What You Don’t Know About the Border Adjustment Tax Could Hurt You
Marc Berejka from REI and Ben Christensen from, Simms Fishing have some insights, and they want to bring you up to speed.
Congress has a new plan to lower corporate tax rates and support U.S. manufacturing. It’s call the Border Adjustment Tax. But the finer details could mean massive tax increases for imported products and the retailers who sell them. What does this all mean for the outdoor industry, and how can you prepare? REI’s Marc Berejka and Simms Fishing’s Ben Christiansen have been heavily involved with OIA on the legislation, and they’ll be leading a panel to talk about it at next week’s Outdoor Retailer Summer Market. We put a few questions to them ahead of the session to find out what they already know, and how businesses can prepare. To learn more, join them next week.
What impact would the border adjustment tax have on retail prices?
The Border Adjustment Tax would raise overseas production costs and wholesale prices. Full stop. Anytime you do that, you impact consumer costs. Big picture, you also fundamentally change the profitability of current business structures. Yes, there are multiple ways that a company can respond to a shift in costs. Increasing retail prices is the most obvious one.
How would the border adjustment tax affect your ability to innovate and create new products?
The other way that companies can respond to to erosion of profitability is to decrease operating expenses. That would significantly impede innovation. There’d be pressure to reduce investment in the people and processes that drive product creation.
How much of a threat does the border adjustment tax pose to outdoor businesses such as yours?
Let’s just say that the BAT is awful for this industry. The sector is highly innovative but it is also extremely competitive. By adding more government costs to our line of work, you squeeze more breathing room out of the system. It’s basic economics. The more you increase the cost of a product, the more you impair demand. The fewer product sales, the worse for the sector overall.
Proponents argue that if the border adjustment tax is enacted, the dollar will appreciate and offset any higher costs. Do you agree?
This is ivory tower, theoretical thinking. From what’s been published, it’s a line of thought emanating from academicians not real world business people. The future value of currencies is highly uncertain, whereas the immediate impact of the border adjustment tax on a company’s financial structure is certain and quantifiable. It is much easier and prudent to plan with a strong bias towards facts and certainty.
We don’t anticipate that a potential shift in currency value would be a meaningful consideration as most companies in our industry evaluate the impact of the border adjustment tax. For sure, the companies in our sector are not going to set up currency trading desks in order to play one currency against another.
How would the border adjustment tax affect import tariffs you already pay?
We don’t yet know how the BAT would impact tariffs. There has been some indication that along with implementing a BAT we could see changes in global import / export policy. But, again, the question is clouded by uncertainty and speculation. Adding a BAT on top of tariffs obviously would be a double whammy. Consumers and companies would be hit twice.
Would passage of the border adjustment tax incentivize domestic manufacturing possibilities for your business?
In theory, it would create a financial motivation to explore domestic manufacturing. Realistically, we believe the sector would struggle to find sufficient manufacturing capabilities and capacity for the types of products that we make. There are significant challenges to overcome for US manufacturers to gain a meaningful piece of the global outdoor product manufacturing opportunity. And where our sector does manufacture domestically, it’s where there’s homegrown value-add, such as with highly tailored products or products that flow from highly automated, advanced manufacturing processes. The BAT is not a panacea for domestic job creation.
Would a phase-in of the border adjustment tax over several ears alleviate any concerns for your business?
We don’t believe that a phased approach would address the fundamental challenges posed by the BAT. It would probably result in a smoother transition, and may give US manufacturers some time to accommodate an increase in demand. We don’t see that it would address more basic concerns around the BAT impact on the sector.