On Feb. 7, with voting in the House of Representatives concluded for the day, Rep. David Brat held court in the Speaker's Lobby, the ornate room just off the chamber floor. He was speaking with a group of tax reporters to discuss the topic on every taxwriter's mind: the border-adjusted tax.
Brat, who is best known for unseating former House Majority Leader Eric Cantor, is also an economist and a former professor. So, it was with the confidence of a college professor that he lectured reporters on the merits of changing the way imports and exports are taxed.
Brat said the House Freedom Caucus, the conservative group of which he is a prominent member, examined every scenario with noted economist Larry Lindsey and found none in which any American business would suffer majorly.
The retail sales industry — think Walmart and the Home Depot — warned that blue-collar and middle-class people would be hit by rocketing costs for imported consumer goods. Brat dismissed that charge as simply wrong. The benefits, he insisted, would be huge.
"Have Walmart go to the white board and show me the worst-case scenario for them," Brat said, throwing down the gauntlet. Border adjustment won't hurt importers because exchange rates would adjust in response, he said. "That's not up for opinion."
Apparently, it was. Just four months later, following an intense lobbying campaign by retailers and their conservative allies in Washington, Brat had flipped from a border adjustment exponent to one of its chief critics.
On June 9, appearing at the Heritage Foundation think tank, Brat and his Freedom Caucus colleagues delivered a blunt message that House Speaker Paul Ryan, R-Wis. should drop the border adjustment tax.
"It's dead," said Rep. Ron DeSantis, R-Fla., a founding member of the House Freedom Caucus, in an interview with the Washington Examiner. "The question is, are we going to realize it's dead now, or are we going to fail at the first effort at tax reform two months from now when it's still in there and the votes start to hemorrhage?"
The evolution of Brat and others reflects a coordinated, multimillion-dollar lobbying by the retail industry and conservative advocacy groups. Success came faster than opponents of border adjustment had imagined possible.
It has brought the linchpin of Ryan's master tax reform plan to the brink of defeat as House and Senate leaders, and President Trump's White House negotiators, work to write legislation they can agree on.
Ryan doesn't accept that border adjustment is dead. But he did concede in an interview that his proposal is in trouble, on Capitol Hill and at 1600 Pennsylvania Ave.
"We've always said that, in its current form, it needs to be modified. And the exercise our tax writers need to go through," Ryan told the Washington Examiner, "[is] to get the best possible policy that can pass. It's premature to say what the final version of the bill is going to look like."
How border adjustment works
Ryan was the 2012 Republican vice presidential nominee who almost single-handedly willed the GOP to adopt reform of Medicare and Social Security as standard party policy. But his career ambition was really to serve as House Ways and Means Committee chairman and lead a rewrite the complex and horribly outdated U.S. tax code.
Last reformed in 1986 under President Ronald Reagan and a divided Congress, it has become an drag on the national economy, leaving American companies at a competitive disadvantage and vulnerable to foreign acquisition.
Not long after winning the Ways and Means gavel in 2014, the Wisconsin Republican was drafted into the speakership. Although the promotion took him away from the hands-on role in writing tax reform, it positioned him to shepherd an overhaul into law.
And so, with the same energy with which he'd pushed the GOP to embrace entitlement reform, Ryan, with longtime allies on Ways and Means, began sketching out a massive rewrite of 75,000 pages of tax regulations.
The result was "border adjustment." The plan would exempt all exports from taxation, but prevent businesses from deducting the cost of imports from their taxable income.
Ways and Means is Congress' main tax-writing committee. Ryan and other Republicans on the panel who favored radical reform had kicked around and refined the concept since it was proposed as a tax reform option by a panel commissioned by President George W. Bush a decade earlier.
The speaker's blueprint, unveiled last July and based on a proposal introduced the previous January by his close ally and senior Ways and Means member, Rep. Devin Nunes, R-Calif., proposed taxing businesses on cash flow rather than profits.
The tax on cash flow would be based on geography. Items purchased domestically for manufacture or resale would be deductible as business expenses, but materials purchased from abroad would not.
