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Focus on Regulation

Border Adjustability Tax in Peril?

The future of the Border Adjustment Tax (BAT) proposal, a critical element of the House Republican tax reform plan, is in doubt after signs of Republican opposition in the Senate emerged last week. Senator David Perdue (R-GA) became the most prominent Republican to overtly criticize the BAT, expressed in a Dear Colleague letter to his fellow Senators.  Under the “Better Way” tax reform proposal advanced by House Speaker Paul Ryan and Ways & Means Committee Chairman Kevin Brady , US business taxpayers would pay no tax on exports, and would not be able to deduct imports (ie the “Border Adjustment Tax”).  This “destination-based cash flow tax” is designed to tax consumption in the US, and remove tax-motivated incentives for businesses to locate outside the US.  The BAT would also provide significant revenue to the Treasury, allowing Congress to in turn lower corporate and individual tax rates.

In the letter to his colleagues, Sen. Perdue criticized the BAT as a “bad idea” on the grounds that it is “regressive, hammers consumers, and shuts down economic growth.” He argues that, as a result of U.S. imports being taxed, the “clear effect of the proposed border adjustment tax is an increase in consumer prices,” which would “hammer consumer confidence and lower overall demand, thus putting a downward pressure on jobs.” Sen. Perdue noted that proponents of the BAT believe that currency revaluation would strengthen the purchasing power of the dollar, thereby offsetting its burdens on taxpayers. However, he contends that a currency revaluation would “trigger a multi-trillion dollar reduction in the value of foreign investments held by U.S. investors including many pension funds and retirees,” having a massively negative impact on the retirements savings of seniors.

Sen. Perdue’s criticism of the BAT concept may mark a turning point in the debate. Although Speaker Ryan and Chairman Brady remain deeply committed to the BAT—possibly bringing with them enough votes to pass the concept through the House—the concept appears far less popular among Senate Republicans. For example, Sen. Orrin Hatch, the Chairman of the Finance Committee, has already raised questions about the wisdom of the BAT, such as whether it is consistent with America’s international trade obligations. Sen. Perdue’s renunciation of the BAT may cause a ripple effect among other Republicans, who have been hearing from major business interests who are opposed.

Meanwhile, President Trump – who has indicated plans to release his own detailed tax plan in the coming weeks — has also expressed skepticism about the BAT, which some have advanced as an alternative method of carrying out Trump’s stated preference for imposing tariffs on imports from foreign countries like Mexico and China.  It remains to be seen whether more Republicans will express opposition to the BAT.  If the BAT does not survive, we expect to see Republicans look for other offsets to pay for tax reform and other options to encourage businesses to locate their operations in the US.

Perdue Letter