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U.S. tax overhaul likely to be a long, hard slog

Tax reform is hard even when everyone is on board, but there are very public rifts in the GOP that will be difficult to bridge



WASHINGTON—After their humiliating loss on health care, Republicans in Congress could use a quick victory on a big issue.

However, it won’t be the much-talked about overhaul of the tax code.

Overhauling the tax code could prove harder to accomplish than repealing and replacing Barack Obama’s health law. Congressional Republicans are divided on significant issues, especially a new tax on imports embraced by House Speaker Paul Ryan. And the White House is sending contradicting signals on the new tax, adding to the uncertainty.

House Republicans also can’t decide whether to move on from health care. Ryan cancelled a scheduled vote on a House GOP plan after it became obvious that Republicans didn’t have the votes. He said he will continue to work on the issue but one of his top lieutenants on health care, Rep. Kevin Brady, R-Texas, says he is now “100 per cent” focused on a tax overhaul.

Ryan says Congress can work on both at the same time. It won’t be easy. Here’s why:

House and Senate Republicans largely agree on the broad outlines of a tax overhaul. They want to lower tax rates for individuals and corporations, and make up the lost revenue by scaling back tax breaks.

But they are sharply divided on a key tenet of the House Republican plan.

The new “border adjustment tax” would be applied to profits from goods and services consumed in the U.S., whether they are domestically produced or imported. Exports would be exempt.

House GOP leaders say the tax is key to lowering the top corporate income tax rate from 35 per cent to 20 per cent.

But good luck finding a single Republican senator who will publicly support the tax. Sen. Rob Portman, R-Ohio, is the latest in a long line of Republican senators to come out against the tax.

Senate Finance Committee Chairman Orrin Hatch, R-Utah, says he wants to work with Democrats to overhaul the tax code.

“A bipartisan bill would allow us to put in place more lasting reforms and give the overall effort additional credibility,” Hatch said.

Majority Leader Mitch McConnell, R-Ky., has said it is bad policy to pass major legislation without bipartisan support.

“Without some meaningful buy-in, you guarantee a food fight,” McConnell wrote in his memoir last year. “You guarantee instability and strife.”

But in the House, Republicans haven’t reached out to Democrats in any meaningful way.

What does the White House want?
President Donald Trump’s administration has been all over the map on tax reform. Trump at one point said the House border tax is too complicated, then said it’s in the mix.

Treasury Secretary Steven Mnuchin told a Senate panel that “there would be no absolute tax cut for the upper class” in Trump’s tax plan.

However, the plan Trump unveiled during his presidential campaign would provide big tax breaks to high-income households.

Since taking office, Trump has promised “massive” tax cuts for the middle class.

A former Treasury official under President Barack Obama says the White House needs to stake out clear goals on tax overhaul to guide the debate in Congress.

“I think it’s important for the administration to signal early the general shape” of what they would like to accomplish so that there are fewer proposals vying for attention, said Michael Mundaca, a former assistant Treasury secretary now at Ernst & Young.

Tax change is hard, not a slam dunk
There is a reason it’s been 31 years since the last time Congress rewrote the tax code. Since then, the number of exemptions, deductions and credits has mushroomed. Taxpayers enjoyed $1.6 trillion in tax breaks in 2016—more than the federal government collected in individual income taxes.

That huge number could provide plenty of tax breaks that lawmakers can scale back so they can lower tax rates significantly. There is just one problem: all of the biggest tax breaks are very popular and have powerful constituencies.

Nearly 34 million families claimed the mortgage interest deduction in 2016. That same year more than 43 million families took advantage of a deduction of state and local taxes.

The House Republicans’ tax plan would retain the mortgage deduction and eliminate the deduction for state and local taxes.

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