Tax proposal unites an unusual coalition
Progressives, retail giants oppose 20% increase on imported goods
As Americans face Tuesday’s deadline to pay their taxes, the Trump administration is hinting that tax reform is up soon on its agenda, with the president predicting it will be an easier political lift than the botched GOP attempt to replace Obamacare.
He may be optimistic, because a key aspect of the tax overhaul would likely hurt some of the blue-collar voters who helped Trump win the presidency. It’s known as a border adjustment tax.
The provision, which is used in many other nations, wouldn’t tax goods that are exported but would tax imported products at about 20 percent. Its goal is to encourage companies to make their products in the United States, keeping jobs here. It would also
raise up to $1 trillion in revenue over 10 years, an inflow that will be needed as most of the GOP tax plans being floated in Washington propose cutting the corporate tax rate from 35 percent to at most 20 percent.
But critics, including bigbox retailers like Costco and Walmart that would have to pay the tax because they import most of their products, predict the average American family would pay $1,700 more a year to cover the resulting increase in the price of clothes, phones and other items on their shelves.
That would make life even tougher for Kailey Norris, a single mother who makes a little less than the nation’s median annual household income of $55,775. Covering that spike would wipe out the $1,000 Norris is trying to save every year.
“I think things are pretty tight already. I would feel that,” said Norris, a case manager at a San Francisco nonprofit who lives in Oakland with her 3-year-old daughter. “I’m paying for her school, and trying to pay for dance class, saving for her birthdays. And now I’m looking at summer camps, and they’re really expensive.
“I get what Trump’s trying to do,” Norris said. “And it might not mean much to someone who makes a lot of money. But it would mean something to me.”
People with a lot more money than Norris are concerned about its cost.
A new nationwide TV ad funded by the conservative billionaire Koch brothers organization rails against it: “America voted for change, economic growth and to stop wasteful spending. But now, some members of Congress want a new, trillion-dollar ... consumer tax that could drive up your costs and hurt our economy . ... Tell Congress that’s not the change we’re asking for.”
Said Brent Gardner, chief government affairs officer for Americans for Prosperity, “This is a tax aimed squarely at the Trump voter, and I hope this is one the administration will reject.”
But Alan Auerbach, professor of economics and law at UC Berkeley who is known as the “father of the border adjustment tax,” dismissed the $1,700 increase as “silly” and “outside the range” of economic projections of what the tax might do. It also doesn’t account for any tax cuts Americans may see under Trump or a stronger dollar as a result of the border tax change.
“It would encourage companies to make their products in America,” said Auerbach, who thinks it would also convince some Silicon Valley companies, such as Google and Apple, to stop basing operations in countries like Ireland, which have much lower corporate tax burdens.
If it sounds odd to hear somebody from Berkeley on the same political side as border tax supporter and Republican House Speaker Paul Ryan, it is illustrative of how the tax has scrambled the usual partisan formations.
On one side are organizations backed by the free-tradeloving Kochs, standing shoulder to shoulder with progressive Democrats like Rep. Ro Khanna, D-Fremont, and retailers like Walmart.
On the other side backing the tax are major manufacturers like Boeing, linking arms with Ryan, Rep. Wayne Brady, R-Texas, chairman of the powerful House Ways and Means Committee, and Trump strategist Steve Bannon.
Leaning toward the border adjustment tax, but not quite fully committed to it, is Trump. Though it would seem to fit squarely into his “America First” ethos, he doesn’t like calling it a “border adjustment tax.” To him, that’s bad branding, as he explained on the Fox Business Network last week.
“I don’t like the word ‘adjustment,’ because our country gets taken advantage of, to use a nice term, by every other country in the world,” Trump said. “So when I hear ‘border adjustment,’ adjustment means we lose. We lose. So I don’t like the term ‘border adjustment.’ ”
“But when you say a ‘reciprocal tax’ — and I’m not saying that’s what I’m doing — but there has to be a certain reciprocal nature to it. But when you say ‘reciprocal tax,’ nobody can get angry,” Trump said. Which says more about semantics than tax policy.
In California, analysts say the tax would have a mixed effect on some of the state’s iconic industries. Even though the state’s agriculture sector is a net exporter, a spokesman for the California Farm Bureau said the group is neutral on the tax.
That’s because while California farmers export around $25 billion worth of products annually, many also import equipment from overseas, said Dan Sumner, a professor of agriculture and economics who directs the University of California Agricultural Issues Center.
Sumner said farmers would be hurt if the tax triggers a trade war with some of California’s best export markets, like Mexico or the European Union.
“Even though the United States has a loony corporate tax structure, we have to do this in a smart way,” Sumner said. “We don’t want to create a system that takes away our big export destinations.”
The tech industry is divided, too. As Hewlett-Packard Enterprise CEO Meg Whitman told CNBC earlier this year: “Everything that is in our products comes from overseas. That supply chain has taken 30 years to set up. So when all those components come in and are taxed, it’s not going to be good. This does not create jobs. It actually lowers the number of jobs for many, many companies.”
But the Silicon Valley Leadership Group, a public policy and trade organization that represents 400 top tech companies, hasn’t taken a position, and won’t until it sees a more fleshed-out version of Trump’s tax plan.
“The border adjustment tax would significantly change how the innovation economy operates, as it has the potential of choosing winners and losers among some of the largest contributors to our economy,” said Carl Guardino, the group’s president.
Khanna, who represents parts of Silicon Valley and went on trade missions when he worked at the Commerce Department, worried about a trade war threatening global economic stability.
“We shouldn’t be the ones throwing bombs at a financial global stability that we stand to benefit the most from as a country,” Khanna said. “We would pay more as consumers. More for our laptops. More for clothes. It’s really a tax on the middle class.”
Politically, Khanna didn’t understand why Trump would support it.
“It’s going to hurt many of the folks who voted for him,” Khanna said, “And that’s why it’s very, very surprising that he’s pushing this.”
If prices for imported toys and clothes would rise, Norris doesn’t know whether she would buy from local stores. She’d like to, “but they’re usually a lot more expensive.”
“My concern is that people who can afford it are still going to pay whatever the new price is,” she said. “But that’s not going to work for the rest of us who are on a budget.”