How the House Could Modify Border Adjustment Tax

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By Laura Davison

The border adjustment tax falls somewhere between dead on arrival and the nation’s greatest hope for jump-starting the economy—depending on who you ask.

House Republicans are continuing to push the idea, despite statements from Treasury Secretary Steven Mnuchin that it “doesn’t work in its current form.” Senate Republicans, including Finance Committee Chairman Orrin G. Hatch (R-Utah), doubt the idea has any chance of becoming law.

House Ways and Means Committee Chairman Kevin Brady (R-Texas) has been saying for weeks that companies concerned about the potential effects should come forward with proposals on how to ease the transition to the new system. But as the idea has failed to gain wide support, House Republicans are more open to modifying the border adjustment tax into legislation that could pass, according to current and former GOP aides. Brady’s office declined to comment on the specifics under consideration.

Even House Speaker Paul D. Ryan (R-Wis.), the import tax and export exemption’s biggest cheerleader, agrees it should be revised. He said the idea needs changes after President Donald Trump’s tax outline didn’t address it.

By leaving it out, Trump “didn’t hinder the House” as it continues to make modifications to the idea, Dave Camp, former chairman of Ways and Means and a senior policy adviser at PricewaterhouseCoopers LLP, said during a May 11 webinar.

The plan is a signal that “there is still some back and forth over those big parameters that have to be determined,” he said.

Simple Idea

Both supporters and detractors for border adjustment say it’s a simple idea. Goods and services brought in from overseas would be subject to a 20 percent tax reported on the company’s tax return at the end of the year. Companies that export goods would exclude their sales abroad from taxable income.

The provision doesn’t require complicated base erosion rules. But importers are pushing against the idea, saying it could fatally upend their supply chains. Koch Industries Inc., Wal-Mart Stores Inc. and Best Buy Co. have lobbied against the idea, saying the tax could force them to raise prices for consumers.

Ryan and Brady haven’t said it, but realize they won’t be able to pass a “pure” border adjustment tax, a former Republican aide said. They recognize they have to be open to compromise if they want to pursue this idea, the aide said.

‘Half BAT’ Approach

“The most obvious way to scale back the BAT while still preserving it is to levy the border adjustment at a lower rate than the tax rate overall,” Scott Greenberg, an analyst at the Tax Foundation, said.

The House could modify the border adjustment so that importers are only denied a 50 percent deduction for the cost of goods and services brought into the U.S., effectively paying a 10 percent tax rate. Exporters, on the other side, could only exclude 50 percent of their income from products sold abroad.

This would give something to importers “who are the guys getting the biggest hit,” Ramon Camacho, a principal at RSM US LLP in Washington, said.

But this “half BAT” approach is anticipated to raise about half the revenue, Greenberg said. Additionally, it wouldn’t be quite as effective at fighting base erosion.

“The more you take down the border adjustment, the less you have to prevent that,” Douglas Holtz-Eakin, president of the conservative American Action Forum said. “Then you start having to do other things to control certain tax base, profit shifting and tax avoidance issues.”

Further adjustments to the BAT could also raise the risk that the provision won’t hold up to World Trade Organization compliance rules. Trade scholars have already warned that the provision could subject the U.S. to retaliation because it allows companies to deduct wages. Trading partners could view further refinements as an export subsidy, engendering ill-will.

Fight for Exemptions

Industry groups, such as retailers, oil refiners and car makers, that have met with the Ways and Means Committee want to exclude specific products from border adjustment, an idea Brady strongly opposes.

“Exemptions for a particular industry or category is a horrible policy idea,” Greenberg said.

The border adjustment isn’t a tax policy idea that can have holes poked in it and turn out all right, he said. If the BAT doesn’t apply to all imports, then it’s not decreasing demand for foreign currencies as much as a pure version would, so it won’t raise the value of the dollar, which would hurt importers and exporters, Greenberg said.

Because it appears Ways and Means is unlikely to grant exceptions for certain categories, groups opposed to the tax want to eliminate the idea from tax overhaul legislation.

“Nothing we have seen or conceived of on our own, to change the new tax, would change the ultimate impact,” the Retail Industry Leaders of America said in an email to Bloomberg BNA. “So until the border adjustable tax is off the table once and for all, our focus will be on stopping it.”

Transition Timing

“Now is the time to do something with everything in alignment politically,” Camacho said. “You pass it with a future effective date and if it is a huge disaster, you repeal it or change it. At least you score a win.”

The transition to a border adjusted system could occur over several years, slowly phasing in the amount importers pay and exporters exempt, to minimize the impact of the shift. A long transition period would make the adjustment less sudden, but could also delay the increase in the value of the dollar. Economists who helped develop the border adjustment say currency valuations should increase to account for the amount of the tax.

Brady has said in recent weeks that his focus is on writing transition rules that minimize the harm to those reliant on imports.

“If Alexander Hamilton had put in place a border adjustable cash flow tax, we’d never move away from it,” Holtz-Eakin said. “We’d love it, it’s very pro-growth, it protects the tax base, so the whole issue is getting from here to there and that’s what’s making people nervous.”

With assistance from Colleen Murphy in Washington.

To contact the reporter on this story: Laura Davison in Washington at lDavison@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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