The centerpiece of House Speaker Paul Ryan’s major corporate tax reform – a 20 percent “border adjustment” tax on all imported goods to help offset the more than $1.2 trillion cost of across the board tax cuts for corporations and individuals—just took another hit over the weekend.
Sen. Lindsey Graham (R-S.C.) said on Sunday during an appearance on the CBS News’ Face the Nation that the House plan won’t garner even 10 votes in the Senate, where the Republicans currently hold a 52 to 48 seat advantage over the Democrats.
“The Congress is stumbling,” Graham said. “Republicans in the Congress – we’re all tied up in knots. The House is talking about a tax plan that won’t get 10 votes in the Senate.” Graham echoed the assessment of Senate Majority Whip John Cornyn (R-TX) last week that the border adjustment tax idea was on “life support” in the Senate.
If Graham and Cornyn are correct, then the growing resistance to the House plan among lawmakers and corporate executives could greatly complicate – or even sidetrack – the efforts by President Trump and GOP leaders to push through the first major reforms of the federal tax code since 1986. That includes repealing taxes associated with Obamacare as well lowering corporate and individual taxes.
However, without the border adjustment tax provision, which is estimated to raise more than $1.2 trillion over the coming decade, the amount that will be needed to offset the massive tax cuts would raise the deficit even further.
Ryan and Ways and Means Committee Chair Kevin Brady (R-TX) wrote last year, in first announcing their plan, “From the perspective of America’s place in the global economy, the new tax system will focus on investment in America and investment for America.”
“The focus on business cash flow, which is a move toward a consumption-based approach to taxation, will allow the United States to adopt, for the first time in history, the same destination-based approach to taxation that has long been used by our trading partners.,” they added. “This will end the self-imposed unilateral penalty for exports and subsidy for imports that are fundamental flaws in the current U.S. tax system.”
But the border adjustment idea is proving to be a tough sell. And even Trump, who is eager to push through a major tax cut this year, has said that Ryan’s plan may be “too complicated” to sell to Congress and the public.
So what exactly is Ryan’s plan, what would it do, and why is it so controversial? Here is a layman’s guide to the plan.
How would the border adjustment work? It would alter the current corporate tax structure by essentially imposing a tax or levy of 20 percent on all imports – including components and parts used in assembly – while exempting U.S. exporters from any taxes. Viewed another way, U.S. companies would no longer have to report revenue generated by their overseas sales as taxable income, but for the same token, they could no longer claim expenses incurred by importing goods and materials as deductible from their federal tax obligation.
“This would shift the current corporate income tax from an origin-based tax—one that applies to the production of goods and services in the United States—to a destination-based tax—one that applies to the consumption of goods and services in the United State,” according to a Tax Foundation analysis.
Why is it so controversial? The proposed border adjustment is arguably the most revolutionary idea in corporate tax reform movement in decades and – if approved – would transform the corporate income tax code into something similar to the European value-added tax or VAT.
Ryan argues that his plan is needed to rectify a trade disadvantage that the current tax system creates for U.S. producers. While most countries levy taxes based on consumption within their borders, the United States taxes its companies based on their income -- including from exports. As a result, he says, U.S. exporters get hit with taxes at home and abroad, putting them at a huge competitive disadvantage.
However, Ryan’s plan would also, overnight, create new categories of corporate winners and losers and invariably drive up prices for U.S. consumers.
Who would benefit most from the change? Clearly, the border adjustment approach would be a boon to export-driven companies, including manufacturers of electronic equipment, machinery, aircraft, munitions, cars, and tobacco. American companies shipped $1.4 trillion worth of goods around the globe in 2016, down slightly from previous years. Supporters of the House plan say it would encourage domestic investment and reward companies that manufacture in the U.S.
Who would be the biggest losers? Any business that relies heavily on imports would be stung by the border adjustment tax, and that includes retailers, foreign car dealers, toy manufacturers and oil refineries. Major retailers like Wal-Mart and Target that obtain many of their products from Asia and other markets with cheap labor would be hard hit by the border adjustment.
Companies heavily reliant on imports would no longer be able to deduct their import costs as a regular business expense and would have no choice but to pass on their added tax obligation to consumers in the form of higher retail prices. Cody Lusk, president of the American International Automobile Dealers Association, recently told the Wall Street Journal that his members view the proposed 20 percent tax on imports as “a very, very serious potential blow to the auto sector and the economy.”
Sen. David Perdue (R-GA), the former top executive of Dollar General and Reebok, has led the opposition to Ryan’s plan and recently described it in a letter to colleagues as a regressive plan that “hammers consumers,” according to The Hill.
Would the border adjustment tax strengthen or weaken the dollar? Ryan and other proponents contend that their plan would result in a stronger U.S. dollar, which in turn would somewhat ameliorate the economic disparities between the winners and losers. A stronger dollar would make imports less expensive and exports costlier. That change alone would negate the tax’s effect on importers and exporters, according to Bloomberg. However, opponents say it’s not as simple as that, and that other factors can alter currency valuations.