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Trump's Virginia remarks frustrate U.S. Republicans' tax push

SANTA BARBARA, Calif., Aug 16 (Reuters) - U.S. congressional Republican leaders were set to promote their tax reform goals at a special gathering in California on Wednesday, but their plans were overshadowed by growing furor over President Donald Trump's controversial statements on Virginia protests that turned deadly.

Wall Street analysts warned that Trump's remarks about a weekend riot in Virginia were hurting Republicans' prospects for progress on domestic policy, even as lawmakers assembled in Santa Barbara to say their tax reform agenda is moving forward.

Kevin Brady, chairman of the tax-writing U.S. House of Representatives Ways and Means Committee, will speak at Rancho del Cielo, the country home of former President Ronald Reagan, a Republican who oversaw the last major tax code overhaul in 1986.

Brady will be joined by Representatives Peter Roskam, David Schweikert and Carlos Curbelo, all Republican committee members.

Brady was expected to say, according to prepared remarks, that the tax code "has become just as broken as the one President Reagan and Congress overhauled in the 1980s."

But market expectations for tax reform have declined in recent weeks, analysts said, and dimmed further after Trump's Tuesday press conference, where he said both sides were to blame for a deadly rally in Charlottesville, Virginia, between neo-Nazis, white supremacists and counter-protestors.

"The president's response to recent events in Virginia and his failure to clearly and unambiguously condemn racist and bigoted behavior has further divided him from key members of his own party," said Brian Gardner, a policy analyst at financial firm Keefe, Bruyette & Woods, in a research note.

Gardner said Trump's comments had "created chaos among his staff, and alienated support within the business community - support he will need to pass key elements of his economic agenda such as tax reform and infrastructure spending."

Still searching for his first major legislative achievement after 208 days in office, Trump has refocused on overhauling the tax code, but he has been constantly distracted by controversies involving North Korea, race relations and investigations of possible ties between his 2016 campaign and Moscow.

Brady remained bullish on the chances for a tax overhaul even after a Republican push to dismantle Obamacare collapsed in July.

As they did with Obamacare, the party has launched a nationwide publicity campaign for tax reform without first hammering out the final details of their proposal.

The 1986 tax overhaul under Reagan was the result of a multi-year, bipartisan negotiation. Republicans are seeking to do tax reform within months, without Democratic support.

Republicans have not yet introduced tax legislation and party leaders have already discarded key pieces of their initial, ambitious plan. No revenue-raising provisions have been agreed upon to replace those that were discarded.

Corporate lobbyists and independent experts have said Congress and Trump are far apart on critical issues, such as how to slash rates without ballooning the federal deficit.

Trump disbanded two high-profile business advisory councils on Wednesday after corporate CEOs quit the committees in protest over his remarks about the violence in Charlottesville.

Jack Ablin, chief investment officer at BMO Private Bank in Chicago, said the CEOs resigned because they saw little risk from doing so.

"They think the opportunity for tax reform has probably diminished enough to where the downside of leaving the committee is probably small," he said. "And investors have already pretty much written off tax reform." (Additional reporting by Amanda Becker and David Morgan in Washington; Writing by Amanda Becker; Editing by Kevin Drawbaugh and Richard Chang)