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April 25, 2017

During yesterday’s highly anticipated press conference on President Trump’s tax reform agenda, Treasury Secretary Steven Mnuchin revealed that the border adjustment tax (BAT) is not part of the “core principles” backed by the president. However, when pressed on whether any tax reform measures were non-negotiable, Secretary Mnuchin avoided any specific condemnation of the BAT in his reply. As the questions from the press continued, the questionable reality of attaining revenue neutrality under President Trump’s core principles quickly became the topic of the day.

Of all the inquiries we have received on tax reform over the last several months, questions on the BAT have remained front and center. As U.S.-based tech companies continue to not only increase revenues derived abroad but also expand their cost base outside the U.S., the prospect of the BAT is equally important to leaders in the industry.

Over the past few months, we have seen a dramatic ramp up in lobbying efforts for and against the BAT. A major goal of the House’s proposed regime, inclusive of the BAT and a lowered corporate tax rate, is to considerably incentivize companies to manufacture and/or purchase domestically produced goods and materials. And while many agree with the goal, not all support the means. Retail giants, such as Target, Wal-Mart and Best Buy, are adamantly opposed and consider the tax “risky and unproven,” according to David French, Senior Vice President of Government Relations at the National Retail Federation.[i] On the other hand, the aerospace industry, including Boeing, seems to fully support the BAT. Aside from industry leaders, there are some notable dissenters on the GOP side from both the House and Senate. Senator David Perdue, R-G.A., a former retail executive, argues that the BAT will “hammer consumer confidence” and increase retail prices. Senator John Boozman, R-A.Z., who notably has Wal-Mart in his constituency, has indicated that he simply could not support the BAT in its current form. Meanwhile, the Speaker of the House, Paul Ryan, has stayed the course on the original House Blueprint (which includes the BAT) and further maintains that the BAT is the linchpin holding tax reform together.

Speaker Ryan’s position raises a serious question: without the BAT, can tax reform still reach home plate, or, like the recent healthcare reform legislation, will tax reform strike out? Several notable members of the GOP say the plan may already be a swing and a miss. As was noted during yesterday’s press conference, much of this doubt comes down to the substantial loss in revenue caused by a dramatic slash of corporate tax rates (among other “cuts”). While there are several “revenue raisers” being considered aside from the BAT (e.g., elimination of most itemized deductions, limitations on interest deductions, deemed repatriation, etc.), there is little expectation that these lesser reform items could make a significant dent on the lost revenue. Why does this matter? The GOP has long promised that any tax reform would be revenue-neutral over a 10-year period, which coincidentally (or perhaps not) is crucial to pushing the reform through the budget reconciliation process. Both Speaker Ryan and President Trump are pointing to growth of the economy (under the controversial “dynamic scoring” method) as the self-evident cure-all to the revenue loss.

While we would love to believe a burgeoning economy will be the designated batter we have been waiting for to hit the long ball in the bottom of the ninth, the reality is that the BAT is estimated to raise $1 trillion in revenue, which will be the most significant direct revenue raiser under the House Blueprint. With the BAT playing such a pivotal role in reaching revenue neutrality, is it possible that the BAT may garner more support if its passage determines the fate of significant tax reform as a whole?

Authors: Rebecca Lara and Kenneth Dettman

We’d love to get your thoughts: Does the possibility of no tax reform make you reconsider your company’s stance on the BAT? Or are there other provisions you believe could replace the BAT’s revenue-generating capabilities? Please call or aliguori [at] alvarezandmarsal.com (email us) and let us know!

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