That last part is crucial. Because America imports more than it exports, the border adjustment would raise massive revenues, more than $1.1 trillion over 10 years, according to the Tax Foundation think tank. On paper, that would solve most of the math problems bedeviling GOP tax reform.
Counting those revenues allows Republicans to lower the corporate tax rate from 35 percent to 20 percent without adding to the deficit.
They had an academic response ready to answer the charge that border adjustment constituted a 20 percent import tax. On paper, neither importers nor consumers would suffer the burden of that tax because the dollar would appreciate as other countries sought them to purchase tax-free American products. The greater purchasing power of the dollar would offset the import tax.
The plan was unveiled last June among Ryan's "Better Way" proposals that were designed to give House Republicans an agenda to run on, and a way to separate themselves from Donald Trump. They, like most others, did not expect the billionaire populist to beat Democrat Hillary Clinton.
Then, Trump won.
All of a sudden, border adjustment was real. It could be reframed to fit the president-elect's agenda to get tough on trade and bring assembly-line jobs back to the American heartland.
Most in the nation's capital, having ignored or dismissed Ryan's work on border adjustment, were caught by surprise. "I honestly don't think I heard anything about it until December. And I thought it was a joke when I first heard it," said Sen. David Perdue, R-Ga., who is aligned with Trump. As the former CEO of a major retailer, and with Home Depot Inc. headquartered in Atlanta, Perdue would emerge as key opponent of border adjustment.
Time to fight
Lobbyist David French awoke on Nov. 9 with the single thought that he must sway Congress against the border adjustment tax.
The Pittsburgh native and Capitol Hill veteran is chief lobbyist for the National Retail Federation. More than anyone in Washington, French is responsible for protecting retailers from the federal government.
He had been aware of Ryan's plan to adjust taxes at the border, but didn't think it had a chance under a President Hillary Clinton. He was shocked when Trump won, and horrified by the live threat of an import tax, with a Republican in place to sign Ryan's bills. "We were 20 miles inland, and we had prepared for a catastrophic storm surge that was not likely to happen," French said. "But on Election Day, boy, it happened."
Realizing they were in a race against House Republican leaders, the retail industry's D.C. lobbyists began meeting in the National Retail Federation's downtown offices to game out a strategy for defeating what they call "the import tax."
By Christmas, a plan was developing, but retailers assumed it was too late to stop it from passing in the House. Their approach, one senior lobbyist says, would be to turn the import tax into enemy No. 1 in the Senate and make it too toxic for Trump to support.
With bipartisanship unlikely, the Senate was an easy mark. As with healthcare reform, Republicans were formulating a tax overhaul strategy that relied on using reconciliation rules. These would allow the GOP to sidestep a Democratic filibuster and pass reform over liberal objections.
That also meant that Senate Majority Leader Mitch McConnell, R-Ky., could only afford to lose two votes, and even then Vice President Mike Pence would have to cast the tiebreaker.
Just Arkansas and Georgia, where Walmart and Home Depot are headquartered, supply four Senate Republicans automatically disinclined to support border adjustment. Throw in North Carolina, where Lowe's is based, and there are six.
Not surprisingly, the provision never had much momentum on the north side of Capitol Hill.
In January, during the Republicans' joint House-Senate policy retreat in Philadelphia, the proposal was received skeptically upon being presented by Sen. Pat Toomey of Pennsylvania, who was deputized to explain it not because he was a supporter but because he understood how it worked.
The rollout proved disastrous. "It went over like a total dud," a Republican senator said, recalling the meeting.
Later that evening, as some senators gathered for drinks, Sen. Ron Johnson, from Ryan's home state of Wisconsin, added to border adjustment's woes when he stated his concerns. As a businessman who had run a manufacturer, his opinion carried a lot of weight.
Worried that border adjustment might appeal to Trump's sensibilities on trade, Perdue and Sen. Tom Cotton, R-Ark., continued to lobby their colleagues against it. Both personally communicated their opposition to Trump.
