Strange days, indeed, here in our nation’s capital. Republicans now control the House, Senate and White House, so tax reform has become a hot topic. Reform means cuts, right? Not necessarily. Under the Republicans’ plan, many outdoor companies could see massive increases to their tax bills, leading to higher retail prices on outdoor apparel, footwear and equipment.
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How Did We Get Here?
House Republicans released a blueprint for tax reform last June to little fanfare. At that time, the expectation was that the Democrats would win back control of the Senate and Hillary Clinton would be elected president. So, the conventional thinking was that the blueprint would go the way of so many others since 1986, the last time Congress passed a comprehensive tax reform package.
Then November 8, Election Day, came. Republicans kept control of the Senate, and Donald Trump was elected president. All of a sudden, comprehensive tax reform went from “unlikely” to “we’re going to get something to the president’s desk by August.” It was time for me to dust off my copy of the House Republican tax plan.
I’ve been poring over it for the last several months.
Currently, all companies are subject to a 35 percent corporate tax rate, with certain allowable deductions. The House Republican plan is to cut this rate to 20 percent. Good news, right? Well, it depends. Under the terms of the border adjustmenttax, importers would be subject to this new 20 percent tax while exporters would be exempt. On top of that, importers would no longer be able to deduct the cost of imported products from their tax bills. So, even with the lower 20 percent rate, importers would likely see their tax bill go way up.
How so? Say a company sells a backpack made in China for $100 at a specialty retail store. Currently, the company can deduct the cost of the imported good—say $95—and pay the 35-percent corporate tax rate on the $5 profit from the sale, producing a tax bill of $1.75. But under the border adjustmenttax, the company will no longer be able to deduct the cost of the imported good. So, the lower 20 percent rate would apply to a much higher taxable income of $95 for a tax bill of $19—almost quadruple the company’s profit. These higher costs will almost certainly be passed on to the retailer and then to the consumer and could put some OIA member companies out of business entirely.
Exporters that make products in the U.S. with American inputs, would be exempt from this tax altogether, so it’s very likely we would see U.S.-made exports go way up. With an “America first” president, House Republicans are eager to incentivize domestic manufacturing and the reshoring of manufacturing jobs. Taxing imports and exempting exports through the border adjustment tax is one way to do that.
Interested in learning more about domestic manufacturing? Think now might be a good time to invest in reshoring efforts? Reach out to OIA Policy Advisor Andrew Pappas to learn about or join our Made In America Working Group.
Not surprisingly, a broad coalition of importers—including retailers, oil refineries and automobile companies—have expressed alarm about the potential impact of the border adjustmenttax. The response from House Republicans? “Relax. Look at the plan as a whole, including the lower corporate tax rate.” More to the point: and offset any higher tax costs. In addition, House Republicans insist that the plan is just a blueprint and the legislative language could include some import exemptions and transition periods to lessen the impact of a dramatic change to the tax code. In other words: hold your fire until you’ve seen the fine print.
In the face of criticism, Speaker of the House, Paul Ryan (R-WI), and Representative Kevin Brady (R-TX), the chairman of the House Ways and Means Committee—the tax writing body in Congress—have been clear: The border adjustmenttax will be a part of the House tax reform plan and the House will vote on it this year. Period. The Senate, however, has yet to embrace the border adjustmenttax, and some Senators have called for additional hearings to examine the issue further. Their message to the House: slow down. Don’t push something that might not go anywhere in the Senate.
It can get lost in a conversation about tax policy, but it’s worth noting: Outdoor companies already face significant import taxes in the form of tariffs. The average tariff on most imports is less than 3 percent—but the average tariff on outdoor products is 14 percent and can go as high as 40 percent.
These tariffs are really “taxes” that translate to higher consumer costs on things like ski jackets, hiking boots and backpacks. So, not only will some outdoor companies potentially see their tax bills go way up, they will still pay these unnecessarily high and outdated import tariffs on their products.
One of the things that I learned from my 14 years working for Senator Dianne Feinstein from California is that you always put your best foot forward and try to find common ground. Compromise is not a dirty word. Yes, you fight for your priorities but you never close the door on dialogue and possible cooperation. And I’m proud that OIA has also embraced this philosophy.
That is one of the secrets to our success in enacting legislation like the REC Act with bi-partisan support.
OIA is working overtime in Washington, D.C., on this issue and stressing the likely devastating impact on the outdoor industry, particularly importers, specialty retailers, and ultimately consumers. We will also listen, carefully analyze the facts before acting, examine the finer details and see if we can find common ground.
Want to help us get the attention of Congress and the administration? Join us at Capitol Summit in April to meet with them in person to explain how the border adjustment tax might affect your business and consumers in their districts.
Your story matters and can make a difference when it comes to local, state and federal outdoor recreation and trade policy. Hear what your OIA peers are saying about the value and impact of advocacy, and find out how you can join the effort.