The tax plan that promises the biggest cuts in corporate taxes without straining the federal budget looks increasingly unlikely to become law.
"I wouldn't call it dead, but I would say it's on life support," said Greg Valliere, chief global strategist with Horizon Investment. Valliere said the chances for the so-called border adjustment tax seemed to wane after President Donald Trump this week met with retailers who oppose the plan.
Trump's backing for the border adjustment tax is seen as crucial to its adoption, and his own plan is anticipated in the next couple of weeks. But Valliere said the speculation is now that Trump indicated a lack of support for the destination tax in his meeting with retailers. Trump initially called the plan too "complicated."
The plan is also facing more vocal opposition on Capitol Hill, and there is even a reported divide among White House advisors.
"We still don't know because Trump hasn't said what he wants. [Steve] Bannon is for it and Gary Cohn is against it," said Peter Boockvar, chief market analyst with the Lindsey Group, referring to two top aides to Trump. "I think the administration is probably trying to come up with a plan A and a plan B."
Senate Majority Whip John Cornyn, R-Texas, joined the list of doubters this week, saying he does not see the votes lining up. In an interview with Bloomberg, he used the same language as Valliere in describing the tax. "The hard reality is the border tax is on life support, and given the imperative of 51 senators and 218 House members and one president, I think we need to look for other options," he said.
House Speaker Paul Ryan has been pushing a border adjustment tax as a necessary component of tax reform. It would tax all imports coming into the U.S., but not exports. That would be a dramatic shift in the way corporations are taxed, and it potentially could raise $1 trillion over 10 years. Proponents say it would help American manufacturing and bring back jobs, while putting U.S. corporations on a more level playing field with global rivals.
But opponents say it's unclear whether the plan would really result in a sharp jump in the dollar that would be required to offset the inflationary impact of taxes on foreign goods. Companies that favor the plan are industrials, like Boeing and General Electric, while retailers, dependent on foreign goods, say it would result in an unnecessary tax on consumers.
"[Trump's] been all over the lot on this issue," said Valliere. "They [retailers] may have persuaded him to oppose this tax. That's speculation. If they do, I think Ryan's got to come up with a trillion dollars. I don't see a trillion dollars." Valliere said the remaining options would be to scale back the size of the tax cut or move ahead without the requirement that it be revenue neutral.
The House proposal is to cut the corporate tax rate to 20 percent from 35 percent, using the border tax for a big chunk of the revenue offset. The plan also includes a limit on interest deductability, but companies would be able to fully deduct capital expenditures. There is also a plan to have a one time repatriation of $2 trillion that companies have stashed overseas.
Another option is to "just let it rip," said Valliere. He said a plan that is not revenue neutral would face its own difficulties being adopted, even though Trump had supported such a plan in the past. "Let it be a revenue loser on paper. Proponents of a big tax cut say it would generate a gusher of revenues over the next few years."
The alternative of a smaller cut in the corporate tax rate may not give the economy the anticipated boost the administration is looking for since many S&P 500 companies already pay far less than the 35 percent. The average effective tax rate is about 25 percent for big companies.
"We're still going to get a tax cut. We're still going to get tax reform. I just think this complicates things even more," said Valliere. He said it could mean a longer time frame and a tax cut that would not become effective until next year. "There is the threat they have to consider a slightly smaller tax cut and that would generate real opposition from the White House."
The stock market's rally has been fueled in part by hopes that a big tax cut — of one kind or another — would bump up corporate profits and spending.
But if tax reform stalls as Congress debates how to shape it, the market could become impatient.
"You're going to get a lot of hand-wringing. It's slow, and it's going to be gradual," said Dan Clifton, head of policy research at advisory firm Strategas.
Companies have been lining up on both sides of the plan, and lobbyists have been pushing for exemptions. There has been talk that energy could be exempted, given the fact that the U.S. imports about 8 million barrels of oil every day. Energy analysts say gasoline prices would rise, but so would the price of domestic oil.
"It's like 'Hunger Games' for tax lobbyists now," said Clifton. "If you're negatively impacted by the border tax, you're pushing the net interest deductibility." Limiting interest deductibility would be a negative for financial firms.
Earlier this week, Goldman Sachs economists put the odds of a border tax adjustment at about 20 percent. Besides concerns about the effect on consumers, the European Union and other trading partners may challenge it with the World Trade Organization.
Trump raised market expectations about tax reform when he promised last week he would unveil his own plan in the next several weeks, and it's unclear whether it will resemble the House proposal.
"If that tax reform date looks like it's pushed too far in the future, the market reacts negatively to it. We don't think it kills the bull market, but it could pull the market down 3 to 4 percent near term. A trim, not a haircut," said John Stoltzfus, chief investment strategist at Oppenheimer Asset Management.
Trump has previously proposed a plan that would reduce the corporate tax rate to 15 percent. "Our expectation is the forthcoming White House plan will reduce rates largely by expanding the budget deficit, with a small amount of base broadening. By contrast, we expect that the Senate will consider legislation that broadens the tax base somewhat more, but proposes a smaller cut to the corporate tax rate to limit the budgetary effect," the Goldman economists said.
They also said without the border adjustment proposal the tax rate would probably be closer to 25 percent, not much bang for companies already at that rate based on deductions. Small companies, however, would benefit because many of them pay much closer to the 35 percent rate.
The plan is so controversial it's hard to say whether it would pass, Boockvar said. "The Senate is going to be a lot more resistant to it. I think bottom line is the market is making it seem like there are only winners from tax reform. But with the border adjusted tax, there are going to be winners and losers."
"They have to come up with a plan B or this market is going to collapse," said Boockvar.
Rep. Devin Nunes, R-Calif., said Tuesday on CNBC that in his mind, there would be no tax bill without a border adjusted tax. "I don't know any other way to do it. We've long looked at this. We've had exhaustive hearing after hearing after hearing for eight years," said Nunes, a member of the Ways and Means Committee. He said the committee has found the only way to make meaningful changes is to move to a full consumption-based system.
"This is the only way to leapfrog United States tax code in front of every other tax code around the world," said Nunes.
Rep. Kevin Brady, R-Texas, head of Ways and Means, also said on CNBC this week there would be no tax reform without it.
Clifton said the House leadership has said this before, and the House does not currently have the 218 votes for tax reform with the border adjustment tax, but Ryan and others believe they have more flexibility to get the tax rate lower with it. He said without Trump's endorsement, it's a hard sell to get other House members on board.
Clifton said a tax plan without a border tax adjustment is most likely, and he recently outlined several scenarios.
One is for a plan that includes 100 percent expensing for a few years instead of having companies depreciate capital expenditures. That could take the corporate tax rate to 23 percent, he said. Tax reform could also include a one-time repatriation of the $2 trillion in corporate cash held overseas, also currently in the House plan. The net interest deduction would also be capped under this plan and existing corporate deductions and credit would be removed.
A second option is a straight tax cut, a proposal that Trump has discussed. But without revenue generation, it could face opposition and potentially result in higher interest rates, as it could add to U.S. debt. Clifton said a straight cut could get done much quicker, and in 2003, a tax cut boosted GDP growth to 7 percent in the third quarter and 5.5 percent in the fourth quarter.
The third fallback plan he sees is a one-time repatriation of overseas cash, together with infrastructure spending. Clifton said the worrisome Oroville Dam in California is likely to renew calls for major infrastructure plans, but thinks House conservatives would probably oppose it.