23 May 2017 Border adjustability concerns aired during Ways & Means hearing Some Republican members of the Ways and Means Committee on May 23, 2017, expressed concerns about the House GOP Blueprint's border adjustability proposal, which witnesses during a Committee hearing said could raise consumer prices by up to 20% on everyday items and result in retaliatory tariffs from US trading partners. Rep. Erik Paulsen (R-MN) most directly said he could not support the border adjustability proposal as included in the Blueprint. Rep. Jim Renacci (R-OH) said he has been skeptical of border adjustability, and cited concerns from businesses in his district, including a coffee seller that relies on imported coffee beans. Although not directly critical of border adjustability, Rep. Mike Kelly (R-PA) said he is concerned about the effect on consumer prices and, as a car dealer, the complexity of taxing component parts. Rep. Kristi Noem (R-SD), who previously expressed concern about the effect of the Blueprint's denial of net interest deductibility on the agriculture sector, said she too is concerned about small retailers, and said that farmers and ranchers are worried that the benefits from border adjustability would not flow down to them. Chairman Kevin Brady (R-TX) said the Committee recognizes the proposal is a significant change from the current tax code and there are legitimate concerns about how it will affect American workers, businesses, and consumers. "And we are committed to working with all of you to address these concerns. We have to get it right, and we will," he said. Trump Administration officials have said they won't embrace the border adjustability proposal in its current form, and Treasury Secretary Steven Mnuchin made stronger statements about border adjustability at the May 23 Peter G. Peterson Fiscal Policy Summit: "One of the problems with the border adjustment tax is that it doesn't create a level playing field. It has very different impacts on different companies. It has the potential to pass on significant costs to the consumer. It has the potential of moving the currencies. We want to make sure that we create a level playing field." In his opening statement at the hearing, Ranking Member Richard Neal (D-MA) called for investment in infrastructure, which he said can be done through the tax code, as well as investment in a "well-trained and skilled workforce." He also asked Chairman Brady to consider holding a hearing on how to use the revenue from a deemed repatriation tax in tax reform. "I support using repatriation dollars to pay for infrastructure or other productive purposes for the middle class," he said. Neal said border adjustability is "interesting" but Congress must evaluate whether it will increase costs for average Americans, given that retailers say the cost of products like food, clothing, and medicine will go up for consumers by more than $1,700 and gas prices will increase by 35 cents a gallon. "Middle-class families can't — and shouldn't — have to sustain those types of increases in consumer prices as a result of tax reform," he said. Other questions Neal posed concerning border adjustability included: Will the dollar strengthen to offset increases in consumer prices? If so, how long will it take and will it be complete? How much certainty is there with respect to currency fluctuations? What are other implications of an increased dollar? Is the border adjustment tax WTO compliant? Is there a risk of retaliation? Rep. Renacci had similar questions: Does the border adjustability proposal in the Blueprint pick winners and losers? To whom will the tax burden ultimately shift? Does it comply with our international treaty obligations? Witnesses at the hearing, "Increasing U.S. Competitiveness and Preventing American Jobs from Moving Overseas," were: Luciano said the company supports the border adjustability proposal because it would eliminate tax disparities on exports that arise due to differences between the US income tax system and the border-adjusted VATs of OECD countries. "We need to modernize our tax code to allow us to keep up with the rest of the world," he said. Cornell said border adjustability would raise prices by up to 20% on everyday items like back-to-school clothes, groceries, medicine and gas; and would more than double the tax rate for Target, from 35% to 75%. He acknowledged academic theory that says currency markets will adjust following implementation of such a proposal, but said, "I can't tell my employees that their paychecks — and Congress shouldn't tell American families that their budgets — are being wagered on an unproven and untested theory." He urged Chairman Brady to move past border adjustability to get tax reform done. Simon said, if properly implemented, it is in the best interest of our country for border adjustability to be considered, mindful of transitional challenges for retailers, including allowing for adjustments that may be necessary to address industry concerns. Lindsey asserted that border adjustment will lead to a currency adjustment that will largely offset the tax, and that the currency adjustment makes the border tax trade-neutral, so the legislation is trade-neutral to the extent currencies adjust. Clausing said there are many factors that may interfere with a quick exchange rate and price adjustment that some predict would follow implementation of border adjustability, and, even if the dollar does appreciate by 25%, that will create large redistributions of wealth away from Americans and toward foreigners. She also said it may be incompatible with WTO trade rules under which border adjustments are not allowed for direct taxes such as corporate income taxes. Since the proposal allows a deduction for wages, it will be ruled a direct tax and our trading partners will be authorized to retaliate with tariffs, she said. Asked by Rep. Devin Nunes (R-CA) about a possible phase-in approach for border adjustability, Lindsey said he understands the proposal is a big leap and one way of addressing concerns is to just do a portion of it and have only 30% of exports or imports involved. "Let's try something minor," he said. In response to questioning from Rep. Renacci, Lindsey said he is a big supporter of phasing in the proposal. Rep. Noem raised the issue of US companies being bought out by foreign companies, especially in agriculture, and asked what in the Blueprint proposal could change that. Luciano thanked Rep. Noem for her leadership on biofuels and biodiesel, and said the Blueprint helps improve competitiveness of the agriculture industry and the profitability of farmers. During questioning, Neal asked Cornell about skepticism over the dollar appreciation that could follow implementation of border adjustability. Cornell cited comments from Federal Reserve Chair Janet Yellen and others about such uncertainty, and repeated his concern about the effects on families of potential price increases for basic essential items. In response to a question from Rep. Mike Thompson (D-CA), Clausing said the current trade deficit results in the border tax proposal raising revenue, "but no country can run a trade deficit forever." Eventually, we will run a trade surplus, so in the future taxpayers will lose money from border adjustment, she said. Thompson asked about the timing of any WTO impact given his representation of wine country in California, saying that any discussion about trade retaliation soon turns to a conversation about the US export of wine. Once the WTO rules that our tax is a direct tax and violates trade obligations, Clausing said, that gives a green light for trading partners to retaliate. Rep. Suzan DelBene (D-WA) said small brewers in her district are concerned that they would face increased costs under border adjustability, without any offset, by using imported ingredients but selling only domestically. Clausing said there are substantial risks to import-intensive industries because of the possibility the exchange rate will not adjust perfectly. She also said digital goods are more difficult to observe, which has raised an issue in countries with VATs. Clausing said it is one of several issues that have not been fully worked out with regard to the plan. "Another big issue is finance, because the financial sector would have to be treated differently under this plan and this creates huge headaches in terms of thinking about how to administer this tax with respect to the financial sector," she said. Rep. Linda Sanchez (D-CA) asked Clausing about alternative ways to address international tax reform. Clausing mentioned eliminating deferral or a per-country minimum tax.
Document ID: 2017-0850 | |||||
