Congressional Hearing Highlights Problems with the Border Adjustment Tax

The debate over the so-called border adjustment tax (or BAT) took center stage this week when the House Ways and Means Committee held its first hearing on the topic. Despite strong support by the House Republican leadership and the Chairman of the Ways and Means Committee, Rep. Kevin Brady, the proposal faced an onslaught of criticism during the hearing from invited witnesses and members of both parties.

The border adjustment tax is a critical plank of the House GOP tax blueprint, which remains the most fleshed out proposal for tax reform. The proposal would exempt companies’ export revenue from tax, while at the same time no longer allowing companies to deduct the cost of imports. The reason that it has become so crucial to the House GOP’s tax reform efforts is that it is one of the few revenue raisers in the blueprint, potentially raising more than a trillion dollars, meaning that without it the House GOP’s plan would have an even bigger revenue hole.

One of the biggest problems with this proposal highlighted during the hearing is the cost of the border adjustment tax could end up being passed onto consumers through higher prices. Representing these concerns on the panel, the chief executive officer of Target noted that he believes the company would be forced to raise prices by 20 percent and that Target’s tax rate would rise to 75 percent under the proposal. Target’s opposition to the border adjustment tax may also reflect the fact that retail and other companies that are paying some of the highest effective income tax rates under the current tax code might end up even worse off under the House GOP blueprint.

BAT supporters contend that the tax wouldn’t increase consumer prices because the U.S. dollar would appreciate substantially, reducing the cost of imports so that the profits of importers will be unchanged on balance. The evidence for this theory is somewhat dubious, however, since there is a complete lack of real-world experience with this kind of tax proposal. In fact, during the hearing Republican Rep. James Rennacci asked, “Can any of you assure me that the currency will adjust so that there will be no effect to the cost of consumers?” The entire panel of experts indicated that they could not make any such guarantee.

Considering the skepticism of the proposal from representatives in both parties, the path forward for the border adjustment tax in the House is uncertain. Elsewhere, the proposal is facing even worse prospects. Last week Senate Majority Leader Mitch McConnell noted in an interview that the outlook is “rather bleak” for it passing the chamber because of the existing opposition by the two senators from Arkansas could block it entirely. The Trump Administration omitted the measure from its most recent tax reform sketch, and Treasury Secretary Steve Mnuchin even criticized the proposal this week, saying it would increase prices and would not level the competitive playing field.

Given its considerable problems and widespread political opposition to the border adjustment tax, lawmakers should move on to real tax reform proposals that would increase the fairness of the tax code and raise much needed revenue. In fact, during the hearing and in her testimony, Professor Kimberly Clausing noted that the best way to solve corporate profit shifting would be “repealing deferral and taxing offshore earnings in full.” Such a move would finally stop offshore tax avoidance, raise about $1 trillion in revenue and avoid all the complications and uncertainty that the border adjustment tax would bring.

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