New border tax would affect Minnesota businesses
It's not easy being a manufacturer these days, with President Trump vowing to eliminate or renegotiate the North American Free Trade Agreement, and House Speaker Paul Ryan pushing for a Border Adjustment Tax on imports.
In a nutshell, NAFTA eases trade barriers among the United States, Canada and Mexico.The Border Adjustment Tax, common in other countries, but new to the United States, would stop companies from deducting the cost of imports from their revenue, which now enables them to lower their overall tax burden.
At the same time, exports and other foreign sales would become tax-free. The plan would operate like a tax on the trade deficit and raise about $1 trillion over a decade, which could help pay for lower tax rates and other provisions, according to the Wall Street Journal.
"Changes in NAFTA would be important to us," said Dave Thomas, president and CEO of SJE-Rhombus in Detroit Lakes. "Canada is very important to us—we have a very important base of customers in Canada," he said. "Mexico is not as large a market, but it's a growing market."
While it appears that no immediate changes are planned to NAFTA, at least for now, based on Trump's latest statement, the company is keeping a watchful eye on on developments, he said.
SJE-Rhombus, which manufactures control panels, variable frequency drives, embedded controls, tank alarms, pump and control switches, and accessories has no physical plant in Canada or Mexico.
But it does manufacture products in China, so a border adjustment tax could affect customers for its Chinese plant, which Thomas says now sells overwhelmingly to customers overseas, as components of products that get exported. "Any changes to that would certainly have an impact on our customers, which rely on an easy flow of products to the United States," he said.
The border adjustment tax is back on the table because House Republicans, not wanting to blow up the budget deficit, are unwilling to pass a major tax cut without at least partially offsetting the cost.
Trump's proposed changes to the tax code could increase the deficit by an estimated $3 trillion to $7 trillion over the next decade, according to the Committee for a Responsible Federal Budget, an independent, nonprofit, bipartisan public policy advocacy group focused on reducing deficits.
House Speaker Paul Ryan is pushing the Border Adjustment Tax on imports because it would raise about $1 trillion a year.
Trump originally spurned the idea, and it is not included in his one-page blueprint for a tax plan. But now, with the White House opting to work with House Republicans on a joint tax plan, the idea is back—although Treasury Secretary Steven Mnuchin says there will have to be changes made before the White House will go along with a border adjustment tax.
The tax would be especially harmful to Minnesota-based retailers like Target and Best Buy, said Jason Flohrs, State director of Americans for Prosperity for Minnesota and North Dakota.
The conservative political advocacy group supports "90 percent" of the House tax plan, but strongly opposes the border adjustment tax.
"It's a $1.2 trillion new tax that generally will be borne by consumers," Flohrs said. "The average family will see a $1,700 impact (through higher prices) in the first year of a border-adjusted tax."
The impact on Best Buy alone would be "in the billions of dollars," he said. And with nearly 6,000 other importers in the state, the tax hit on Minnesota would be almost $7 billion, "just by implementing this," he said.
"The government in D.C. is pushing it as part of a broader tax package," he added. "They want it to be revenue neutral from a policy standpoint, but it will absolutely slam importers, it will absolutely slam retailers like Target and Best Buy."
The automobile industry is an example of how manufacturing often works these days, with various parts sometimes made in other countries and shipped to the United States, where the car is made.
All those parts would be taxed under the border adjustment tax, likely causing the price of a U.S.-made vehicle to rise by several thousand dollars. The proposed tax would have more impact on Michigan than any other state.
Federal policy-makers would do better to go after waste, fraud and abuse in government payments, which would save hundreds of billions of dollars, he said. "We don't need this in order to change the tax code and make America more competitive."
Supporters say it would fit Trump's goal of promoting exports and penalizing imports, and would encourage more products to be made entirely in America. And they point to economic projections suggesting the policy would strengthen the dollar, making it cheaper to buy imports and easing the burden on consumers from higher taxes on those goods.
Indeed, a strong dollar is key to making the new tax feasible for importers, since it could essentially make the difference between a profit and a loss for them.
But a strong dollar, even with the border adjustment tax, would seriously dent profits for exporters.
It's all part of the big tax battle brewing in Washington. Stay tuned.