The Republican effort to overhaul the nation's tax code was stuck.
House Republican leaders, most notably Speaker Paul RyanPaul Davis RyanPaul Ryan researched narcissistic personality disorder after Trump win: book Paul Ryan says it's 'really clear' Biden won election: 'It was not rigged. It was not stolen' Democrats fret over Trump-district retirements ahead of midterms MORE (Wis.), were pushing for a controversial provision called “border adjustment” that would tax imports and exempt exports. Many House Republicans were skeptical of the plan while GOP members in the Senate said it was dead on arrival if it ever got to the upper chamber.
In April 2017, President TrumpDonald TrumpKinzinger says Trump 'winning' because so many Republicans 'have remained silent' Our remote warfare counterterrorism strategy is more risk than reward Far-right rally draws small crowd, large police presence at Capitol MORE huddled with his senior advisers on strategy. The White House was poised to release its own plan and the president's team was debating whether they should hit the brakes. The one-page blueprint notably didn’t include border adjustment and there was some discussion of postponing release of the White House proposal.
“No, we're moving forward,” Trump said, according to a senior White House official. “It's time to move forward.”
The White House's action was the beginning of the end for the border adjustment idea, which attracted intense criticism from retailers and influential GOP donors Charles and David Koch.
Trump’s plan “broke the gridlock” on border adjustment, the senior White House aide said.
House Majority Leader Kevin McCarthyKevin McCarthyDemocrats lean into vaccine mandates ahead of midterms Far-right rally draws small crowd, large police presence at Capitol 'Justice for J6' rally puts GOP in awkward spot MORE (R-Calif.) said he didn’t think the proposal would ever get off the ground.
“Paul [Ryan] was always for that, but I never felt that had the votes to pass,” McCarthy told The Hill.
Gary CohnGary David CohnOn The Money: Wall Street zeros in on Georgia runoffs | Seven states sue regulator over 'true lender' rule on interest rates | 2021 deficit on track to reach .3 trillion Former Trump economic aide Gary Cohn joins IBM The Hill's Morning Report - Presented by the UAE Embassy in Washington, DC - Trump OKs transition; Biden taps Treasury, State experience MORE, who was Trump's top economic adviser, said, “We knew talking to Senate leadership there were virtually no votes in the Senate for a border-adjusted tax.”
Over the past several months, The Hill has interviewed dozens of Trump administration officials, lawmakers, aides and stakeholders to report the behind-the-scenes stories of the most sweeping changes to the tax codes in decades.
The tax cuts are both Trump’s biggest legislative achievement to date and the most important bill passed during the retiring Ryan’s Speakership. Republicans promised they would further unshackle a growing economy, and they have been rewarded with economic growth of 4.2 percent in the second quarter of this year.
But the tax cuts have not paid big political dividends for Republicans to date, and there is a growing pile of evidence that suggests Democrats are winning the current political debate over the measure. A poll commissioned by the Republican National Committee on Trump's tax law, obtained and published by Bloomberg last week, found that most voters say the tax law benefits corporations and wealthy individuals more than the middle class. The analysis on the poll concluded that the GOP has “lost the messaging battle on the issue.”
Over the next week, The Hill will delve into how a GOP tax bill evolved into a blockbuster legislative package that effectively ended the ObamaCare mandate that all Americans buy health insurance and opened a portion of the Arctic National Wildlife Refuge in Alaska to drilling.
It will examine how the law is playing out in the battle for Congress and the 2018 midterm elections, and how the legislative debate uniquely reflects the Trump era in Washington.
Trump's role on tax reform
Frustrated with the constant delays from the GOP-led Congress and its ultimate failure to repeal ObamaCare, Trump played a more hands-on role with taxes, according to several of his top advisers.
He constantly worked the phones, trying to nudge on-the-fence Republicans to get to "yes." Treasury Secretary Steven MnuchinSteven MnuchinMenendez, Rubio ask Yellen to probe meatpacker JBS The Hill's Morning Report - Presented by Goldman Sachs - Biden rallies Senate Dems behind mammoth spending plan Mnuchin dodges CNBC questions on whether Trump lying over election MORE and Cohn briefed Trump on a daily basis on tax reform.
Several senior White House officials said Trump was especially interested in significantly lowering the corporate tax rate and getting the bill done in 2017. And while Trump for the most part didn't make public remarks that surprised congressional Republicans who were working on the tax package, there were times when he weighed in on Twitter.
In fall of last year, lobbyists started hearing that Republicans were considering a sharp cut in pre-tax 401(k) contribution limits. The idea immediately attracted negative media attention.
At 7:42 a.m on Oct. 23, 2017, Trump buried the idea with one tweet: “There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!”
Still, the GOP-controlled Congress wrote the bill and rejected some ideas coming out of the White House such as then-Trump aide Stephen Bannon's idea to increase taxes on the wealthy — which would have never gotten the votes to pass.