In separate meetings with the president early in the year, they warned that middle-class voters responsible for installing him in the White House would get hit the worst by border adjustment, suffering higher prices in stores.
In February, when the prospects for border adjustment were still healthy, Perdue and Cotton moved more actively to kill it.
Perdue, the former CEO of Reebok and Dollar General, who had run companies in Europe and seen how similar taxes operated, sent a letter to fellow Republican senators saying the provision could sink tax reform.
Cotton delivered a speech on the Senate floor mocking border adjustment as "Orwellian." Taking a veiled shot at Ryan, he said: "Some ideas are so stupid only an intellectual could believe them."
Luck on their side
The retail industry, meanwhile, still wants to kill border adjustment in the House.
Ryan is the chamber's most powerful member, and, along with Ways and Means Chairman Kevin Brady, of Texas, is border adjustment's champion. Yet, the retailers were able to damage it so badly that it might never get a vote in committee or on the floor.
Lobbyists involved in the fight, and Republicans and their staff in the middle of it, credit the apparent defeat of border adjustment to the speed and scope of the opposition campaign. It made two key decisions — to go big and go fast.
Border adjustment foes ramped before New Year, much faster than proponents. Where those in favor focused on wooing members of Ways and Means, opponents wooed all rank-and-file members.
They presumed border adjustment would through Ways and Means, so they aimed to turn the rest of the Republican conference against it to make it a poison pill for any tax reform bill on the House floor.
Retailers organized as Americans for Affordable Products, and hired the firm DDC Public Affairs to help run a full-scale influence campaign. Amid Trump's calls to overhaul U.S. trade policy and "drain the swamp" of so-called special interests, the effort might have backfired, or flopped.
But it was joined by conservative advocacy groups with grassroots credibility, such as Heritage Action, affiliated with the think tank where the House Freedom Caucus had announced its opposition, and Americans For Prosperity, a Koch brothers organization expert at ginning up activism in the states.
Later, lobbyists would credit the Kochs' effort in particular with helping cut the legs out from under the House GOP leadership.
They were relentless in courting House Republicans and carpet-bombed the political media with their message. So, even as efforts to repeal Obamacare hogged the spotlight, lobbyists and activists opposed to border adjustment were practically living in Republican offices on Capitol Hill. Just one group, the Retail Industry Leaders Association that includes Walmart, Home Depot, Best Buy and others, says it had over 280 meetings with lawmakers specifically on border adjustment.
By the time Brady countered with a new message that border adjustment would end the "made in America tax" by leveling the playing field for domestic manufacturers, it was too late. It didn't help that American manufacturers wouldn't fully back the cause for fear of offending their retail industry customers.
"Opponents organized aggressively and quickly and got way out in front of supporters," said Sage Eastman, a Republican aide on the Ways and Means Committee when Dave Camp, R-Mich., had been chairman and tried and failed to advance major tax reform. "With the opposition being this unified and aggressive, passing border adjustment became a tough hurdle to clear."
"It was defined early and became a conservative litmus test almost immediately," added a Republican operative who works for a K Street lobbying outfit.
The coalition also caught a couple of critical breaks along the way.
First, Ryan saw his academic pitch for border adjustment undermined by three Republicans on Ways and Means who own automobile dealerships and made their living selling cars before coming to Congress.
According to a Ways and Means Republican, after one explainer session held for the committee's GOP members, Reps. Vern Buchanan of Florida, Mike Kelly of Pennsylvania and Jim Renacci of Ohio raised red flags about border adjustment's impact on consumer prices. This Republican, who spoke to the Washington Examiner on condition of anonymity, says the episode was a turning point.
As businessmen in the retail sector, the three lawmakers' opinions carried more weight than economists' promises of an American manufacturing renaissance and assurances that exchange rates would change to offset the new import tax.
The Mike Kelly Automotive Group, in Butler, Pa., sells Chevrolets and Cadillacs, Kias and Hyundais. But Kelly, now in his fourth congressional term, says the American brands he sells would suffer from sticker shock the same as the foreign ones under a tax regime built on adjusting at the border.
