Americans for Prosperity and Freedom Partners recently released a report on the prospect of a Border Adjustment Tax being included as a piece of major tax reform, a framework of which is expected to be released today by the Trump administration. AFP and FP are not fans of a BAT.
The free-market group with ties to conservative billionaires Charles and David Koch said in its report that “It is impossible to predict the real world impact of the BAT because something like this has never been done before. This proposed system is unlike anything in existence and there is a tremendous amount of risk surrounding its implementation.”
Going to BAT
A BAT would certainly be unprecedented. We have previously written about the scheme and how the novel approach to corporate taxes could possibly deliver similar export benefits to those of a value-added tax without actually imposing a national sales tax on every single transaction that American citizens make. A BAT would, rather, tax companies on their imports as part of the corporate tax code rather than impose a sales tax on transactions.
The proposed plan would subject imports to a 20% tax and exempt exports. It is a key element of a tax-reform blueprint that House Republicans are using as the starting point for legislation.
It has also been the focus of intense lobbying, with supporters and opponents working hard to make their cases to lawmakers. Supporters of the BAT say it would take away companies’ reasons for moving jobs overseas, while opponents, like AFP, say it would lead to higher prices on consumer goods.
AFP’s report said that states such as Michigan, Louisiana, Tennessee, New Jersey, Kentucky, South Carolina, Illinois, Texas, Georgia and California would be among the most vulnerable because of the importer industries operating in them.
“We are very concerned about the impact of this proposed border adjustment tax here in Minnesota in part because two of the largest and biggest losers are going to be a couple of Minnesota’s flagship companies and two of Minnesota’s largest employers,” said AFP Minnesota State Director Jason Flohrs. “The Minneapolis-St. Paul area is home to the corporate headquarters of Target, one of the largest and biggest importers and retailers in this country, and Best Buy, one that’s just a little bit further down the list. Retail accounts for about 300,000 jobs here in Minnesota and about 12% of our total employment.”
There’s little doubt that retailers would be hit hard by a BAT. Even if manufacturing companies could re-source their raw materials from U.S. companies and eliminate imports from their supply chains, that option wouldn’t really exist from retailers. It’s going to be nigh-impossible for a company like Target to even limit the number of items it sells that are produced and imported from countries such as Taiwan and China.
So, while there may be some winners among manufacturers from a BAT, one simply cannot deny that there would be millions of losers among retailers. Companies doing their manufacturing in the U.S. could make the argument that they do deserve preferential treatment from the tax code over foreign competition but, well, someone’s still going to need to sell those finished products and, aside from major automakers, few manufacturers have a monopoly on selling their own finished products.
There have already been signals from House leadership that even its main proponents on the Ways and Means Committee would be open to changes to the BAT plan. The opposition groups such as AFP, however, view it as a new tax and have said victory in this effort means no version of a BAT but rather comprehensive tax reform that lowers rates across the board.
One thing, however, that AFP is in agreement with House leadership on, is that a BAT is better than a VAT.
“We would not be in favor of a VAT. If you look at the tax structures in Europe, they have a very high VAT, sometimes as high as 20%, in addition to their corporate income taxes,” said Mary-Kate Hopkins, one of the authors of the study. “The way that our current tax code is structured and give the constitutional concerns with the income tax, we don’t see any scenarios in which they could swap out a VAT for the corporate income tax. It would have to be in addition to the corporate income tax. That leaves the door wide open for creating new tax hikes down the road and I don’t know that the European model is one we would ever want to follow, given that they are extremely high-taxed countries.”
Hopkins went on to say that AFP sees the BAT as very similar to a VAT and that, at least AFP believes, that its overall impact would be similar. I, myself, have been known to a be a VAT conscientious objector, as well. I do think, though, that the idea of a BAT, while it certainly has VAT similarities, is intriguing in that it uses the corporate income tax to encourage manufacturing in the U.S. It may not pass this time, but it’s an idea worth exploring that’s far better than taxing individual transactions as a way to benefit American manufacturers. Let’s see what the administration has to unveil today.