More than 75 trade associations signed a letter yesterday to House Ways and Means Committee Chairman Kevin Brady (R-Texas) and incoming ranking member Richard Neal (D-Mass.) to express concerns over a “border adjustments” provision in the Republicans’ proposed tax reform plan, saying it could result in “huge business challenges” for many importers.
“Companies that rely on global supply chains would face huge business challenges caused by increased taxes and increased cost of goods, which would in turn likely result in reductions in employment, reduced capital investments and higher prices for consumers,” the letter warned.
A central element of the Republicans’ sweeping “Better Way” blueprint aimed at making the U.S. corporate tax code more internationally competitive by taxing companies based on where they sell their goods rather than where they are based, the border-adjustment provision would impose new taxes on imports while allowing exports to be sold tax-free.
Overhauling the tax system to shift it from the current “origin-based” approach whereby U.S. companies face a statutory tax rate of 35% on their global profits, regardless of where they’re earned, to a “destination-based” corporate income tax with a 20% levy on domestic sales and imports of foreign goods and materials would not only offset the cost of cutting the corporate tax rate to 15% but also, the plan’s supporters claim, remove the incentive for companies to shift profits overseas to comparatively low-tax countries.
The groups, including the National Retail Federation, the American Apparel & Footwear Association, the Alliance of Automobile Manufacturers and the Association of Food Industries said they “stand ready to work with Congress and the administration on a pro-growth comprehensive tax reform,” though one “without the border-adjustment provision,” which they maintain would harm their businesses and burden consumers with higher prices.
This echoed a statement made last week by Koch Industries, the Wichita, Kansas-based conglomerate with interests ranging from oil and ranching to farming and the manufacturing of electrical components, warning that even though its own businesses would most likely benefit from the change because it produces many goods domestically, “the long term consequences to the economy and the American consumer could be devastating.”
In addition to the growing chorus of corporate voices concerned about the proposal’s potentially harmful effects, the border adjustments provision may face another obstacle in the form of compliance with World Trade Organization rules, which permit border adjustments in systems with value-added taxes, but not for income taxes. The Republican’s plan is a hybrid of the two and runs the risk of being considered an impermissible adjustment to a direct tax. As such there is a “significant danger” it could lead to litigation with the WTO that could take years to resolve, Joel Trachtman, an international law professor at Tufts University recently told Bloomberg.
The House Republican report on tax reform states that the Ways and Means Committee will have an “ongoing dialogue with stakeholders” as the Committee drafts the plan’s proposals into tax legislation in the future.