By Naomi Jagoda - 08-06-17 07:30 AM EDT
Republicans are wrestling with how low to cut the corporate tax rate.
While GOP lawmakers and the White House all believe that the current rate of 35 percent is too high and makes the U.S. business climate less competitive, some policymakers want to cut it more deeply than others.
The lack of unity is a challenge for Republicans as they seek to pass tax reform by the end of the year.
Congressional GOP leaders and administration officials released a joint statement in late July that said their plan should reduce tax rates "as much as possible." The statement suggested that individuals, small businesses and corporations would all see tax cuts.
But exactly how low those rates should go is a matter of fierce debate.
Trump has called for a 15-percent corporate tax rate since the early months of his presidential campaign, and White House National Economic Council Director Gary Cohn said Monday that's still the administration's goal.
"We've proposed 15 percent and we're trying to work off a 15-percent base, seeing if we can get there, that's important to us," Cohn said.
Rep. Mark Meadows (R-N.C.), the chairman of the conservative House Freedom Caucus, also wants to cut the corporate rate to the teens.
"I think that something with a one in front of it, whether it's 15 or 17 or 18 [percent], that's where we need to be," he said Wednesday.
Meadows told reporters that he's not drawing "any lines in the sand," but that "it would be very difficult to support" a tax rate in the 20s because it might not lead to enough growth.
Other key Republicans seem willing to leave the corporate tax rate in the 20s.
The tax plan Speaker Paul Ryan (R-Wis.) released last year proposed a 20 percent corporate rate. And Senate Finance Committee Chairman Orrin Hatch (R-Utah) said this week that a 15-percent rate would be very difficult to achieve.
"The president wants them down to 15 percent. I'd love that if we could. I doubt that we can, though," Hatch told reporters Thursday. "It'd be a great thing if we could get it down to 20 percent."
Still, Hatch rejected the idea that Republicans are at odds.
"When the administration puts out a framework that calls for a 15 percent corporate tax rate while the House Blueprint has a 20 percent rate target, that's not really a disagreement," he said in remarks submitted to the Congressional Record on Thursday. "Both sides want to lower the corporate rate significantly, and the general idea in both cases is to reduce the rate as much as is reasonably possible."
Experts think that tax-reform legislation is more likely to include a corporate tax rate of around 20 percent than around 15 percent.
Brandon Arnold, executive vice president of the National Taxpayers Union, said that Meadows "is representing the most conservative wing in the Republican Party" and it makes sense for him to try to put pressure on other lawmakers. But at the end of the day, Republicans will need to produce a bill that can pass both the House and the Senate, so concessions will have to be made.
The degree to which the corporate rate will be lowered depends on whether a tax-reform bill is revenue-neutral and what policymakers are willing to do to raise revenue to offset rate cuts.
Congress is likely to pass tax-reform legislation using a process known as "reconciliation" so that a bill can pass the Senate with only Republican support. But reconciliation bills can't add to the deficit after the end of the budget window, so a tax bill likely needs to either be deficit-neutral or have at least some parts that are temporary.
Meadows said he's open to tax changes that expire if it would result in a corporate tax rate in the teens. But Ryan prefers for key tax changes to be permanent, and Cohn told Fox Business on Friday that tax-reform legislation won't add to the deficit because it needs to be long-lasting.
A bill that's deficit-neutral will need to have tax cuts offset by tax increases and/or spending cuts. The lower the rates, the more offsets will be needed.
That's a problem.
Republicans have already taken one potential revenue raiser, Ryan's border-adjustment tax proposal (BAT) to tax imports and exempt exports, off the table.
A June paper from the conservative-leaning Tax Foundation found that eliminating non-structural corporate tax breaks would only raise enough revenue to cut the corporate rate to 28.5 percent. To lower the rate beyond that, lawmakers will need to either pass tax legislation that's not revenue neutral, cut spending, pay for a corporate rate cut by eliminating tax breaks for individuals, or make structural changes to the tax code, according to Scott Greenberg, the paper's author.
Republicans face challenges on setting the tax rates for non-corporate businesses and individuals as well.
Republicans want to lower tax rates for non-corporate businesses known as "pass throughs" whose income is taxed through the individual code. To do so, they need to craft rules to ensure that wealthy individuals don't use a special rate for pass-throughs to avoid taxes.
Key Republicans have also said they want to lower tax rates for all individuals and have pushed back when asked about reports that White House Chief Strategist Steve Bannon wants to raise the top individual rate from 39.6 percent to 44 percent.
Treasury Secretary Steven Mnuchin said Monday that most wealthy people won't get a tax cut. But that goal will be difficult to achieve, given that higher earners already pay the greatest share of taxes. Additionally, congressional Democrats and liberal groups are already mobilizing to fight against tax changes that benefit people in the top 1 percent of income.
"It's very difficult to do individual rate reduction without providing a tax benefit to the wealthy," KPMG's John Gimigliano said. "Mechanically, how to construct this will be a challenge to resolve."