Border tax may be bad idea, but it's not unconstitutional
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The House Republicans’ plan for a “border-adjusted” corporate tax is still a long way away from becoming law, but already a number of prominent lawyers and law professors have called into question the proposal’s constitutionality. Just last week, Theodore Olson, who served as U.S. solicitor general under President George W.  Bush, said that if the border-adjusted tax becomes law, the Supreme Court should strike it down.

All this is an unfortunate distraction from an important debate about the substantive merits of the House Republicans’ proposal. There are lots of legitimate reasons to oppose a border-adjusted corporate tax, but the claim that it would be unconstitutional is borderline frivolous.


The House Republicans’ plan would replace the current corporate income tax, which tops out at a 35-percent rate, with a 20-percent “border-adjusted” cash flow tax on corporations. Under a straightforward cash flow tax, corporations are taxed on revenues minus expenses, and they can write off all costs immediately instead of having to take deductions for depreciation gradually. A border-adjusted cash flow tax works the same way except that corporations aren’t taxed on income from exports and they can’t deduct the cost of imports. 


A number of major exporters — including Boeing and General Electric — are lobbying in favor of the proposal. They like the lower rate, the immediate write-off for expenses, and the exemption for export income. Retailers that rely heavily on imports are pushing back

Koch Industries is lobbying hard against border adjustment too, and the Koch brothers have hired top D.C. lawyers to advise them on their efforts. One of those lawyers is Olson, who has won dozens of cases before the Supreme Court, including Bush v. Gore and Citizens United v. Federal Election Commission.

In a recent Washington Post op-ed, Olson made the case that the border-adjusted cash flow tax violates the apportionment clause in Article I of the Constitution. Given Olson’s phenomenal track record at the high court, any constitutional argument he makes deserves careful attention. But unlike the usual Olson argument, this one’s a dud.

The apportionment clause says that “direct taxes shall be apportioned among the several states which may be included within this union, according to their respective numbers.” So if Congress imposes a “direct tax” — say, a tax on the value of land — then it has to ensure that residents of California, home to 12 percent of the country’s population, pay no more than 12 percent of all land taxes. The House Republicans’ plan contains no such assurance.

But not all revenue-raising measures are direct taxes subject to apportionment. A separate clause in Article I makes clear that “duties,” “imposts,” and “excises” are not direct taxes and so do not have to be apportioned among the states. For example, tariffs on imported products qualify as “imposts” and are therefore exempt from the apportionment requirement.

In the landmark 1911 case Flint v. Stone Tracy Co., the Supreme Court held that a corporate income tax is an “excise upon the particular privilege of doing business in a corporate capacity” that need not be apportioned either.

Two years later, the 16th Amendment was ratified, and Congress’s power to tax expanded significantly. The 16th Amendment says that Congress can collect taxes on “incomes” without worrying about apportionment, even if the tax would have been a direct tax under prior case law. So Congress still can collect duties, imposts and excises without apportionment, and now it can collect income taxes without apportionment too.

The apportionment requirement continues to apply only to a small set of revenue-raising measures that do not qualify as duties, imposts, excises, or income taxes — like a hypothetical head tax or a federal property tax.

What does all this mean for the border-adjusted cash flow tax? It means that the constitutional concern about apportionment is a red herring.

As Olson himself says in his op-ed, the border-adjusted cash flow tax is effectively two taxes. First, U.S. corporations pay a tax on their domestic revenues minus expenses. Second, U.S. corporations pay a 20-percent tax on the cost of imported products. Under the Stone Tracy decision, the first component is an excise that need not be apportioned.

It doesn’t matter that the House Republicans’ plan allows corporations to deduct expenses immediately rather than gradually: the Constitution does not mandate a particular depreciation method for unapportioned excises.

The second component, the 20-percent tax on imports, need not be apportioned either. It’s an impost, and imposts are not — nor have they ever been — direct taxes.

Why does Olson reach a different conclusion? He says that the border-adjusted cash flow tax isn’t a tax on “incomes” and so is not exempt from apportionment under the 16th Amendment. But so what? Duties, imposts and excises were not subject to apportionment before the 16th Amendment and are not afterwards either. The border-adjusted cash flow tax is a combination of an impost and an excise, so whether it also qualifies as an income tax is constitutionally irrelevant.

Just because border adjustment is constitutional doesn’t mean we should do it. But whether or not we do it should have nothing to do with the Constitution.

Daniel Hemel is an assistant professor at the University of Chicago Law School. Hemel’s research focuses on taxation, risk regulation, and innovation law. 

The views expressed by contributors are their own and not the views of The Hill.