In the end, the bill Trump signed a few days before Christmas was in many ways a traditional Republican tax-cut measure. Ryan, along with Ways and Means Committee Chairman Kevin BradyKevin Patrick BradyHouse panel advances key portion of Democrats' .5T bill LIVE COVERAGE: Ways and Means to conclude work on .5T package LIVE COVERAGE: Tax hikes take center stage in Ways and Means markup MORE (R-Texas) and former chairman Dave Camp (R-Mich.), had laid the groundwork for years before Trump’s victory over Democratic presidential nominee Hillary ClintonHillary Diane Rodham ClintonClinton lawyer's indictment reveals 'bag of tricks' Attorney charged in Durham investigation pleads not guilty Attorney indicted on charge of lying to FBI as part of Durham investigation MORE. And for the first time since 2006, Republicans controlled the White House and Congress.
Trying to raise money for tax reform
For years, Republicans had been pushing a revenue neutral tax reform and the Ryan/Brady border adjustment plan, first proposed in June 2016 as part of the Speaker’s “Better Way” agenda, would raise $1 trillion to pay for the entire package. Specifically, the Better Way plan aimed to stop companies from moving their headquarters, jobs and intellectual property overseas by pairing territoriality with a “border adjustment” provision to tax imports and exempt exports. Under the border adjustment proposal, goods consumed in the U.S. would be subject to U.S. taxes no matter where they are made.
The problem was it never had a chance to pass.
Sen. Pat ToomeyPatrick (Pat) Joseph ToomeyBlack women look to build upon gains in coming elections Watch live: GOP senators present new infrastructure proposal Sasse rebuked by Nebraska Republican Party over impeachment vote MORE (R-Pa.) said he knew border adjustment was doomed in early 2017 when he explained the idea to Senate Republicans at a retreat in Philadelphia. The idea went over like a lead balloon.
“It was obvious to me after that retreat in Philadelphia, when I stood up and explained it to my Republican colleagues,” Toomey said. “I was not pitching it as an advocate but I was saying, ‘Here’s the mechanism, here’s the argument for it,’ and everybody immediately said, ‘Oh my God, it’s going to destroy importers and retailers.’
Toomey added that the hostility to the border adjustment proposal was “widespread and very vociferous.”
“It was immediately clear to me this has no chance of surviving,” Toomey recalled. “That also underscored, of course, the need for this to not be revenue neutral. That was a trillion dollars worth of revenue that in the House [plan] is not going to happen.”
Sen. David Perdue (R-Ga.), one of the earliest senators to come out against the proposal, said that he thought House members’ explanation of why the border tax would work was “not correct.”
“There were a lot of people that didn’t know a lot about border adjustment tax, and once we had that kind of open dialogue in Congress, you saw a lot of people sort of gravitating to be against it,” he said.
In February 2017, Sen. Lindsey GrahamLindsey Olin GrahamThe Hill's Morning Report - Presented by National Industries for the Blind - Tight security for Capitol rally; Biden agenda slows Trump offers sympathy for those charged with Jan. 6 offenses Lindsey Graham: Police need 'to take a firm line' with Sept. 18 rally attendees MORE (R-S.C.) said the House border tax plan "won't get 10 votes in the Senate."
Retailers mobilized quickly to advocate against the proposal because they were worried it would lead to higher prices on goods. By the end of February, retailers were confident that there were enough senators who opposed the tax to torpedo the idea.
Even on the House side — and within the Ways and Means Committee — there were concerns with the proposal.
In summer 2016, GOP Reps. Pat TiberiPatrick (Pat) Joseph TiberiOhio Democrat Danny O'Connor won't seek Portman's Senate seat The Hill's Morning Report - Biden argues for legislative patience, urgent action amid crisis Ohio New Members 2019 MORE (Ohio), who has since left Congress, Mike KellyGeorge (Mike) Joseph KellyHouse Ethics panel reviewing Rep. Malinowski's stock trades Lobbying world Lobbying world MORE (Pa.) and Jim RenacciJames (Jim) B. RenacciGovernors' races see flood of pro-Trump candidates Former House Republican to challenge DeWine for Ohio gubernatorial nomination The Hill's Morning Report - Presented by Facebook - Republicans seek to sink Jan. 6 commission MORE (Ohio) were leaving a meeting when they started talking about the border adjustment proposal. Kelly, a car dealership owner, said he started thinking about Monroney labels, which are stickers on new cars that mention the percentage of parts made in various countries. Kelly brought in the Monroney labels to show lawmakers that fall as part of an effort to express concerns about how a border adjustment tax might increase the price of cars.
“We’re not talking about dollars, we’re talking about thousands of dollars,” Kelly said.
In March 2017, Kelly went on TV and publicly came out against the tax. He told The Hill he would never have been able to get to "yes" on the proposal.
Renacci, who is running for the Senate, expressed reservations about the tax early on. He worried that it would hurt businesses in his state.
“I was willing to listen,” he said. “I was not comfortable with the border adjustment tax but I was not writing it off entirely. I had asked for a hearing at one point in time so we could get some outside information.”
But at some point, Renacci said, he made it “public within the family” that he wouldn’t support the plan.
For the most part, Brady and Ryan stood firm in support of their proposal.
