Brady Plans to Set Stage for a Broader Tax Overhaul

By Kaustuv Basu and Stephen Cooper
Tax Notes
December 22, 2015

With tax extenders out of the way, Ways and Means Committee Chair Kevin Brady, R-Texas, wants to focus on international tax reform in 2016 and set the stage for a broader tax overhaul after the presidential election.

Brady, who took over as committee chair in early November, told Tax Analysts in two exclusive conversations on December 17 and 18 that he has one-, two-, and four-year plans in mind when it comes to overhauling the tax code.

Brady said that passing tax reform is incredibly difficult. “That’s why it happens once [in] a generation,” he said. But now that Congress will not be “lurching” between extender packages each year because of the deal signed into law December 18, “good tax policy is going to blossom, and we’re going to have a chance to give [tax reform] oxygen over 2016 and 2017,” he said.

Brady pinned his hopes for tax reform to Republicans’ efforts in the 2016 elections, saying, “How we run in 2016, how we lay this foundation is critical to how we finish this effort.” He added that next year will be about reigniting the belief that Congress can pass a tax reform bill.

As for Ways and Means’ priorities for 2016, they will largely follow those already laid out by House Speaker Paul D. Ryan, R-Wis., who wants the committee to focus on reforming the tax code, repealing the Affordable Care Act, opening trade possibilities , and reforming welfare programs.

Case for International Tax Reform

Having a competitive, pro-growth tax code is the best way to stop U.S. companies from moving abroad, Brady said.

“The answer isn’t in more Treasury rules, or in pointing fingers, or hand-wringing,” Brady said, commenting on Treasury’s efforts to administratively stem corporate inversions, even as it has called on Congress to enact a permanent fix.  For Republicans, a large part of that involves lowering the corporate rate. Brady added that while earlier discussions have centered around a 25 percent corporate tax rate, that would put the United States in only the middle of the pack.

“I am convinced that we have to be at 20 percent or below to keep us competitive for the longer run,” Brady said.

The Ways and Means Committee is looking at steps such as passing international tax reform or “creating incentives to bring innovation companies back to the U.S., looking at some tailored approaches that — driven by urgency by the changes in the tax laws around the world — could help us stem those job losses,” Brady said.

Brady’s assertions mirror those of Senate Finance Committee Chair Orrin G. Hatch, R-Utah, who recently told reporters that implementing a 20 percent corporate tax rate was his preferred option to stop inversions, not the Treasury’s approach to anti-inversion regulation.

The innovation box draft released in July by Ways and Means Committee members Charles W. Boustany Jr., R-La., and Richard E. Neal, D-Mass., and work done by the international working group in the Senate, led by Charles E. Schumer, D-N.Y., and Rob Portman, R-Ohio, will serve as the framework for an international tax reform overhaul, Brady said.

Permanent repatriation will be critical for U.S. multinationals, Brady said. “Doing that in a way that does encourage them to bring those profits back is a challenge,” he said. “It is definitely achievable. And right now, again — because of the [OECD’s base erosion and profit-shifting project’s influence] around the world — there is an urgency to determine if we allow ourselves to become isolated in our tax code where innovation companies simply can’t justify doing their [research and development] and manufacturing here in the U.S. If that continues, we are going to lose [a] tax base that is important to the country.”

Brady will also have to battle opposition from some Democrats to a tax reform effort that does not raise revenue. In recent remarks to reporters, Senate Majority Leader Mitch McConnell, R-Ky., said President Obama has not agreed to the Republican goal of revenue-neutral tax reform, which he defined as using revenues generated by removing tax preferences to pay for a lower tax rate.

Asked about Democratic assertions that former Ways and Means Committee Chair Dave Camp’s failed tax reform plan to broaden the base and lower rates proved that it’s too difficult to find support to end tax preferences, Brady said he believed that lawmakers could craft a fairer, flatter tax system with lower tax rates by closing deductions and loopholes enjoyed by individuals and businesses. The challenge, he said, would be choosing the elements of the current tax system that help the economy grow.

As for corporate-only tax reform, Brady said that House Republicans are not going to leave small businesses or passthroughs behind. “I want to make sure small businesses don’t pay higher rates than larger businesses, and I want every size business to be competitive again,” Brady said. “I don’t want tax reform to bail out Washington spending problems. I want it to grow the economy.”

Challenges Ahead

Although Hatch recently said the 2016 presidential election could hurt the chances of moving a tax reform effort next year, Brady said the race could be helpful.

“Every serious candidate has released their idea of what a competitive U.S. tax code would look like. While they all differ . . . the message they are sending is that fixing this broken tax code is going to be [their] priority,” Brady said. Such talk about tax reform being a key component of their presidencies is also helpful because it drives the public interest, he said.

When asked about likely pressures from the House Freedom Caucus, a group of about 40 conservative Republicans who forced the departure of former House Speaker John A. Boehner, Brady said that he believes tax reform will unify the House Republican Conference.

“In 2016 one of my goals is to engage our conference in tax reform [by] inviting them to bring their ideas to the surface. Let’s have hearings in the Ways and Means Committee,” Brady said. “Let’s examine their pros and cons.”

Brady said he wants to educate members about tax reform and encourage both Republicans and Democrats to bring their ideas to the table.

White House Relationship

Although he has not yet had a conversation with Obama since becoming chair, Brady said he was impressed with everyone’s approach to the extenders negotiations. “Those who were at the table, stayed at the table, trying to find constructive common ground,” he said.

Brady said negotiators were able to narrow the differences between Republicans and Democrats and find solutions everyone could agree on. “And at the end, we put together a very pro-growth package that creates certainty and permanency for families, for businesses in a number of areas,” Brady said, adding that he has a good working relationship with the administration.

“This White House and I have very different visions of what this country should be and what our tax system should look like and what our healthcare system should look like,” Brady said. “Nonetheless, I think this permanency package demonstrates that if you stay at the table and fight for your values, and work through others’ priorities, you are going to find common ground.”