Finance

Don't throw the baby out with the BATwater

House Republican leaders feared jettisoning the border adjustment tax (BAT) from their "Better Way" proposal would kill tax reform. They now worry that tax reform will be all but impossible if Congress fails to adopt a fiscal 2018 budget resolution and its all-important reconciliation instructions. Despite their fears, these developments mark not the end of tax reform, but its true beginning.

Following last year's presidential election, House Republicans were confident tax reform could advance quickly, along partisan lines, using reconciliation. But first they would use reconciliation to repeal ObamaCare.

In theory, it made perfect sense.

Repealing ObamaCare first would make tax reform easier because it would strip taxes totaling nearly $1 trillion from the revenue baseline.

As House Speaker Paul Ryan (R-Wis.) explained: "A trillion dollars ... that's 10 percentage points on rates for businesses ... And so taking tax reform with a bigger trillion dollar number in it makes it really hard to do. That's why doing this [ObamaCare repeal] first makes tax reform that much easier to accomplish."

Discord among Republicans delayed getting ObamaCare repeal through the House, but Speaker Ryan delivered. It was then the Senate's turn.

With only 52 Republicans in the Senate, the reconciliation strategy forced Republicans opposed to the measure to vote against their conscience (and perhaps their political self-interest) or vote against ObamaCare repeal and watch the entire effort come tumbling down. We all know how that turned out.

Not only did the ObamaCare debacle reveal the flawed nature of the reconciliation-only strategy, but the lengthy delays gave those opposed to the BAT time to organize. Their multi-million dollar lobbying and media campaign so thoroughly tainted the BAT that House Republican leaders begrudgingly abandoned it.

Tossing the BAT from the House Republican blueprint traded one seemingly insurmountable political problem for two new problems.

First, the blueprint relied on the BAT to generate more than $1 trillion in revenue over 10 years. Legislators will be hard-pressed to replace that revenue.

Second, abandoning the BAT will force legislators to rethink how best to protect against tax- base erosion - a problem that has bedeviled past would-be tax reformers; just ask former Ways and Means Committee Chairman Dave Camp (R-Mich.).

As Republicans wrestle with these problems, a tiff over proposed entitlement cuts threatens the fiscal 2018 budget resolution and any hope of pursuing tax reform via reconciliation.

Even if Republicans overcome these hurdles, doing so will take precious time.

The irony is unmistakable. As Stan Collender wrote recently in Forbes: "Almost a whole year that could have been spent moving tax reform ahead through regular order will have been wasted in a futile effort to expedite the process."

Pursuing health and tax reform via reconciliation ensured that Democrats, understandably fearful of being sidelined, would oppose and filibuster Republicans at every turn.

To Speaker Ryan's chagrin, the reconciliation strategy handed the Freedom Caucus immense power over the House. Whenever Speaker Ryan cannot count on a modicum of bipartisan support for a given measure, the Freedom Caucus knows it can withhold its support and deny him the 218 votes he needs to pass legislation.

Republicans, without 60 votes in the Senate and a reliable 218 votes in the House, have the appearance of control without actual control. This is perhaps, at least from the Republican perspective, the worst of all scenarios - all the blame and little ability to govern with Republican votes alone.

What's the solution? Listen to Sen. Orrin Hatch (R-Utah), chairman of the Senate Finance Committee, and follow his lead.

"From the outset," Hatch said at a recent hearing, "I have made clear that my preference is to move tax reform through this committee with bipartisan support. I have no desire to exclude my Democratic colleagues from this discussion, and I'm not determined to report anything by a party-line vote."

In the wake of President Trump's election, bipartisanship offered the most promise for tax reform. Indeed, in a Senate with only 52 Republican members, 60 votes may be easier to achieve than 51.

The threat of using reconciliation for tax reform could have kept Democrats negotiating in good faith. It's the political equivalent of a neutron bomb: Use it and the Democrats disappear from the legislative process.

Reconciliation should never have been Republicans' first option.

Democrats have a stake in bipartisanship as well. Ten Senate Democrats face re-election next year in states that Donald Trump won last November; five of those senators are in states Trump won by double digits. They can either risk their seats by opposing the president's tax reform effort or they can embrace it and run for re-election having accomplished something.

Then there's Sen. Ron Wyden (D-Ore.), the Senate Finance Committee's ranking member. Wyden radiates an infectious enthusiasm for tax reform. For more than a decade, Wyden has pursued tax reform with anyone who would listen.

Wyden worked with then-Sen. Judd Gregg (R-N.H.) for two years to develop a comprehensive plan to reform the tax code. Introduced in early 2010, their proposal attracted bipartisan support and later prompted the Los Angeles Times to call it the "year's most-talked-about idea."

Wyden-Gregg, and a subsequent bill with then-Sen. Dan Coats (R-Ind.), demonstrated that it is possible to craft a comprehensive, fiscally responsible, bipartisan tax bill that is both equitable and pro-growth. It can be done.

But it probably can't be done via reconciliation. Political considerations aside, reconciliation is simply ill-suited for tax reform. The so-called "Byrd Rule" imposes far too many restrictions to make tax reform via reconciliation practical.

President Trump has, rightly, begun to court Democrats. He'll need them.

A 60-vote legislative strategy will require Republicans to entice support from at least eight Senate Democrats. Securing those votes - the political equivalent of reaching escape velocity - will prompt more Democrats to follow suit.

Once the legislation attracts bipartisan support, moderate Senate Republicans, who may otherwise waver in their support, will find they can support the measure without the electoral risk that accompanies a strictly partisan measure.

The demise of the BAT and the failure to adopt a fiscal 2018 budget resolution could be what Congress needs to get tax reform back on track. Now is the time for bold, bipartisan tax reform that restores America's competitiveness and promotes economic growth and shared prosperity.

Carter served as the head of tax policy implementation on President Trump's transition team. Previously, he was a deputy undersecretary of Labor under President George W. Bush and an advisor to Sen. Judd Gregg (R-N.H.), helping to develop the Wyden-Gregg tax reform proposal.

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