Republican leaders billed their decision to abandon acontroversial plan to tax companies' domestic sales and imports asan essential step toward uniting their efforts to overhaul the U.S.tax code—but its death adds new complications to an alreadyintricate task.

Though the so-called border-adjusted tax had circled the drainfor months, its last gasp on Thursday greatly increased the chancesthat any tax cuts Congress delivers will be shallower thanPresident Donald Trump and other GOP leaders want, orshorter-lived, experts said. Without the proposal's estimated $1trillion in new revenue, a resulting bill may look more like thetemporary tax cuts of 2001 than the once-in-a-generation overhaulof 1986 on which Trump and lawmakers have set their sights.

The death of the BAT “means a lot,” said Douglas Holtz-Eakin,who leads the GOP-aligned research and advocacy group AmericanAction Forum. “Obviously it was a big pay-for so it puts pressureon the other pay-fors. There's a lot at stake.”

Trump administration officials and top congressional lawmakerssaid in a joint statement Thursday that the border-adjusted taxwouldn't be part of negotiations on tax legislation. Theannouncement was a victory for retailers and other import-heavyindustries and for groups backed by billionaire brothers Charlesand David Koch, which had strenuously opposed the measure.

The proposal, which had been pushed by House Speaker Paul Ryanfor more than a year, enabled Ryan and his allies to proposelowering the corporate tax rate to 20% from the current 35%. Trumphas called for going even lower—to 15%, a target that may be farharder to achieve.

Republicans, who control only 52 seats in the Senate, plan touse congressional budget rules that would allow for approving a taxbill with a simple majority. But those rules also require that taxcuts would have to be offset so they don't add to the budgetdeficit in the long run. If they did increase the deficit, they'dhave to be set to expire over time.

Losing the revenue raised by the border-adjustment concept“could be a retreat from permanence,” said Marc Gerson, a formerRepublican tax counsel for the Ways and Means Committee. “The otheralternative is to do something temporary that has a deficitimpact.”

If Republicans remain committed to a permanent remake of the taxcode—and the leaders' joint statement Thursday cited a “priority onpermanence”—they'll either have to settle for shallower rate cutsthan they've promised, or come up with other ways to raiserevenue.

In crafting the House leaders' blueprint for taxes, Ryan feltlike he had two options—pursue BAT and take on retailers, or raiserevenue from a broad swath of industries by taking them all on,according to four people familiar with the speaker's thinking. Thelatter approach, attempted by former Ways and Means Chairman DaveCamp in 2014, received scant support from House Republicans at thetime and went nowhere. So Ryan originally chose the border tax, thepeople said.

So far, Senate Republicans haven't backed any major revenueraisers, and the joint statement released Thursday didn't specifyany. Returning to a broad, Camp-style approach now could unleash anew array of opponents as industries seek to preserve their favoredbreaks in the tax code. It may also mean a corporate tax ratethat's higher than Republican leaders want.

Without a border-adjusted tax, the lowest the corporate tax ratecould go is 27% for a tax bill to remain revenue neutral, if HouseRepublicans stick with their original plan, said Scott Greenberg, asenior analyst at the conservative Tax Foundation.

Dean Zerbe, the national managing director of tax advisory firmalliantgroup and a former Senate Finance tax counsel, said he wasbetting the corporate rate would be in the 26% to 28%range.

Setting a 28% tax rate would be largely meaningless for morethan 150 of the largest U.S. companies, which already paid lowerrates than that from 2008 through 2015, according to a recentstudy.

Still, Neil Bradley, the senior vice president and chief policyofficer at the U.S. Chamber of Commerce, a powerful trade andlobby, said not specifying how low a corporate rate could go was agood move since “one sign of getting close to an agreement is notdrawing hard lines in the sand about particular numbers.”

It's unclear how the elimination of the border-adjusted tax willaffect Trump and the GOP's plan to simplify the tax code forindividuals by condensing the current seven income tax brackets tothree, with a top rate of 35% instead of 39.6%, and doubling thestandard deduction.

Immediate Expensing

Another potential boon for many companies—a costly proposal toallow them to fully deduct their capital spending from incomeimmediately instead of over years—didn't receive full-throatedsupport in the joint statement Thursday. The statement called for“unprecedented” expensing, but didn't make clear that it would befull and immediate.

Eliminating full expensing could save revenue for deeper ratecuts, but that's a bad idea, according to Greenberg, who said itwould boost economic growth more than a rate cut would.

One other workaround, which might extend the life of tax cutsthat weren't offset by new revenue, would be to change thetime-horizon in which the cuts would be analyzed. That notion,which would increase the current 10-year budget window to as manyas 25 years, has been endorsed by Senate Finance Chairman OrrinHatch. The Utah Republican, like Ryan, is a member of the so-calledBig Six group that has been meeting weekly to discuss taxpriorities.

Sen. Pat Toomey of Pennsylvania, who came up with the proposalfor a temporary tax cut with a longer budget window, said theelimination of BAT strengthens his case.

He said without the border-adjusted tax it would be much harder“to get really pro-growth policy” on a permanent basis.

Agreeing to shelve the border-adjusted tax doesn't make it anyeasier to get a tax overhaul completed by the end of the year,according to John Gimigliano of KPMG's Washington National Taxpractice. Ryan has said it's imperative to accomplish the task in2017 to avoid the influence of the 2018 elections on thelegislative process.

The statement from the Big Six emphasized that tax legislationwill now proceed under “regular order” meaning committees in theHouse and Senate will take up the tax of crafting actuallegislation.

“That takes a lot of time,” Gimigliano said. “It's going to bereally hard to get this done this year.”

But the U.S. Chamber's Bradley disagreed, saying, “I think wecan see something enacted by the end of the year.”

Even before the decision on the border-adjusted tax was madepublic, Republicans were racing to work on their messaging. OnThursday morning, congressional staff members briefedrepresentatives from business groups and conservative interestgroups about their planned statement with the goal of shoring upsupport, according to two people who were familiar with themeetings. The people asked not to be named because the sessionswere private.

The staff members who ran those sessions seemed to be tryingspecifically to end campaigns against the border-adjusted tax, suchas one led by Koch-backed groups, to keep from damaging theprospects for a tax overhaul, one of the people said.

As House members prepare to begin a five-week recess next month,the Koch-backed Americans for Prosperity announced plans to kickoff a series of 50 events around the country to “unify around apositive vision for tax reform.”

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