TAX POLICY

Energy fears dog border adjustment push

Congressional efforts to enact the first major overhaul of the tax code in 30 years are encountering lawmakers' long-standing reluctance to embrace policy changes that could raise the price Americans pay for gasoline at the pump.

Fears of higher domestic energy costs are a major hurdle for a proposal by House Republicans called the border adjustment tax, or BAT. It would impose a 20 percent tax on imports into the United States while exempting exports.

Proponents, such as Speaker Paul Ryan (R-Wis.), say the shift would "equalize" the U.S. tax system with that of 160 other nations that have similar "territorial" systems of taxation.

"And what that means is you tax based on if it was consumed in your country, not if it's made in your country," Ryan told reporters earlier this month. "What America does, we tax people based on whether it's produced in America. And so that means we do not tax our imports and we tax our exports."

But lawmakers can't shake fears that a BAT will add significant costs to refiners that rely on imports of foreign crude to produce gasoline.

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"I've had some refiners tell me they think it could increase the price of gasoline by 30 cents per gallon," Majority Whip John Cornyn (R-Texas) said before last week's recess.

"I don't actually know whether that's true or not," he said, "but it sort of raised my antenna, along with other concerns raised by constituents that we need to be careful and understand and get right before we do something that we'll regret. So that's what we're in the process of doing."

Sen. Bill Cassidy (R-La.), who sits on the Energy and Finance committees, was careful not to take a position on the House's BAT proposal in an interview earlier this month.

But he acknowledged that he's fielding lots of questions from sectors in his state that would be affected, including oil and gas producers, refiners, farmers, and manufacturers.

"I'm hearing from folks who only export and folks who only import their inputs," he said. "And people that export services and manufactured products. Are those treated the same? There's a lot of different perspectives, and I'm hearing from all of those perspectives."

Cassidy said he's trying to balance the competing arguments for and against the BAT. The House GOP plan would raise $1 trillion over 10 years to lower overall tax rates.

"A company says we import our crude so we pay more," Cassidy said. "But then the second-degree effect is that the value of the dollar appreciates."

'Foreigners will pay'

The BAT's possible effect on currency exchange rates is crucial for proponents, who argue that implementing the system would encourage overseas purchases of U.S. exports, boosting the value of the dollar by up to 25 percent and minimizing or offsetting costs.

If that prediction proves correct, "foreigners will pay for the tax," the Peterson Institute for International Economics wrote in a policy brief last month.

However, should the BAT not affect the value of the dollar, "ultimate consumers of imported goods will bear the burden, since the tax will be passed forward in prices charged."

Whether the predicted currency effects of BAT will occur remains hotly debated. Ryan this month called it "obvious and mathematical that a currency adjustment would occur when we harmonize our tax laws with the rest of the world."

Pressed on the subject during a House Financial Services Committee hearing this month, Federal Reserve Chairwoman Janet Yellen said that "in principle" appreciation of the dollar could fully offset the costs of the BAT.

"The problem is, there's great uncertainty about how, in reality, markets would really respond to these changes," Yellen told House lawmakers.

"And a strong set of assumptions is needed to believe that markets would fully offset those changes. It's very difficult to know just what would happen," she said. "There is more than trade that affects a country's exchange rates."

Sen. Ron Wyden (D-Ore.), the ranking member of the Finance Committee, scoffed at the rosy predictions of a stronger dollar post-BAT.

"I've been reading what people who are knowledgeable about the dollar have to say about it, and they think this is a real crystal ball," he said in an interview. "But there's no evidence for this, that's what people tell me, that this is real speculation on speculation."

Highlighting the political challenge in legislating major policy changes based on abstract economic theories was a blunt Feb. 16 floor speech by Sen. Tom Cotton (R-Ark.), whose home state is the headquarters for Wal-Mart Stores Inc., one of many major retailers that oppose the BAT.

