key takeaway is that Brady’s comments did little to assuage DBCFT opponents. For example, Heritage Action, a conservative policy organization, responded almost immediately with the following statement from its CEO, Michael Needham: “Phasing in flawed, unnecessary policy is not a solution; in fact, it is likely to create more problems than it solves. Rather than creating additional economic uncertainty, congressional leaders need to declare the border adjustment tax dead. Only then can a serious conversation on advancing real, pro-growth tax reform move forward.”