BAT Tax, Who Benefits?

Apr

05

BAT Tax, Who Benefits?

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By: Liz Lasater, President of Red Arrow Logistics

The White House and Congress are gearing up for a long-promised overhaul of the tax code. Among the proposed changes is the House Republican “Better Way” Border Adjustment Tax (BAT), a controversial measure that, if adopted, has the potential to drastically alter the logistics landscape for both exporters and importers.

The BAT denies the ability for the importer to deduct the cost of imports from their taxes.  The plan is designed to offset the proposed reduction in corporate and individual tax rates, but could increase imports by as much as 20%. It does this by shifting how companies are taxed from an origin-based system (in which companies are taxed for the production of goods in a country) to a destination-based system (in which companies are taxed for the sale of goods in a country). (For a great two-minute explanation, check out the Wall Street Journal’s video on the tax.) The BAT’s advocates hope that the measure will encourage more companies to source from American suppliers to avoid the tax implication, and make it more difficult for companies to dodge taxes with profit-shifting schemes. The BAT’s opponents, among them most retailers, worry they’ll be forced to raise prices, reduce their workforces, or even close their doors

Many export-driven companies, on the other hand, are in favor of the tax, given that the bill allows the exporter to deduct the cost of exports from their taxes, making their goods more marketable and less expensive on the global market. Manufacturers including Boeing, Eli Lilly, and General Electric (GE) are among more than 25 U.S. companies that have publicly supported the proposed bill by launching the “American Made Coalition.” However, the nonpartisan Tax Foundation cautions that the BAT may not be as export-friendly as it may appear, and a properly functioning border tax should be import-export neutral. They point to studies that show that in an economy with a flexible currency, like the US, the increased value of the dollar should stabilize markets.

Of course, the BAT may not ever be implemented. As the recent failure to repeal the Affordable Care Act proved, even a Congress united under Republican leadership can struggle to pass this sort of sweeping legislation. The BAT has specifically been singled out by Senate Democrats and even some Republicans, who are reluctant to burden import-reliant businesses and consumers. Retail behemoths like Wal-Mart and Big Lots have already come out against the BAT, and the National Retail Federation is running an ad campaign warning consumers about the tax’s potential to raise prices on everyday goods. 

In response, the American Made Coalition launched their own ad campaign video on March 19, 2017 presenting the BAT as a means to create 1.7 million new American jobs.

Even should the tax be passed by Congress, it may run afoul of WTO regulations for discriminating against imports, though other countries, notably Japan, have gotten away with similar legislation. The GOP’s proposal might have a more difficult time, since unlike a “pure” BAT it does not treat imported and exported goods identically, since it allows companies to deduct the cost of American labor.

 It’s unclear whether the BAT would violate WTO rules, or how this unusually confrontational administration would handle a dispute if it did. In recent days, the White House has floated a plan to enact a punitive 100 percent tax on European imports such as Perrier water and Vespa scooters, to protest the EU’s refusal to stock hormone-laden American beef. This aggressive posture means we may be faced with something of a taxation arms race, though it’s difficult to imagine who benefits from trading partners antagonizing one another.

The result of all this confusion—about the BAT’s effects, probability of passing, and legality—have many logistics companies wondering how to proceed. In this highly uncertain climate, flexibility will be crucial in maintaining supply chains, and logistics companies that contract services out may be in the best position to nimbly react to shifting policy, as opposed to firms with massive cargo ships which suddenly find themselves with nothing to carry.

Although the BAT may fail in the short-term, it provides a glimpse at the types of protectionist trade policies Washington is interested in pursuing. Though President Trump no longer mentions “tariffs” with the same frequency he did during the campaign, his promises to bring manufacturing jobs back to the country will still ultimately hinge on rewarding exporters and by definition, hurting importers. As the Wall Street Journal reports, globalization is on the decline across the world stage, a trend for which the BAT may only be a symptom, and a glimpse of things to come.


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