In a blistering critique delivered one day after Ryan urged Senate Republicans to "keep their powder dry" on BAT, Cotton said he was dubious of the optimistic currency predictions. He noted the tax would provide an estimated $100 billion in revenue annually.

"That's a lot of money, and someone has to pay it," he said. "And I'll tell you exactly who's going to pay: working Americans who've been struggling for decades. A tax on imports is a tax on things working folks buy every single day — and I'm not talking about caviar and champagne. I'm talking about T-shirts, jeans, shoes, baby clothes, toys, groceries."

Invoking George Orwell's dystopian novel "1984," Cotton said of the underlying currency argument, "Some ideas are so stupid only an intellectual could believe them."

'Gradual transition'

Responding to doubters, Ryan this month said the House Ways and Means Committee is considering options to address concerns "so that the transition from a really bad tax system to one of the best in the world we would get out of this is a gradual transition."

Although he also hails from the oil patch, Ways and Means Chairman Kevin Brady (R-Texas) has been the House's leading pitchman on the BAT, emphasizing the adjusted currency benefits while signaling openness to some sort of transition to ease effects.

One option involves phasing in the BAT over several years. Another would create a specific exemption or other sweetener to help smaller refiners.

That happened at the end of 2015, when Congress ended the decades-old ban on crude oil exports and added tax breaks for some refiners that said the policy shift would have harmed their bottom lines.

However, both options would reduce revenues needed to achieve the broader goal of tax reform — lowering corporate rates — while also opening the door for a host of exceptions for other affected sectors of the economy.

Rep. Devin Nunes (R-Calif.), a senior Ways and Means member, called it crucial for lawmakers to understand that the GOP plan would change the entire structure of U.S. taxation.

"If you really want to have fundamental reform, this is the only pathway I see to do it," he said in an interview this month.

Nunes, who has previously sponsored legislation to end tax breaks for fossil fuel companies, predicted that wary energy sectors would ultimately rally around the BAT, which he said should appeal to domestic producers.

"Most energy companies are in favor of having fundamental reform," he said. "I think it's just a matter of hopefully more education."

Additionally, Nunes said businesses will have far more freedom to make capital investments because they will no longer have to write off the costs of those investments over several years as they do under the current tax system.

'All over the map'

American Petroleum Institute CEO Jack Gerard in January echoed familiar concerns over the BAT's effect on American refiners.

"We're bringing in a product that we're then refining by and large and producing for domestic or global consumption," he said. "So yes, we're concerned about it. We haven't taken a hard position yet but we're going to be looking at that very closely, particularly in that broader context of tax reform."

An API spokeswoman this month said the group continues to review the border proposal to see how it "could interact with our industry and impact consumers."

Lobbyists say some major energy lobbying groups may avoid taking a firm position on the BAT, given that the economic impact will vary widely among companies, depending on an individual firm's assets and services.

Energy companies are "all over the map" on the proposal, said Peter Cohn, a senior analyst at Height Securities, a Washington, D.C., investment firm.

He estimates there is a 75 percent chance the BAT passes the House this Congress, while only a 30 percent chance it moves in the Senate. Still, he noted, if the House measure does move, the Senate might be reluctant to be seen as killing a tax overhaul.

"At the end of the day, Hatch does not want to be the guy that stops tax reform," Cohn said of Finance Chairman Orrin Hatch (R-Utah).

Democrats are expected to have little input on the overhaul, which Republicans plan to move under a fast-track budget process that allows them to bypass Senate filibuster rules. But Texas Democrats say they're hearing fears from energy interests they represent.

Rep. Lloyd Doggett (D-Texas), a senior Ways and Means member, chided the panel earlier this month for failing to hold any hearings on the BAT.

"It seems to be an academic proposal that won over Paul Ryan and Kevin Brady, but they are not sufficiently proud of it that they are willing to expose it to public debate and discussion," said Doggett, who added that he's worried the BAT would result in a trade war with Mexico that would devastate his South Texas district.