"If you look at the Monroney label, which I look at all the time, you realize that when you look at parts contents, that there's truly no such thing as a car that's made in America from start to finish," Kelly said.
The Monroney label is the window sticker that details a car's price and parts content and is affixed to every automobile before it's wheeled into the showroom. The label was named for former Sen. Almer Stillwell "Mike" Monroney, D-Okla., sponsor of the Automobile Information Disclosure Act of 1958.
"The percentage of the parts that come from a different area of the world make up an awful big percentage of the car. I don't know how you start taxing and putting tariffs on it," Kelly said.
None of this might have mattered as much if Trump had embraced border adjustment. But again, the opposition got lucky, this time when Nunes, among Trump's closest allies in Congress who just happened to be a key author of the provision, was sidelined over a matter having to do with his role as chairman of the House Intelligence Committee amid the investigation into Russian meddling in the 2016 election.
Nunes first spent time with the president during the 2016 GOP presidential primary, when the candidate made a campaign swing through the congressman's Trump-friendly central California district.
They hit it off, and Nunes would go on to play a central role in Trump's transition and begin pitching senior White House aides on border adjustment.
But the Californian was swamped by a wave of criticism after advising Trump on the progress of the House Intelligence Committee's investigation into Russian meddling in the 2016 election. The dustup forced him to hand authority over the investigation to his senior GOP colleagues.
It then became impractical for Nunes to spend time at the White House lobbying on border adjustment. Doing so might reignite speculation about whether Nunes was keeping Trump apprised of the Russia investigation.
"There's no question that this issue has hindered his ability to work with the president," a House Republican said.
So, as a top House proponent of border adjustment was taken out of the game, retailers had settled on a winning message.
They found it almost by accident in December while conducting polling on other topics. At the time, the retail industry was already mobilizing to fight two other lobbying wars. One was a push to halt congressional efforts to protect online competitors from sales taxes. Another was a major lobbying contest with banks over a provision in a banking deregulation bill that would allow debit card providers to charge higher rates on retail transactions.
The retailers won that battle, which one Republican aide to a House Financial Services Committee member called a "dry run" for the effort over border adjustment.
While polling on those issues, the Retail Industry Leaders Association sneaked in one question framing border adjustment as a tax on consumers, and discovered that, indeed, the public was solidly against the idea of taxing consumers to lower corporate tax rates. By February, the National Retail Federation had produced an analysis concluding that border adjustment would produce a $1,700 tax on the average family in the form of higher prices for clothes, gas and every other consumer product that involves imports.
From then on, the idea that the BAT was a consumer tax featured in ads in lawmakers' districts, on social media and in outreach to the press. Given the underlying complexity of border adjustment, Republican leadership struggled to respond.
Validation of the retailers' strategy came at a highly-anticipated Ways and Means hearing on May 23.
The coalition, Americans for Affordable Products, prepared for the hearing the same way campaign aides would for a debate. They helped ensure that the industry witness opposed to the BAT, Target CEO Brian Cornell, was as ready as a debater would be. They told committee members they'd have constituents who oppose the BAT sitting in the front row. They prepared rapid-response emails to pro-BAT talking points, and spammed the media with facts and figures during and after the hearing.
The payoff came when several Republican panel members aired their concerns about border adjustment. Erik Paulsen, a former Target employee who represents a competitive district in Target's home state of Minnesota, said he couldn't support the provision unchanged. Kelly of Pennsylvania also worried that the measure might raise prices.
The killshot came from Renacci. He asked all the witnesses, including the experts selected to support the BAT, if they could guarantee that the dollar would appreciate in response to the BAT so that there would be no impact on consumers. He was met at first by silence, and then "nos" from each of the panel's experts.
Given that it was Ways and Means that dreamed up the border adjustment tax idea, the fact that senior members of panel were publicly sniping at it was a clear signal of the danger it was in. Worse for supporters, more House Republicans outside the committee were turning against border adjustment.
