Corporate world at war over GOP’s border tax

Corporate world at war over GOP’s border tax
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Corporate America is deeply divided over the proposal from House Republicans to tax imports and exempt exports.

Across the board, companies have long agreed that there is a need for reform legislation that lowers tax rates for businesses.

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But that unity has been shattered by the House GOP border-adjustment proposal, which is pitting some of the nation’s largest companies against one another.

On one side are large exporters, such as Boeing and General Electric, and pharmaceutical companies, such as Merck and Pfizer, that back the tax proposal. On the opposite side are retail giants like Wal-Mart, Target and Best Buy.

Each side has formed a coalition to push its stance.

“For the most part, you start to see the lines drawn between the big importers and the big exporters,” said a tax lobbyist who asked not to be named.

As the White House and congressional Republicans work toward the goal of passing tax reform legislation by August, both supporters and opponents of the border-adjustment proposal have met with President Trump to make their case.

A group of retail executives met with Trump earlier this month, and manufacturing executives — including some that signed a letter in support of the border tax — visited the White House on Thursday.

After the meeting with manufacturers, Trump told Reuters that he thought the border-adjustment tax could lead to an increase in U.S. jobs. However, he did not specifically endorse the proposal.

A number of the companies that support the border-adjustment tax are heavy exporters. For example, Boeing exports aircraft, GE sells engines abroad, and Caterpillar sells construction equipment in other countries.

Their support could prove persuasive for Trump, who campaigned on a pledge to bring back manufacturing jobs to the United States.

“For someone who sells big, expensive things overseas, this is a good bill for you,” the tax lobbyist said.

Eric Toder, co-director of the Urban-Brookings Tax Policy Center, said that exporters think “they’re going to get a big tax cut” from the GOP plan. If exports aren’t subject to U.S. tax and businesses can still deduct their costs, export-heavy businesses could have negative tax liabilities.

But Toder and many other economists don’t think exporters will necessarily end up seeing a benefit because the value of the dollar would strengthen and revenues from exports would decrease. And exporters could end up being worse off if they can’t fully take advantage of the tax savings, he said.

Businesses that support the border-adjustment tax say it would help curb corporate inversions — transactions in which U.S. companies merge with foreign businesses and then reincorporate overseas for tax purposes.

Bob McGovern, senior vice president of tax at pharmaceutical giant Merck, said that the pharmaceutical and biotechnology industries have seen a lot of inversions and foreign acquisitions in recent years because the U.S. has a high corporate tax rate and a “worldwide” system that taxes business earnings overseas.

Border adjustability “would stem the flow of those [inversion] deals” and would level the playing field between American and foreign companies, McGovern told The Hill.

While Merck is both an importer and an exporter, the company views border adjustability as “something we can work with,” McGovern said. He noted that in addition to including border adjustments, the House GOP’s tax reform blueprint moves to a “territorial” tax system that does not tax U.S. companies’ foreign earnings.

Companies that back the border-adjustment proposal view the House Republicans’ overall tax plan as likely to boost economic growth.

“If we want to drive further growth in the economy, increase job support, raise wages, we need a new corporate tax system, and we think this is a great start, the blueprint being put forward by House Speaker [Paul] Ryan [R-Wis.],” Eli Lilly CEO David Ricks told CNBC Wednesday.

But companies that rely heavily on imported products have a sharply different view.

They believe that they would face a tax increase as a result of the border adjustment and say that hike would be passed onto customers in the form of higher prices.

The retail and oil-refining industries, in particular, are vocal in their advocacy against the proposal.

“We believe the [border adjustment] tax would significantly increase our corporate taxes, which would limit our ability to make capital investments, hurt our associates and be bad for our customers,” Mike Watts, vice president of tax at Big Lots, said Thursday. 

Big Lots was one of several companies that participated in a roundtable discussion with Rep. Jim Renacci (R-Ohio) that was hosted by the anti-border tax group Americans for Affordable Products.

Many economists argue that a border-adjustment tax would not lead to higher prices and would be neutral for both importers and exporters. They say the U.S. dollar would strengthen after the plan was enacted, so it would be cheaper for companies to buy imported goods, offsetting the additional tax.

But critics are skeptical that the dollar would strengthen and fear it wouldn’t happen immediately. They view the drawbacks of border adjustability as outweighing other features of the House Republicans’ tax plan that they otherwise would support.

“We are hopeful that Congress can implement a tax reform plan that helps businesses of all sizes without increasing costs to consumers or jeopardizing retailing jobs,” said Everett Gallagher, senior vice president and treasurer of Abercrombie & Fitch, another retail giant that was at the Ohio event.

The business advocacy on the border-adjustment tax is likely to intensify in the coming months, as House Republicans seek to begin work this spring on a tax reform bill that includes the policy.

Border adjustability is expected to raise more than $1 trillion in revenue that could be used to pay for cuts to tax rates.

But while the idea is a cornerstone of the House’s plan, it is facing skepticism in the Senate.

Many GOP senators have concerns with the proposal, raising questions about whether it would have enough support to pass.