"Not only are there concerns by refiners, but by retailers, by auto manufacturers, by any consumer who gets fresh produce from Mexico. The thought that we would pay 20 percent more is very concerning, and I think it would disrupt the economy," he added.

Rep. Vicente Gonzalez, a freshman Democrat from South Texas, said a border tax would harm the oil and gas industry back home.

"I have oil and gas folks in my district that are concerned about trade with Mexico because we refine a lot of Mexican petroleum and then ship it back," he said. "A border tax would be awful for Texas, for sure. Mexico is our largest trading partner, and it's transformed my region in the past 25 years."

A recent Congressional Research Service report that analyzed the effects of a 20 percent tax on imports just from Mexico — an idea the White House floated last month as a way to pay for the estimated $15 billion-$20 billion cost of President Trump's proposed border wall — found it could disrupt North American crude oil prices "enough to create market inefficiencies and change the incentives for related investment, production and consumption."

One possible outcome noted in the CRS report, which did not examine the broader implications of a BAT applied to imports of all nations, could be a total or partial exit by Mexico from the U.S. crude oil market, particularly if Mexican producers find they can profit more from selling oil to other nations.

In addition to depriving the U.S. Treasury of revenue from the BAT, less Mexican crude exports to the United States could prompt an increase in demand from Canadian producers, possibly boosting the economics of the proposed Keystone XL pipeline.

Mixed messages

While House GOP leaders are firmly behind the BAT, support from the rank and file is considered to be less strong.

Last week, the conservative Club for Growth announced a $150,000 ad buy urging Rep. Kristi Noem (R-S.D.), a senior Ways and Means member, to oppose the plan (Greenwire, Feb. 22).

Americans for Prosperity, the free-market advocacy group aligned with the pro-fossil fuel Koch brothers, has been working to scuttle the BAT for months.

Last week, the group said it was expecting to make about 100 congressional staff visits during recess and has promised grass-roots work in 35 states.

"Our perspective is this will be a devastating tax for not just for folks who buy goods but fuel too," said Brent Gardner, AFP's chief government affairs officer. The group has said it would oppose any form of a BAT, even if it came with significant transition rules.

Americans for Affordable Products, a coalition that includes dozens of companies opposed to the BAT, held its own events last week in South Carolina and Ohio to pressure those states' delegations against the plan.

While Senate Republicans remain deeply skeptical over the BAT, supporters last week touted the potential support of one key policymaker — Trump.

The president has sent mixed signals about the plan, which in January he called "too complicated," although the White House has also said it continues to be in the mix.

Following a meeting with manufacturing CEOs, Trump on Thursday told Reuters the plan "could lead to a lot more jobs in the United States."

Brady, who's touted the BAT at events over the last few weeks sponsored by the mainstream U.S. Chamber of Commerce and the Conservative Political Action Conference, has consistently painted the proposal in terms that line up with Trump's "America first" mindset.

"We go very bold because our competitors insist we do," Brady, who spent nearly 20 years working for local chambers of commerce before running for office, said earlier this month.

"We have one chance in 30 years to go back to the lead and stay there for a long time. We are not going to shoot for mediocre," he said. "We will not continue a tax code that favors foreign-made products over American products, nor will we continue a tax code that actually encourages American companies to move overseas."

Asked about the many critics of the House tax plan, Brady told the CPAC audience on Friday it comes with the territory.

"You have all these special interests who are going to attack and attack and attack to keep their special tax break because we're proposing to eliminate a lot of the special interest provisions for some so we can lower the rates for everybody," he said.

While a strong Trump endorsement of the BAT could help carry the proposal over the finish line, the stakes remain high for the overall tax reform push.

"They're going to have quite the challenge trying to either building the consensus to do it or to make up the revenue if they don't," Wyden said.

Reporter Arianna Skibell contributed.

Twitter: @geofkoss Email: gkoss@eenews.net

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