This update follows up tax updates we issued right before and right after the presidential election of November 2016. Tax reform and tax policy remain among the top policy issues in Washington, and the focus on tax policy will only increase. While many aspects of our core analysis from earlier updates remain unchanged, developments over the first 100 days of the Trump Administration have provided additional insight and color to many of the key questions.

From the beginning we have believed that tax reform will take longer than many policy makers would prefer and that a likely outcome is that tax reform legislation could be signed into law late in 2017 or early in 2018. We continue to believe that. With the announcement of high-level principles by the Administration on April 26, 2017—and, perhaps even more importantly, the tasking of key Administration personnel with the responsibility to negotiate with Congress on tax reform—the process is fully underway. Members of Congress and the Administration will attempt to negotiate at least the major components and structure of a tax reform bill prior to it being introduced to Congress. Compared to the alternative process, in which the House proceeds with its tax reform proposal, followed by the Senate amending the House proposal or generating its own proposal and the Administration trying to independently influence both, this “pre-negotiation” process will be slower at the front end but faster at the back end.

This raises the obvious question about what an agreement, at least at a high level, between Congress and the Administration may look like. The principles released by the Administration on April 26 were very high-level and generally tracked the tax reform proposal that President Trump campaigned on. However, there was one key and important difference: international tax reform. In the campaign, the president’s proposal maintained the current worldwide tax system. The principles released by the president on April 26 clearly stated a shift to promoting a territorial-style system. Thus, stakeholders now know that both Congress and the Administration are on the same page with respect to wanting reform to move the United States to a territorial-style system.

Virtually every other key design question is still open. While the president’s proposal reiterated his goal to get the corporate rate down to 15 percent, we believe that is unlikely. The revenue loss to the federal government of going to a 15 percent rate (especially if that 15 percent rate is also extended to the business income of pass-through entities) is simply too large to be viable—even if the final product is a net tax cut.

Limitations on the deductibility of interest are certainly on the table, even if full denial of interest expense, as proposed in the House GOP Blueprint, may be too radical of a change to be included in the final proposal.

Given that all policy makers are now committed to a territorial-style system, they must now devise anti-base erosion rules to accompany that policy. Despite significant opposition from many stakeholders, the concept of a border adjustment tax remains on the table for two key reasons: 1) the president himself is very focused on what he views as the unfair/uncompetitive treatment that US companies face as the result of the imposition of VAT taxes by other countries (hence his repeated comments about a “reciprocal” tax), and 2) the border adjustment tax would raise a lot of money, and policy makers will need revenue from other policies to offset the cost of reducing the corporate rate (while it is possible that the final package could be a net tax cut, the size of that cut must be constrained in order to meet process rules around the budget reconciliation process that policy makers intend to use to avoid the filibuster).

While the tax reform debate in Washington was already intense, it is about to get even more so as negotiations between Congress and the Administration ramp up.