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Michigan Could Take Hardest Hit From Border-Tax Plan

April 6, 2017
Louisiana, Tennessee, New Jersey, Kentucky, South Carolina, Illinois, Texas, Georgia and California could all be affected, too, because of their higher levels of imports compared to GDP, according to a new study from  conservative groups associated with the billionaire Koch brothers.

Michigan was critical to Donald Trump’s presidential win and could be the hardest hit by a proposed 20% tax on U.S. companies’ domestic sales and imports, according to a study released by conservative groups associated with billionaire brothers Charles and David Koch.

The report, which used federal tax, labor and census data, was commissioned by Freedom Partners and Americans for Prosperity. Both have lobbied against the so-called border-adjusted tax, while supporting comprehensive tax reform.

The proposal for border adjustments — part of a tax overhaul plan backed by House Speaker Paul Ryan of Wisconsin and House Ways and Means Committee Chairman Kevin Brady of Texas — is driving a wedge between the mega donors and some of their traditional political allies. The Koch-backed groups say the tax would mean higher costs for retailers and other industries that rely on imports, including Michigan’s automakers.

The study, released Thursday morning, compared state imports to overall economic activity to show how sensitive each might be to a tax on imported goods. Those most affected, because of their higher level of imports as compared to gross domestic product, were found to be Michigan, Louisiana, Tennessee, New Jersey, Kentucky, South Carolina, Illinois, Texas, Georgia and California.

Like Michigan, eight of the top 10 states listed in the study are home to auto assembly plants. Ryan’s home state of Wisconsin ranked 29th, while Brady’s Texas was eighth.

 “Americans deserve comprehensive, pro-growth tax reform, but a new tax on U.S. consumers is the wrong approach,” Nathan Nascimento, a vice president of policy for Freedom Partners, said in a statement. “Lawmakers should consider the vital role of importers in their states, and ask themselves whether they are willing to put so much at risk just as state and local economies are starting to turn the corner.”

The proposal’s supporters say it would lead to a strengthening dollar, which would mitigate the effect on importers. Still, some economists have said currency exchange rates are difficult to predict and may not move in lockstep with a tax on imports. An industry study found that most automakers would need to raise vehicle prices by thousands of dollars to recoup higher costs associated with the tax.

The National Automobile Dealers Association and the American International Automobile Dealers Association have both come out against the proposal, while the two biggest U.S. automakers have expressed differing views.

General Motors Co. CEO Mary Barra said in February that the BAT could be “harmful” if not done thoughtfully and warned of unintended consequences. In January, Ford CEO Mark Fields called the proposal “very intriguing” for his company because it’s the largest producer of vehicles in the U.S. and a top exporter.

Japanese, German and Korean carmakers would likely get hit even harder by the tax than most U.S. manufacturers. Some of the states in the study’s top 10 list are home to their plants, including Tennessee (Volkswagen), Kentucky (Toyota), Illinois (Subaru), Texas (Toyota) and Georgia (Kia).

The House Republican plan calls for replacing the existing corporate income tax of 35% with the border-adjusted tax on their domestic sales. Companies’ exports and offshore income would be exempt from U.S. taxes. The proposal, which has been estimated to raise more than $1 trillion over a decade, is a centerpiece of Ryan’s tax blueprint because it helps to fund planned rate cuts.

Koch Industries, a Wichita, Kansas-based conglomerate with interests ranging from oil and ranching to farming and the manufacturing of electrical components, would actually benefit from passage of the proposal because it produces many products domestically, according to a statement earlier this year released by Koch Companies Public Sector LLC.

Whether Trump would sign on to a border-adjusted tax remains to be seen. Treasury Secretary Steven Mnuchin and Gary Cohn, the chairman of his National Economic Council, are said to oppose the concept.

By John McCormick

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Licensed content from Bloomberg, copyright 2016.

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