BAT Tax, Intended to Help U.S. Manufacturers, Would Actually Hurt Them, Study Finds

A new report on the state-by-state impact of a proposed "border-adjusted tax" (BAT tax) suggested that the tax, which is designed to help American manufacturers, would actually hurt them.

"This package was put forward to promote manufacturing in the United States, but what we see is that some of those very same people, auto manufacturers for example, would be hardest hit," Alan Nguyen, senior policy adviser at Freedom Partners and a co-author of the report, told PJ Media in an interview Thursday. "The border-adjustment 20 percent tax on imports would impact them greatly and put those jobs at risk."

Mary Kate Hopkins, senior policy analyst at Americans for Prosperity (AFP) and the report's other co-author, agreed. "Even if the BAT tax were included as a part of a wider tax cut package, it would be substantial enough that these importing companies wouldn't see a tax cut — and the reform might even feel like a tax hike," Hopkins told PJ Media.

The BAT tax is part of a tax reform plan supported by House Speaker Paul Ryan (R., Wisc.) and House Ways and Means Chairman Kevin Brady (R., Texas). The plan has met stiff opposition from classical free trade conservatives, and among those opponents has been the network of conservative groups associated with Charles and David Koch, of which both Freedom Partners and AFP are a part.

The report, which used federal tax, labor, and census data, listed seven states won by Donald Trump last November as the most likely to be negatively impacted should the proposed 20 percent border-adjustment be implemented. Those top ten states included Michigan, Louisiana, Tennessee, New Jersey, Kentucky, South Carolina, Illinois, Texas, Georgia, and California.

Eight of those top ten states are home to auto assembly plants. While the BAT tax proposal is part of President Trump's initiatives to promote "America First" when it comes to manufacturing, the proposed tax would actually cripple American manufacturers, especially in the auto industry.

Nguyen noted that both raw materials and partially assembled products are actually imported by American car companies in the construction process. While the manufacturer is indeed based in the U.S. and the cars are considered "made in America," "some of those components can come across the border multiple times, which could subject them to the border-adjustment tax every time they cross the border," the Freedom Partners analyst explained.

Nguyen quoted an auto dealer, saying, "I have all these people who work with me, and if I have to increase the cost of these cars, and sales fall because of that, what is that going to do to the jobs here?"

Michigan, which had the most motor vehicle manufacturing jobs of any state in 2014 (124,500 jobs), would be hardest hit by a BAT tax. Five other states in the top ten most sensitive to BAT also rank in the top ten for motor vehicle manufacturing: Tennessee (5), Kentucky (4), Illinois (7), Texas (9), and California (6).

But manufacturing is far from the only sector which would be hurt by a BAT tax, according to the report. Retail would take a huge hit, since most retailers heavily rely on imports to stock their shelves. Since the retail industry typically operates on a model of low profit margins, foregoing larger prices for a higher volume of sales, such companies tend to be very sensitive to a proposed 20 percent tax on imported goods.

The report presented a hypothetical shoe retailer which buys a pair of shoes from a Chinese manufacturer for $50 and pays $10 in shipping costs. Selling the shoes for $70, the retailer makes a profit of $10. The current tax system would charge the retailer $3.50 — 35 percent tax on the profits, and allowing the retailer to deduct the $60 in business costs.

But under the proposed tax plan — including slashed corporate tax rates — the retailer would still pay 20 percent on the $10 profit ($2), and 20 percent on the $50 cost of the imported shoes ($10). The resulting tax bill, at $12, would be more than the retailer's profit from the sale.

Such a low return on investment is not economically feasible, and the retailer would have to raise prices, cut jobs, or shut down. Perhaps for this reason, a coalition of over 120 retailers launched the Americans for Affordable Products (AAP) coalition to oppose the BAT, in February.

In every single U.S. state, retail makes up more than 10 percent of the entire private sector workforce. In Florida, for example, retail jobs account for 15.4 percent of the private job market — 1 million employees. A BAT tax would cause enormous damage to this critical workforce, in every state in the union.

Hopkins, the AFP analyst, noted that there has been bipartisan opposition to the BAT tax in both the U.S. Senate and the House of Representatives. Georgia Senator David Perdue and Arkansas Senator Tom Cotton have been among the most vocal opponents. North Carolina Congressman Mark Meadows, current chairman of the House Freedom Caucus, also opposes the BAT, along with the former chairman, Ohio Congressman Jim Jordan.

As tax reform will be spearheaded by Republicans, Democrats are likely to oppose the border-adjusted tax on partisan lines. The fact that New Jersey, Illinois, and California — three states Hillary Clinton handily won in November — are among the 10 most effected should spur them into action.

Nguyen noted that Freedom Partners supports a great deal of the Republican tax reform plan, but warned that if such a plan includes the proposed 20 percent BAT tax, his organization will oppose it. "Whatever they decide to package it with, we would not be supportive of a 20 percent tax on imports," he declared.

Both Freedom Partners and AFP were among the most vocal opponents of the American Health Care Act (AHCA), the House Republicans' bill to replace the inaptly named Affordable Care Act, also known as Obamacare. These conservative groups attacked the Republican health bill as too similar to Obamacare, and joined Senators like Rand Paul in calling for a straight repeal instead.

The failure of the AHCA bodes well for the Koch-backed groups, and poorly for the border-adjusted tax. After Congress' Easter recess, expect another heated battle inside Republican ranks — this time on tax reform.