Remember Brat's flip from defending the BAT to trying to kill it? Representatives of Dollar Tree, the major discount retailer, worked him over, and succeeded in changing his mind.
Brat later said they presented a "pretty persuasive argument." Part of the attraction of border adjustment would be an inducement for retailers to move parts of their supply chains back to America. But the Dollar Tree lobbyists explained that there would be no way for them to keep costs as low in domestic manufacturing. Brat agreed.
Any tax reform plan will inevitably create winners and losers. Brat says that he might be willing to override the objections of any one loser to enact border adjustment if it were politically feasible. But with the Senate and administration aligned against it, the House Freedom Caucus member accustomed to arguing that good policy makes good politics says he had determined that the politics of border adjustment aren't worth the trouble.
The White House's attempt
Despite all of that, Trump has the political capital, and more importantly the presidential signature, to revive border adjustment. That doesn't appear likely.
Trump handed responsibility for negotiating a tax reform deal with Republicans in Congress to Treasury Secretary Steven Mnuchin and White House National Economic Council Director Gary Cohn, both veteran Goldman Sachs financiers. Neither has shown interest in border adjustment. It wasn't included in the tax reform draft of ideas the two unveiled in April.
"The administration's official position is that we don't support the border adjusted tax in its current form but would be willing to look at revisions," White House spokeswoman Natalie Strom said on July 5. "As we've said many times, the administration is not going to put out a more detailed plan. We are leading a process with the Hill to develop a unified plan with the House and Senate that we hope to release in early fall."
Trump had flirted with the idea for a while, vacillating between the urgings of a divided White House.
Mnuchin and Cohn fueled the resistance. They raised doubts about the effects of the rapid appreciation of the dollar that was expected to result if exports went untaxed. A 25 percent increase in the value of the dollar, which is the appreciation that would be necessary to offset a 20 percent import tax, is the kind of major financial disruption that haunts Wall Street's dreams.
Chief of staff Reince Priebus, who hails from Wisconsin and is a longtime ally of Ryan's, and White House chief strategist and senior counselor Steve Bannon, were more predisposed toward it.
In a December interview with the conservative talk radio host Hugh Hewitt, Priebus outlined a mash-up of Ryan's tax priorities and Trump's trade rhetoric. Border adjustability, he says, could be a way to equalize trading terms between the U.S. and its partners.
In fact, retailers' polling suggested that Trump voters were primed for such a pitch.
Very few actually understood the concepts behind border adjustment. But they associated it with Trump's nationalist platform. They were prepared to favor it as a mechanism for paying for Trump's promised wall on the Mexican border, or as part of Trump's repeated calls for a tougher line in negotiating trade deals.
Retail lobbyists feared Trump would embrace border adjustability as part of his trade policy. And on Jan. 26, that is what he appeared to do while attending the joint House-Senate Republican policy retreat in Philadelphia. It proved a pivotal moment for the White House on the issue of border adjustability.
On the retreat's second day, Trump hopped on Air Force One for the first trip of his presidency to join Republicans there, deliver a rah-rah speech, and possibly answer some questions, as is customary.
Flanked by Republican leaders, he said he was working on tax reform with Ryan that would increase exports and "generate revenue from Mexico that will pay for the wall if we decide to go that route."
So far, so good. It sounded like an endorsement of Ryan's border adjustment. On the flight back, the small contingent of reporters who flew along with the president pressed his spokesman, Sean Spicer, outside Trump's cabin.
Spicer then appeared to issue a confirmation. He alluded to Trump's plan to pay for the wall by "using comprehensive tax reform as a means to tax imports from countries that we have a trade deficit from, like Mexico."
It was clear that neither Spicer nor the reporters he was speaking to fully understood the issues. Some journalists thought that the White House was threatening a trade war with Mexico through the imposition of a 20 percent tariff.
Retailers knew exactly what Spicer was referring to. It was the realization of their worst fear. The White House had aligned itself with Ryan, and they were now fighting a unified House and administration.