“We talked to Ryan and Brady frequently, we talked to their staffs frequently. They weren’t budging,” said David French, senior vice president of government relations at the National Retail Federation.
Club for Growth President David McIntosh said Ryan and Brady were “completely tone deaf” to the arguments against the tax.
But a former senior House GOP aide countered that both legislators were open to letting go of the border plan if there was a viable alternative.
Ryan and Brady had hoped Trump would endorse it, but the White House was careful with what they said about the plan publicly. And behind the scenes, various Trump aides were divided about the proposal.
“It was too controversial to find 51 Republican senators to support that," former White House Legislative Affairs Director Marc Short told The Hill. “So there is a policy argument about it, but there was also just the political reality that we can debate this all night long, but it's not going to get 51 votes. So, why are we continuing to kick this around?"
Cohn opposed the border tax and opponents of the proposal got the sense from their meetings with him that he was in their corner.
Trump held a series of meetings on an array of topics with business leaders during the early months of his presidency, including with retailers and major exporters.
On Feb. 15, 2017, Trump huddled with more than a half dozen retail CEOs. When one executive in the room said the border adjustment tax would make the company’s tax rate 120 percent, Trump replied something along the lines of, “That’s not good,” according to Brian Dodge, senior executive vice president of public affairs for the Retail Industry Leaders Association, who was briefed on the meeting.
Executives who attended the meeting came away with the strong sense that Trump knew the difference between tariffs, which he was interested in, and Ryan’s idea. The president “was not embracing border adjustment tax at that point, and ... we had an opportunity to keep the White House from embracing the idea,” Dodge said.
"The president didn't support it. He made it very clear, and so, you know, that was initially a big part of paying for the bill. And ultimately he became very clear that wasn't going to be in the bill,” House Majority Whip Steve Scalise (R-La.) said. “And so Brady and his team went back to work."
Shortly before the White House's one-page plan was unveiled in April 2017, Mnuchin and Cohn briefed several groups about it. Mnuchin first gave a “long, careful” answer about why the Ryan/Brady provision wasn’t in the plan. Then Cohn said, “It’s dead,” a key source stated.
After months of pushback on the tax from lawmakers, retailers and conservative groups, Brady proposed phasing in the proposal over five years. But that didn’t ease any of the opponents’ concerns.
Brady subsequently convened a hearing on the topic in May 2017, which some involved in the tax process viewed as a turning point.
Besides Renacci and Kelly, Tiberi and Rep. Erik PaulsenErik Philip PaulsenThe Biden 15 percent global tax puts foreign companies ahead of American workers House panel opens probe into Tom Reed over sexual misconduct allegations GOP Rep. Tom Reed accused of sexual misconduct MORE (R-Minn.), one of Brady’s roommates, expressed concerns about the concept at the hearing.
“Paulsen, that was the first time [his opposition] became public,” Renacci said.
Democrats this fall are targeting Paulsen, whose district was won by Clinton in 2016. Paulsen has doubled down on the tax cuts and has touted the new law repeatedly in his reelection campaign.
Brady said he still thinks border adjustability is a “game changing” idea that would “level the playing field for American companies.” He added the plan might have gotten more support if lawmakers had several years to examine it.
But Brady said that by about June 2017, it became clear that the blueprint was dividing the business community and lawmakers.
“It was clear it needed to be set aside, that we needed to find a way to level the playing field internationally without it,” he said.
Brady added that he and Ryan didn't shelve it until they got a commitment from the other key tax negotiators that there would be an alternative way to address the erosion of the U.S. tax base.
The border adjustment was formally scrapped in July 2017 in a statement released by the “Big Six” — Ryan, Brady, Mnuchin, Cohn, Senate Majority Leader Mitch McConnellAddison (Mitch) Mitchell McConnell'Justice for J6' rally puts GOP in awkward spot Republicans keep distance from 'Justice for J6' rally House to act on debt ceiling next week MORE (R-Ky.) and Senate Finance Committee Chairman Orrin HatchOrrin Grant HatchCongress, stop holding 'Dreamers' hostage Drug prices are declining amid inflation fears The national action imperative to achieve 30 by 30 MORE (R-Utah).
Retailers and conservative groups that had focused their energy on killing the plan, switched gears and started to promote an overhaul of the tax code. And Republican lawmakers started to become more productive.
The Big Six statement came hours before Senate Republicans’ efforts to repeal ObamaCare fell short. That failure prompted Republicans and outside groups to be even more motivated to enact tax legislation.
Renacci recalled that when Ways and Means Committee Republicans held a retreat in September, “you could start to see there were some principles that were starting to come forward. There were some agreements starting to be made on many of the issues between members of the Ways and Means Committee, and I think that it started to gel.”
“I actually think once the border adjustment was taken out of the mix, you started to see this plan starting to gel more and more,” he said.
Members of The Hill's staff who have worked on this tax reform series over the past several months are Alexander Bolton, Juliegrace Brufke, Timothy Cama, Jordain Carney, Bob Cusack, Niv Elis, Naomi Jagoda, Mike Lillis, Peter Sullivan, Megan R. Wilson and Melanie Zanona.