Republicans struggling to pass a major tax overhaul that doesn'tadd to the federal deficit are discussing a kind of compromise:mixing permanent revisions with temporary rate cuts for individualsand businesses.

Officials on the House and Senate tax committees are talkingwith the White House about a hybrid approach that would combinelasting tax code changes to deter offshore profit shifting bycorporations with lower rates for a number of years, according tothree people familiar with the discussions.

Mixing and matching proposals—making some permanent and otherstemporary — could be a potential workaround for GOP leaders whowant to use a budgetary process known as reconciliation to preventSenate Democrats from blocking tax legislation. That course limitsthe scope of the overall bill because it requires that any taxchanges that add to the nation's long-term deficit would have toexpire.

The combined approach has emerged as administration andcongressional staff evaluate the effects of various proposals, saidthe people, who described it on the condition of anonymity.

“It's the best of both worlds,” said Daniel Clifton, a formertax lobbyist who was involved in the tax-cut negotiations underformer President George W. Bush in 2001. “But if you're a puristfor tax cuts or a purist for tax reform, it's going to beneither.”

Critics caution that temporary changes won't spur the level ofeconomic growth that President Donald Trump and congressionalleaders have targeted.

A hybrid plan isn't a new idea, but it may be gaining tractionnow that the controversial border-adjusted tax on imports has beeneliminated from tax negotiations. The BAT was estimated to generatemore than $1 trillion in revenue over a decade. Without it, taxwriters are forced to find other revenue raisers to offset ratecuts—if they want permanent changes.

White House advisers, along with top congressional leaders, saidlast month their plan “places a priority on permanence,” but somehave individually signaled some openness to shorter-term changes.Treasury Secretary Steven Mnuchin summed it up at a hearing in May:“Permanent is better than temporary, and temporary is better thannothing.”

House Speaker Paul Ryan has been more resistant, pushingespecially for the corporate rate cut to be permanent, according toone of the people familiar with the negotiations.

“Consistent with our joint statement, we are placing an emphasison permanence but no decisions have been made yet,” Natalie Strom,a White House spokeswoman, said in a statement.

Spokesmen for Senate Majority Leader Mitch McConnell and SenateFinance Committee Chairman Orrin Hatch said the tax committeeswould be working this fall to develop tax legislation. Hatch'soffice added that the goal was a package that will provide morerelief to the middle class, increase U.S. wages and job growth, andensure American businesses can compete in global markets.

Lauren Aronson, a spokeswoman for the House Ways and Meanscommittee, said chairman Kevin Brady continues to believe thatpermanent changes to the tax code will deliver more years ofeconomic growth. Ryan's press office directed comments to Ways andMeans.

Middle Class Cuts

The one-page outline of a tax plan that the White House releasedin April called for cutting the corporate tax rate to 15%—down fromthe current 35%. It also would condense the existing sevenindividual income tax rates to three, cut the top rate to 35% fromthe current 39.6% and double the standard deduction. Overall, theplan might cost as much as $5 trillion over 10 years, according toan estimate from the nonpartisan Committee for a ResponsibleFederal Budget.

Administration officials have disputed that number, but evencoming up with half of it—by raising new revenue, closing outdeductions and other benefits or cutting federal spending—wouldrequire a delicate balancing act that has bedeviled negotiators inthe past.

Trump has repeatedly emphasized that one of his main objectivesis to provide the middle class with a tax cut. He's under pressureto deliver, especially after another promise—to repeal the 2010Affordable Care Act—has run aground in Congress.

Making individual tax cuts temporary would help with the math.Just a reduction of 1 percentage point to the current top rate of39.6% would cost $106 billion in tax revenue, without accountingfor the macroeconomic effects of the cut, over the next decade,according to a calculation by Scott Greenberg, a senior analyst atthe Tax Foundation.

Temporary cuts could be extended eventually. That's whathappened in 2010 as part of a deal between Republican lawmakers andformer President Barack Obama over temporary tax cuts enacted underformer President George W. Bush. And other proposals affectingindividuals, such as calls for eliminating the alternative minimumtax and the estate tax, could be phased in slowly to avoid animmediate decline in federal revenue, or even stay in place ifthey're too costly, said two of the people.

The corporate side is more complicated. Some business groups saychanges affecting corporations must be permanent because executivesneed certainty before they can commit to hiring new workers orbuilding more factories in the U.S. —a necessary step for achievingthe White House's goal of 3% annual economic growth.

But some companies would prefer a lower rate—no more than25%—even if it's just for 10 years, said one of the people familiarwith the tax discussions.

It's not clear how long a temporary corporate rate cut couldlast without adding to the deficit. A study that Ryan requestedfrom the Joint Committee on Taxation showed that cutting thecorporate rate to 20% for just three years would result in lostrevenue more than a decade later. The Tax Foundation's Greenbergsaid lawmakers could extend the cut by creating a revenue raiserthat would kick in at the end of Congress's 10-year budget window,though he didn't recommend that approach.

A separate study from the Tax Foundation found that lowering thecorporate rate to 15% for just 10 years would initially boostgrowth, but then would be slower in the seventh year than if therehadn't been a cut at all, as companies braced for the higher rateto return. A temporary cut would be more likely to benefitshareholders according to that June report, while a permanent cut'sbenefits would trickle down to workers.

Territorial System

Meanwhile, there's broad agreement that rules to shift the U.S.tax code to a territorial system, in which most foreign profitswould be exempt from U.S. taxes, must be permanent, Clifton andthree others briefed on the plan said. Currently, the U.S. taxesbusiness income no matter where on earth it's earned, thoughbusinesses can defer taxes on offshore income until they return itto the U.S. Those features of the tax code spur companies to shifttheir profits offshore, and leave them there.

GOP officials are discussing how to pair a territorial systemwith another mechanism to prevent such profit-shifting, the threepeople said.

Other tax proposals—such as a costly one that would allowcompanies to fully deduct their capital spending from incomeimmediately instead of over years—are being evaluated to see ifthey should be made temporary or permanent, the three people said.Allowing full and immediate expensing on a temporary basis couldencourage companies to accelerate their investment plans—and helpget the growth the White House is banking on.

Clifton, who is now the head of policy research at StrategasResearch Partners, said if Republicans want to use reconciliation,then they have to accept that they won't be able to have a fullReagan-style overhaul of the tax code. “From a practicalperspective, there are going to be provisions that are not going tobe fully permanent in this bill,” he said.

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