Kochs Could Find Democratic Allies in Import Tax Opposition

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By Laura Davison and Aaron E. Lorenzo

The potential for an overhaul of the tax code makes for strange allies as both Senate Democrats and Republican-friendly groups oppose the border adjustability provisions in the House Republican tax plan.

A memo from Democratic Senate Finance Committee staff obtained Dec. 19 by Bloomberg BNA says the plan to tax imports and exempt exports could cause consumer prices to increase. The memo points out that Koch Industries Inc., run by Republican donors Charles and David Koch, opposes the border adjustability provisions in the plan.

The memo, first reported by Inside U.S. Trade, highlights how Democrats and groups that tend to donate to Republicans, such as the Kochs and the National Federation of Retailers, could end up being on the same side of one of the most contentious issues included in the House Republicans’ tax plan. Industries that rely heavily on imports, including oil refiners and apparel retailers, have criticized the proposal because it could raise prices for consumers.

“The key feature on the business side of the plan—a destination-based cash flow corporate income tax with ‘border adjustments'—is confusing, untested, leads to bizarre results, and is possibly illegal under” World Trade Organization rules, the memo said.

Pain at the Pump

The Kochs, who have said the import taxes could be “devastating” to the economy, are now seeking to show just how badly the plan could impact consumer prices. Gas prices would jump 13 percent because of the border adjustment provision, according to a study funded in part by Koch Cos. Public Sector LLC, the conglomerate’s lobbying arm.

In addition to petroleum, costs would climb for electronics and cars, said the study, which was co-authored by energy analyst Philip K. Verleger Jr. and consultants at the Brattle Group Inc.

Assuming crude oil barrel prices of $50, imposing the House GOP border adjustment only on the petroleum industry would reduce consumer expenditures on other goods by 0.3 percent and that could lead to a 0.4 percent reduction in gross domestic product, the report said. Higher barrel prices could have very serious economic consequences, the report said.

“It is this potential increased vulnerability of the economy to crude oil price shocks that should be of greatest concern to policymakers,” the report said.

No Foreign Energy Subsidies

House Ways and Means Committee Chairman Kevin Brady (R-Texas) has signaled that he isn’t willing to abandon border adjustability. In addition to providing revenue to pay for lower tax rates and full expensing for businesses, supporters of the plan say border adjustments put made-in-America products on equal footing with imports.

“Americans believe that our broken tax code should not continue to subsidize foreign energy at the expense of American energy,” a Brady spokesperson said in an e-mail to Bloomberg BNA. “When we have level competition, American consumers always win. We’re continuing to talk to refiners and other importers about their concerns.”

The Senate Democrats’ memo also says that the tax plan could create problems for taxing financial services and could lead to the use of passthrough entities to game the tax rates. The document also says the plan could cause tax-driven takeovers, as net exporters seek to combine with net importers to use losses generated by the House Republican blueprint’s framework.

To contact the reporters on this story: Laura Davison in Washington at lDavison@bna.com and Aaron E. Lorenzo in Washington at aaron@bna.com

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

For More Information

The memo from Democratic Senate Finance Committee staff is at http://src.bna.com/kQS.The study on the impact of border adjustability on U.S. oil markets is at http://src.bna.com/kRp.

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