By Naomi Jagoda - 05-29-17 07:00 AM EDT
The Trump administration and congressional Republicans are working toward unifying around a single tax-reform bill, aiming to pass the legislation this year.
But there are still some key differences between the priorities of the White House, the House and the Senate that need to be ironed out.
Speaker Paul Ryan (R-Wis.) and House Ways and Means Committee Chairman Kevin Brady (R-Texas) have said that Republicans agree on about 80 percent of a tax reform package. But working through that final 20 percent could take some time.
Here are five tax reform issues that Republicans need to resolve.
How long should the tax changes last?
House GOP leaders on tax reform are pushing for the changes to be permanent, but some senators and administration officials have expressed openness to temporary tax changes.
Procedural rules play into this debate. If Republicans want to pass a tax-reform bill under "reconciliation" to bypass a Democratic filibuster in the Senate, the legislation can't increase the deficit outside of the budget window. As a result, a tax bill either needs to be revenue neutral - meaning that it won't increase the deficit - or make the tax cuts on only a temporary basis.
The top tax-writers in the House want to produce a permanent tax bill that's revenue neutral, after accounting for economic growth. They argue that permanent changes to the tax code are necessary for businesses' long-term planning.
But some GOP senators are more interested in producing legislation with a net tax cut, which could mean making the cuts temporary under reconciliation. Sen. Pat Toomey (R-Pa.) suggested in a Bloomberg View op-ed earlier this month that Congress could extend the budget window from the traditional 10 years to 20 or 30 years to enact longer-lasting tax cuts.
"A 20- or 30-year tax reform would be as close to permanent as we can get since Congress would be likely to overhaul the tax code within that period anyway," he wrote.
Treasury Secretary Steven Mnuchin and Office of Management and Budget Director Mick Mulvaney have also said they are willing to consider lengthening the budget window. And Mnuchin has said that short-term tax cuts are preferable to no tax cuts at all.
"Permanent is better than temporary, and temporary is better than nothing," he said at a hearing on Wednesday.
How low will the tax rates be?
Republicans agree that they want to lower tax rates. But tax plans put forward by House Republicans and the White House diverge on how low to set tax rates for both individuals and businesses.
The tax plan the Trump administration unveiled in April proposes individual tax brackets of 35 percent, 25 percent and 10 percent. It also proposes a rate of 15 percent for both corporations and small businesses known as "pass throughs" whose income is taxed through the individual tax code on their owners' returns.
Meanwhile, the blueprint House Republicans released last year would establish individual tax rates of 33 percent, 25 percent and 12 percent. The corporate tax rate would be 20 percent, while pass-through businesses would pay a maximum rate of 25 percent.
Republicans argue that lowering the corporate tax rate is particularly important because the current rate of 35 percent is among the highest in the world, making American businesses less competitive.
But the lower the rates are, the more revenue loss the rate cuts would produce. That would mean that lawmakers would need to find more ways to pay for the rate cuts to avoid increasing the deficit.
What happens to the controversial border adjustment tax?
The biggest fight over tax reform so far this year has centered on the House GOP's border-adjustment tax (BAT) proposal.
Under the proposal, imports would be subject to a 20 percent tax that wouldn't apply to exports. Proponents of the BAT say it would raise revenue to offset rate cuts and help prevent an erosion of the corporate tax base.
But the proposal's fate doesn't look good: GOP senators, administration officials and even some House Republicans have expressed concerns about its impact on consumers.
House GOP leaders are working on transition rules aimed at addressing concerns about the BAT's impact on import-heavy industries. But Ryan also recently said he could see a situation where the House passes a tax bill that doesn't include any border adjustment.
Without the BAT, lawmakers will have to find other ways to raise revenue and prevent corporations from shifting profits overseas.
How will the tax bill treat business investments?
After the BAT, the GOP tax plan's language about business investment may be its next most hotly debated provisions.
The plan would eliminate the deduction for businesses' net interest expenses, instead allowing companies to immediately write off the full costs of their investments.
House GOP leaders believe that "full expensing" is a policy that would provide more of an incentive for businesses to invest. And the Tax Foundation estimates that eliminating the interest deduction would raise more than $1 trillion in revenue over 10 years.
But the interest deduction has its defenders, who say that debt financing is important to industries such as real estate, private equity, telecommunications and agriculture.
Mnuchin has said his preference is to keep interest deductibility, and Senate Finance Committee Chairman Orrin Hatch (R-Utah) told Bloomberg TV earlier this month that the deduction would be "pretty tough to do away with."
Will tax reform be tied to infrastructure spending?
The tax plans from House Republicans and the White House do not include infrastructure. But linking taxes and transportation may not be off the table, since Trump and some lawmakers have floated the idea.
Days after the administration released its tax plan, Trump told The Economist that he "may align" tax reform and infrastructure to get support from Democrats.
Additionally, a bipartisan group of House members in the Problem Solvers Caucus recently expressed support for pairing tax reform with infrastructure.
The issue of connecting tax reform and infrastructure has also divided prominent conservative thought-leaders.
Some of Trump's former campaign advisers have suggested that Congress pass a business-only tax cut bill that also includes money for infrastructure, while anti-tax crusader Grover Norquist has warned that every additional dollar that goes to infrastructure can't be used to cut taxes.