Will Opposition Kill GOP’s Import Tax Star?

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By Laura Davison

Dec. 9 — House Republicans have received a slew of criticism and skepticism in recent weeks about their plans to tax imports and give exporters a deduction for products they send overseas.

Economists and tax policy watchers are at odds about whether this border adjustability provision will make it into the final draft of legislation to overhaul the tax code.

Border adjustability is a central element of the Republican tax plan. Not only does it serve as a barrier to prevent U.S. companies from shifting profits overseas, it also pays for the lower corporate tax rates and full expensing provisions that headline the proposal.

Retailers, led by the Retail Industry Leaders Association, and Koch Industries Inc. have publicly denounced the proposal, saying it could hurt consumers through higher prices and reduced corporate profits. This has prompted a team of economists at Goldman Sachs & Co. to say that lawmakers will seek an alternate route.

“In light of the uncertainty regarding the potential effects of such a policy, and the opposition it has already provoked, we think that Congress is more likely to move away from the destination-basis tax proposal,” the Goldman economists said in a Dec. 8 report.

The border adjustability provision is at the center and all the other features—full business expensing, lower corporate rates and individual income rate reductions—stem from that, a Republican aide told Bloomberg BNA. Without it, the plan doesn’t work, he said.

Back to Reality

Previous plans for a tax revamp have included strong anti-base erosion rules, such as a minimum tax on foreign profits, rather than the import tax-export deduction approach, but those were extremely unpopular, Douglas Holtz-Eakin, president of the American Action Forum, said Dec. 9.

“It’s important to not pretend that it’s this or nothing,” said Holtz-Eakin, who supports border adjustability. “You’re going to need something to protect the tax base. Pick among realistic alternatives.”

Advocates for border adjustability say that the dollar will appreciate to compensate for the additional tax that importers will pay to bring products into the country. The Goldman economists said they are skeptical that the transition, which would require the dollar to appreciate 25 percent under the GOP plan, would go smoothly.

“Such an abrupt change would result in large negative wealth effects for US residents and the risk of potentially serious dollar-denominated debt problems abroad,” the Goldman report said.

It is also unclear if the tax would comply with World Trade Organization rules, which permit border adjustments in systems with value-added taxes, but not for income taxes. The House Republican plan is a hybrid of the two.

There is a “significant danger” that it would be understood as a tariff, which could lead to litigation with the WTO, said Joel P. Trachtman, an international law professor at Tufts University. The process to resolve the case could take years, and the U.S. could continue to impose the import tax while the case went through the WTO panel and appeal process.

60 Percent Shot

Despite opposition to the border adjustability plan, Henrietta Treyz, an analyst with financial research firm Height Analytics LLC, still pegs the likelihood of the border adjustability provisions making it into a tax overhaul bill at 60 percent.

One way that some of the opposition could be reduced is to include import tax exceptions for certain goods, such as oil, or for products under a certain dollar amount, which would appeal to apparel importers, Treyz said. Small carve-outs to appease certain industries could quell some of the outcry without detracting too much from the approximately $1 trillion the border adjustments are projected to raise over a decade, she said.

House Ways and Means Committee Chairman Kevin Brady (R-Texas) said he is looking at issues related to carve-outs for raw materials, such as oil, while he continues to get feedback from business groups about how to build a tax system that will expand the economy.

“The nature of tax reform is to radically change the tax code so as to simplify, lower the rates, broaden the base and, in this case, foster economic growth,” Holtz-Eakin said. “Those big changes inevitably have winners and losers. The losers are never mollified and often very loud and by the end usually quite hoarse. That’s just the nature of the beast.”

With assistance from Aaron E. Lorenzo 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

For More Information

The Goldman Sachs report is at http://src.bna.com/kEQ.

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