Border-Tax Foes Look for Next Reform Targets

The coalition that successfully fended off a levy on imports is now focused mostly on cutting corporate rates.

AP Photo/April L. Brown, file
Sept. 19, 2017, 8 p.m.

Major business groups and conservative foundations fought to kill the proposed $1 trillion border-adjustment tax earlier this year. Victory in hand, they’ve turned their effort to pushing down the corporate rate in the Republicans’ planned tax bill, perhaps at the cost of another proposed break.

The border-adjustment tax—a 20 percent levy on imports but not exports—met sharp opposition from the retail sector, which lobbied heavily against the revenue raiser unveiled as part of the House GOP’s 2016 tax-reform blueprint.

With the border tax dead, there’s a big revenue hole in the GOP tax plan, and some business and conservative groups say that tax writers should prioritize cutting the corporate tax rate over other provisions, such as allowing companies to immediately deduct the cost of some capital equipment, a $2.2 trillion proposal known as full expensing. Some retailers are also putting a higher priority on lowering corporate rates rather than fighting another proposal to eliminate the deduction for interest paid on business debt.

“We have members who would be concerned about the loss of the interest deduction, and I think it’s fair to say that it’s an issue that we want to share some concern about how they structure that provision. But far and away our No. 1 priority is rate reduction,” said David French, chief lobbyist at the National Retail Federation, who adds that expensing is not a priority for retail.

And these groups may have a winning strategy to get their message across. FP1 Strategies, a firm hired by both the NRF and Retail Industry Leaders Association to head up their anti-BAT effort, released a “case study” last week detailing the grassroots- and research-driven campaign to kill the tax.

“From day one, FP1 catalogued all critical voices of opposition against the BAT, from President Trump calling it ‘too complicated’ to the steady drumbeat of criticism that soon followed, resulting in over 130 pages of dissent,” the report said.

Those quotes were sent to out to media, amplifying the perception that the BAT was not well supported and was losing momentum, the report said.

After House Ways and Means Chairman Kevin Brady proposed the BAT as part of the tax-reform blueprint, the idea never got much traction in the Senate or in the White House. After months of opposition from importers and antitax groups, lawmakers dropped the BAT from their tax plan in July.

Tax writers had hoped the border tax would help make their bill revenue-neutral. Its demise has sent them scrambling for new revenue, and many tax principals such as House Speaker Paul Ryan have backed off the call for revenue-neutrality.

“Most of our members are willing to accept a certain amount of deficit if we think it’s a very pro-growth tax bill that will accomplish our objectives, and that’s greater growth in the economy,” Senate Finance Committee member John Thune told reporters Tuesday.

The BAT had some corporate backers. Domestic manufacturers such as The Boeing Company and General Electric formed the American Made Coalition to support the proposal. But ultimately, foes captured the narrative, successfully arguing that the tax would increase prices on the consumer, and the idea was doomed.

Today, the AMC has refocused its effort toward permanently lowering tax rates, sending a Sept. 14 letter outlining its new tax-reform principles to Brady, Ryan, and other members of the Big Six group of lawmakers and administration officials working on tax reform. The AMC is also pushing for a switch to a territorial tax system, in which only U.S. income is taxed, a proposal important for exporters.

Conservative groups instrumental in killing the BAT have shifted their effort as well. The Koch brothers-backed Americans for Prosperity has shifted its multimillion-dollar campaign to focus on lowering the corporate rate and killing the full-expensing proposal, which they say is too expensive.

“That is money that could otherwise be utilized to drive down those rates,” said Brent Gardner, chief government affairs officer at Americans for Prosperity.

Gardner said one lesson from the BAT fight will inform AFP’s tax-reform efforts going forward: the value of coalition building. Retailers, conservative groups, and center-right groups lined up to defeat the border proposal, and that effort could work as a model for other tax provisions going forward.

Some in real estate aren’t fans of the expensing provision, either.

Under current law, property owners can write off the value depreciation of a building over several years—39 years for commercial buildings and 27.5 years for residential rental buildings. Switching to full expensing would allow one big, immediate deduction, but that doesn’t encourage as much growth and could distort the market, said Jeffrey DeBoer, president and CEO of the Washington-based Real Estate Roundtable, during a Sept. 19 Senate Finance hearing on tax reform.

“It will incentivize our industry to build, but we see no benefit in buildings that are ahead of demand and the economy,” DeBoer said.

He instead supported applying a 20-year recovery period for both commercial and residential real estate.

Not all tax groups favor a corporate rate cut over expensing, however. Scott Hodge, president of the conservative-leaning Tax Foundation, said during the hearing that while his group prefers expensing along with a corporate rate cut, expensing drives more growth because it incentivizes new investment.

“We see expensing as the most powerful policy change you can make to improve economic growth, and on an apples-to-apples basis, our models show that full expensing delivers twice the economic growth than a comparable rate cut,” Hodge said.

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