Corporate America divided over import tax reform plan

Dozens of US exporters including GE and Boeing are squaring off against Walmart and other retailers as a radical Republican plan to tax imports divides the giants of corporate America.

The rift in the business community threatens President Donald Trump’s pledge to overhaul the tax code for the first time in 30 years by undermining a blueprint that House Republicans are drafting for the White House.

GE, Boeing and several dozen manufacturers are in advanced talks over forming a coalition to lobby in favour of the import tax, just as Walmart and other big importers, including the billionaire Koch brothers, mobilise against it.

Walmart sent its top tax executives to meetings on Capitol Hill this week to warn officials that the proposal would have a dramatic impact on its business, potentially forcing the retailer to raise prices for shoppers, according to two congressional aides.

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The “border adjustment” tax regime, which would penalise imports and encourage exports, is central to the plans of House Republicans initiating tax legislation. But visceral divisions over the idea do not bode well for its prospects.

US companies have spent years urging policymakers to fix a “broken” tax code only to see previous efforts fail on Capitol Hill. A post-election rally in the US stock market has been driven partly by hopes of a cut in the tax rate, but the outlook has been clouded by the import tax furore.

The stakes for both sides in the battle are high.

Helping exporters

GE is known as one of the sharpest tax planners in US industry and Jeff Immelt, its chief executive, said of border tax adjustments in December that "things that help exporters are a good thing for GE".

GE and Boeing are among the companies negotiating the formation of a coalition to lobby for the proposal by Kevin Brady, the chief tax policymaker on Capitol Hill, according to three people familiar with the talks.

The coalition is likely to be launched in a matter of weeks and one person said 27 businesses had already agreed to join it while dozens more had expressed an interest.

The companies are in talks over hiring a political consulting firm called Cavalry to manage the campaign. The firm was founded by two former aides to Mitch McConnell, the Republican Senate majority leader, who will help decide whether the import tax survives in the Senate.

More crucial to the idea’s fate will be the stance taken by Mr Trump, who has equivocated on it. Lobbyists predict that it will only prevail if he embraces border adjustments as part of his “America first” agenda – and comes up with a better slogan for the tax policy.

Border adjustments would work by not letting US companies deduct the cost of foreign inputs from their revenues for tax purposes, while giving a rebate to exporters by allowing them to exclude revenue from foreign sales from their taxable income.

Mr Brady, who is writing the tax plan as an ally of House speaker Paul Ryan, says the import tax would make US exporters more competitive overseas.

Foreign-made goods

Retailers that sell a high proportion of foreign-made goods say the import tax threatens to wipe out a large chunk of their profits.

The Walmart officials visiting Capitol Hill said the company estimated conservatively that it would have to raise the prices consumers pay for clothing and electronics by 20 per cent, said one congressional aide.

Scot Ciccarelli, analyst at RBC Capital Markets, divided retailers into four groups according to the impact of border adjustment and placed Walmart among those likely to suffer the most, alongside Best Buy and Williams Sonoma.

They would experience “sizeable drops in net income and more limited ability to pass through price increases, materially raising future earnings risk”, he wrote this month, citing the price sensitivity of Walmart shoppers as a barrier to asking them to pick up the cost.

With 98 per cent of clothes sold in the US made overseas, the National Retail Federation, a trade group, says the import tax could inflate the tax bills of some fashion chains to three to five times their pre-tax profits, jeopardising their solvency. – Copyright The Financial Times Limited 2017