Border Tax Hits a Wall of Opposition

A key element of Paul Ryan's tax-reform plan has lots of GOP foes, especially in the Senate.

Trucks ride next to the U.S.-Mexico border fence before crossing to the United States.
AP Photo/Guillermo Arias
Feb. 15, 2017, 8:01 p.m.

Despite a persistent press by House Speaker Paul Ryan, it’s hard to find a Republican senator who supports a key aspect underpinning his tax reform plan—one of the top agenda items for the White House and Congress this year.

At issue is a proposed tax on imports—and it’s freaking out the constituents of senators. Sen. John Cornyn of Texas, the second-ranking Republican, recalls a conversation with one oil refiner who told him the proposal would increase the cost of gas by 30 cents. Sen. Rand Paul of Kentucky says that he’s heard a Camry would cost $1,000 more—hurting Toyota manufacturers in his state. Sen. Pat Roberts of Kansas wants to make sure it doesn’t start an agriculture trade war.

“We sure as hell don’t need that,” said Roberts.

At issue is Ryan’s controversial proposal to impose a 20 percent tax on imports while excluding exports in order to help offset the cost of dramatically lowering the corporate tax rate. While Republicans often state their desire for a simpler, lower tax code to unleash economic growth, the so-called border adjustment has divided them, imperiling the possibility of passing tax reform.

In the Senate, Republicans from across the ideological spectrum have expressed doubts. Hard-right conservatives don’t think the plan lowers the corporate tax rate enough; they’d prefer to lower it from 35 percent to zero, instead of 20 percent plus the new tax, as Ryan has argued. Meanwhile, more moderate senators have raised questions about whether the proposal would increase costs on American consumers—and whether it would hurt various home-state industries, including automobile manufacturers, oil refineries, and retailers.

“Some people think that they’re doing this so they can raise more taxes without it being noticed,” said the top Senate tax-writer, Finance Chairman Orrin Hatch, in an interview. “But the problem is that all those costs, according to some critics, will be passed onto American citizens.

“You know, there’s a real question whether it’s that good of a deal to do that, while at the same time antagonizing perhaps some of our closest neighbors,” Hatch added.

After repealing and replacing the Affordable Care Act, the White House, Ryan, and Senate Majority Leader Mitch McConnell have set tax reform as the second-highest priority of the year. And as in the battle over health care, the Republicans in Congress have decided to go at the tax code without Democratic input. But by doing so, they’re forcing themselves to get at least 50 of 52 Republican senators to pass their agenda. That’s proving difficult on multiple fronts, including on passing tax reform with border adjustment.

The intra-party battle has pitted import-heavy businesses like Wal-Mart and other retail giants like Target, Gap, and Best Buy—the CEOs of which met with President Trump on Wednesday—against major exporters like Boeing and General Electric. On Tuesday, Ryan visited the Senate Republicans’ luncheon to make his pitch, but it doesn't appear he changed many minds.

Sens. Tim Scott and Lindsey Graham of South Carolina represent a state that has a significant business presence on both sides of the issue. On Wednesday, both senators expressed their concerns.

“You don’t get the 20 percent break coming in; you get it going out,” said Scott. “That means that ultimately the guy who’s in the country may pay a higher price."

Other Republican senators have been less circumspect. Sen. David Perdue, a former CEO of Reebok and Dollar General, recently sent around a letter to his colleagues saying the border adjustment “hammers consumers and shuts down economic growth.

“This proposed border-adjustment tax is a bad idea and should not become a permanent part of our tax code,” he added.

Supporters of the proposal say the cost to importers will be offset by a strengthened dollar. But Republicans in the Senate leadership and on the Finance Committee are uncertain that the theory will be realized in practice. Sen. Chuck Grassley, a senior member of the Finance Committee, said, “That’s sort of a relationship pretty hard to prove.”

President Trump’s position isn’t yet clear. In an interview, Hatch said that the administration is “not very enthused” about the border tax; a White House official responded, “We are in open conversations with Congress” on tax reform.

Last month, Trump told The Wall Street Journal that the idea is “too complicated” before walking his statement back. But some senators have latched onto his initial comments.

“If it’s complicated for a businessman that deals in billions, you know how it’s complicated for a guy that makes $174,000,” quipped Grassley.

The border-tax measure is controversial in the House, too. Members in the hard-right Freedom Caucus said last week at a retreat in Manhattan that they don’t support adding a new tax to the government’s revenue stream.

“I don’t. That would be a tax on my constituents. It would increase [the price of] their goods and services. At this point, I have not heard any good reasoning for it,” said Rep. Raul Labrador of Idaho.

But even Republicans who usually align with their leadership have expressed concerns that it would hurt businesses in their districts.

“The border tax does not help a lot of people, especially in Texas,” said Rep. Roger Williams. “You name it—oil and gas, auto, retail.”

Some members of Congress are still trying to understand such a complicated issue. When asked his position on border adjustment in the Capitol this week, Sen. Bill Cassidy, a member of the Finance Committee, gestured to the man walking next to him. He replied, “I don’t know about that, but I’m talking to this guy who does.”

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