They had moved quickly after the election to mobilize an anti-border adjustment campaign. The Retail Industry Leaders Association launched a "12 days of taxes" campaign around Christmas, producing statistics about how specific kinds of goods and presents would get taxed under the border adjustment.
But Americans for Affordable Products was still a week away from launching, and it grew anxious. It needn't have worried. The administration's embrace of the BAT would prove short-lived.
Later that day, after Air Force One landed back in Washington from Philadelphia, White House aides walked back Spicer's endorsement of border adjustment. Spicer said it was merely under consideration. Priebus said it was just one of a "buffet of options."
It was yet another stroke of luck for the retailers, even though they weren't fully prepared to handle the White House's clumsy entrance into the debate. Media confusion over the proposal helped advance the impression that consumers faced higher taxes. After a scary few hours between Spicer's Air Force One interview and walkback, retailers landed on a stronger footing than before.
Border adjustment foes aren't taking their victory for granted. Supporters, meanwhile, refuse to accept defeat.
"I'm still prepared for a long fight," French said. "I think border adjustment is going to come back three to four more times before it's over."
The simple reason to fear a resurrection the BAT is that it makes so much sense in the context of tax reform, if the goal is to produce a permanent reform of the tax code rather than a temporary tax cut.
Republicans always knew that business interests would rally to stop tax reform, BAT or no BAT. In fact, that was the reason Ryan and his allies adopted the border adjustment concept.
It was a lesson learned in 2014, when Camp tried to advance tax reform, and failed to gain any traction. The goal of Camp's tax plan was the same as Ryan's, to lower tax rates as much as possible. Camp proposed cutting the top corporate rate from 35 percent to 25 percent, and the top individual tax rate from 39.6 percent to 35 percent.
Yet, Camp also assumed, as Ryan later would, that tax reform legislation should not lower tax revenues and add to the federal deficit. Accordingly, reductions in tax rates would have to be offset by eliminating tax breaks, such as credits and deductions, or finding other ways to raise revenues.
The problem came up when the congressional budgeteers worked through the math. To pay for rate cuts, Camp not only had to take away many of businesses' prized deductions, but also would have to make them write off investments over a longer time frame. He also would have instituted a new tax on big banks.
As a result, the plan had no business support when Camp unveiled it in the early weeks of 2014. John Boehner, then the speaker of the House, dismissed its prospects in the House on the day Camp released it.
Camp's failed effort led many GOP tax reform advocates to find a different way forward. Camp's math didn't add up, because in order to tempt businesses into giving up their tax breaks, you'd have to offer a lower rate than 25 percent. After all, 25 percent is still relatively high by the standards of the United States' peers, such as the United Kingdom and Germany.
Rather than expanding the tax base, as Camp sought to do by eliminating tax breaks, the alternative would be to choose a different, bigger tax base altogether.
Hence, border adjustment.
Without it, legislators must find $1 trillion somewhere else to make sure the reduction in tax revenues from the cuts are paid for, without losing the support of other industries sure to fight to keep their favored carve-outs. On top of that, they would have to find another mechanism for keeping corporations in the U.S., rather than seeing them move their headquarters to foreign tax havens.
"It's hard to do revolutionary things in the tax world, and this was revolutionary," said Ken Kies, a tax lobbyist and managing director of the Federal Policy Group. "Having said that, nobody has yet explained how they replace a trillion dollars of revenue in tax reform."
Many factions have aligned against it, but the two lawmakers who matter most, Ryan and Brady, haven't given up on border adjustment. Without it, permanent, wholesale tax reform seems to be off the table.
Getting tax reform passed with border adjustment included might be hard. But enacting it without border adjustment might be harder.
"It's very much alive because as you consider the options you realize, what's the other remedy? How do you deal with the erosion of the tax base and also deal with the significant revenue gap?" said Rep. Peter Roskam of Illinois, a Ways and Means Republican who strongly supports the provision.
This article has been updated to clarify Rep. Brat's stance on border adjustment.