Speaker Kevin McCarthy says he doesn’t support plan to replace income taxes and abolish the IRS
The proposal gained prominence following talks Kevin McCarthy held with his Republican critics to become House speaker earlier this month.
WASHINGTON—A decades-old proposal to replace federal income, estate and payroll taxes with a national sales tax has gained support and attention in the new House GOP majority, but House Speaker Kevin McCarthy said he doesn’t favor the policy.
The so-called FairTax, if enacted, would be the largest structural change in U.S. taxation in 110 years. Wages, capital gains and corporate profits would become tax-free. The new levy would hit consumption instead. The national sales tax would apply to a broad base including food, medical care and new homes.
Mr. McCarthy (R., Calif.) told reporters late Tuesday that he doesn’t support the FairTax, distancing himself from an idea with support from a vocal segment of his party but that has begun to cause political headaches for Republicans.
The proposal gained prominence following negotiations that Mr. McCarthy held with his Republican critics to become House speaker earlier this month. Rep. Lauren Boebert (R., Colo.) listed a FairTax vote among the commitments she said Mr. McCarthy made to secure the job. The leader of the House tax-writing panel also has said the committee should consider the proposal.
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Subscribe GOP lawmakers haven’t said what they will do and when. Even if the FairTax got through the narrowly divided House—a long shot without Mr. McCarthy’s backing—opposition from Senate Democrats and President Biden is expected to prevent it from becoming law.
FairTax supporters say a national sales tax would be simpler to administer than income taxes. Some House Republicans, particularly those facing primary challenges, also could feel pressure to support legislation that would abolish the Internal Revenue Service.
Rep. Jason Smith (R., Mo.), the new chairman of the tax-writing Ways and Means Committee, said the committee should consider the proposal. PHOTO: ROD LAMKEY-POOL/GETTY IMAGES At the same time, the FairTax is drawing sustained criticism from Democrats, who could use it to attack Republicans in swing districts. Democrats say the plan would reduce taxes on high-income people, who spend a smaller share of annual earnings than the middle class does, while raising them on many people who pay little or no federal taxes.
“It gives the Democrats such an easy talking point—because it’s factually accurate—because it would raise taxes on tens of millions of seniors and the working poor and dependents,” said Ryan Ellis, a conservative tax activist who says FairTax supporters have failed to adjust their plans in response to criticism. “This is what happens when you have an idea written on the back of a Burger King place mat.”
Supporters say the plan has been thoroughly thought through, and they contend that a sales tax wouldn’t be a drag on investment as income taxes are. Lead sponsor Rep. Buddy Carter (R., Ga.) said sales taxes also ensure that people in the country illegally pay federal tax on purchases. He said many high-income people would pay more than they do now.
“The taxes on a yacht, on a 45-foot yacht, are going to be higher than the taxes on a 6-foot jon boat,” said Mr. Carter, referring to a kind of fishing boat. “I don’t know a whole lot of rich people, but the ones I do know do seem to spend a whole lot of money.”
Prior independent analyses found that the FairTax would raise taxes on middle-income households and cut them for higher-income people. Democrats are happy to point that out.
“I love their 30% sales tax,” Mr. Biden said at the White House on Tuesday, mocking the proposal. “We want to talk a lot about that.”
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Rep. Jason Smith (R., Mo.) co-sponsored the FairTax during his first two terms. Now, as the new chairman of the tax-writing Ways and Means Committee, with responsibility for managing the legislation and intraparty debate, he is staking out a more neutral position.
“The FairTax is an interesting idea,” Mr. Smith said in a statement that noted longstanding congressional interest in consumption taxes and simplification. “It is important that the Ways & Means Committee not avoid, but rather engage in this debate to hear about what that system would look as for American families, farmers, workers and small businesses.”
The plan starts the sales tax at 23%. That includes the tax, the way income taxes are calculated. Expressed as a traditional sales tax—with tax added to price—it would be 30%.
The change would trigger revenue, distributional, administrative and economic consequences. The congressional Joint Committee on Taxation hasn’t yet estimated any of those effects.
Rep. Buddy Carter (R., Ga.) is the lead sponsor of the national sales- tax plan. PHOTO: CAROLYN KASTER/ASSOCIATED PRESS Households would get a monthly stipend called a “prebate” to cover the tax on spending up to the poverty level. To address conservative concerns about federal income taxes being put back in place by a future Congress, the sales tax would end after seven years if the country hasn’t repealed the 16th Amendment, which allowed the income tax.
The FairTax rate would need to be higher than promised to replace existing revenue, said Bill Gale, a senior fellow at the Brookings Institution, a left-leaning think tank. Higher rates create more opportunities and incentives for evasion. The FairTax would also create challenges for states, which could help administer the plan and would determine how it meshes with existing sales and income taxes.
“The problem here is not the focus on consumption,” Mr. Gale said. “The major problem is the sheer administrability of it and the just fantastical elements of keeping the rate at 23% and abolishing the IRS.”
There are also transition challenges. For example, people who save in Roth-style accounts—funded with posttax dollars and available for tax- free withdrawals in retirement—would now face federal taxes on spending using savings that have already been taxed once.
GOP lawmakers have introduced the FairTax in Congress since 1999, and Republican leaders have repeatedly considered and discarded the idea. Grover Norquist, the antitax advocate, opposes the plan and conservative tax analysts from the American Enterprise Institute and Manhattan Institute have criticized it, too.
Mr. Ellis, the conservative tax activist, said the best course is to schedule a vote soon, as far from the next election as possible.
“Then move on,” he said. “Never talk about it again.”
Write to Richard Rubin at richard.rubin@wsj.com