Mar 17, 2017

Border Adjustment Tax Threatens American Manufacturers with Complexity, Disruptions to Supply Chain

Post by Mary Kate Hopkins

United States manufacturing on its own would be the ninth biggest economy in the world. But the proposed Border Adjustment Tax (BAT) – which would impose a new 20 percent import tax on American manufacturers – could change all of that.

Instead of “leveling the playing field,” the unprecedented tax would actually erect trade barriers resulting in increased costs on middle-class consumers, economic decline and job losses. Because BAT would apply to everything that we import, the supplies and materials that American manufacturers rely on to make their products would be slapped with the new tax – not just finished products.

In effect, prices will rise, production will shift, and employment will suffer as American manufacturers absorb these new costs and are bogged down with myriad complexities to their international supply chain.

The U.S. auto industry, for example, is closely integrated with Canada and Mexico. Every car manufactured in the U.S. in 2016 had 80 percent or less domestic parts, and many had 50 percent or more foreign parts.

According to David Andrea, vice president for research at the Center for Automotive Research in Ann Abor, Michigan, “Some raw materials components cross borders many times in the manufacturing process, potentially being taxed repeatedly before a finished vehicle ships to the dealership,” reports the Milwaukee Journal Sentinel.

“For instance, a piece of steel might be taxed when it enters the U.S. to be made into a screw. The screw would be shipped to Mexico to fasten the box for electronic controls. That box then comes to Michigan to be attached to a V8 engine. Then the engine goes to Mexico where it’s installed in a pickup that is shipped to a dealership in Milwaukee. The result: A single part that has been taxed multiple times, with each time increasing the cost of an engine made in Detroit and a vehicle sold in Wisconsin.”

CNBC also reports Prime Minister of Canada Justin Trudeau believes that a BAT in the U.S. would hurt both countries in the form of complex tax liabilities.

During the March 9th speech in Houston, Trudeau stated, “The level of regulations that would have to come in, say in auto parts, — a part might track back and forth across the border six or seven times. If you’re counting on bean counters to track each trip, you’re going to hurt the economy.”

BAT is a bad deal, plain and simple: disrupting business supply chains and entangling American manufacturers in a web of new cost complexities for obtaining goods would hurt businesses, consumers and the economy.

In fact, estimates show that both foreign and domestic car manufacturers would have to substantially raise their prices by thousands of dollars, according to Michigan based Baum and Associates. As The Wall Street Journal reports, “…[R]etailers and other big importers … warn of tax bills that would exceed profits, forcing them to pass costs to consumers.”

“We view this as a very, very serious potential blow to the auto sector and the economy,” says Cody Lusk, president of the American International Automobile Dealers Association.

Comprehensive tax reform would be a major boon to the economy and we’re glad that Congress is making it a top priority. Lawmakers should continue to focus on simplifying the tax code and lowering rates for businesses and individuals, but this trillion-dollar tax hike would be punch in the gut to hardworking families everywhere.

Rather, cutting wasteful spending, closing complex loopholes and eliminating deductions and corporate welfare will help businesses flourish, grow the economy and allow Americans to keep more of their money. These proven pro-growth reforms, paired with regulatory reform, will create the environment that American businesses need to succeed in a global market – not make life more expensive for millions of people.

READ: Border Adjustment Tax Myth vs. Fact