Koch Industries Says House GOP’s Tax Plan ‘Could Be Devastating’

  • Billionaire brothers’ firm adds to retailers’ complaints
  • Corporate overhaul would tax imports while exempting exports

The Significance of Possible U.S. Tax Reform on Markets

Koch Industries Inc., the influential private firm headed by billionaire Republican supporters Charles and David Koch, slammed a key element of the House Republicans’ plan to overhaul corporate taxes, saying it would raise prices for American consumers and “could be devastating” to the economy.

In a statement, Koch objected to the plan’s proposal to replace the current corporate income tax with a 20 percent levy on U.S. companies’ domestic sales and on their imports of foreign goods and materials. Exports under the plan would be tax-free.

The proposal, which is generally known by the term “border adjustments,” would “adversely impact American consumers by forcing them to pay higher prices on products produced in and goods imported to the U.S. that they use every single day,” the company said in the statement.

Koch’s statement made clear that the company supports a comprehensive overhaul of the U.S. tax system. But its opposition to border adjustments is the most politically prominent yet in a swelling chorus of corporate voices concerned that the proposal would damage companies such as Wal-Mart Stores Inc. that rely on imported goods to sell products at low cost. For Republicans, buoyed by Donald Trump’s surprise electoral victory last month, the opposition demonstrates that their call for a tax overhaul early in Trump’s administration may hit some speed bumps.

Trump’s Plan

Trump hasn’t signed on to the border-adjustments plan, but has embraced other elements of a blueprint for tax policy that House Republicans released last summer: Both would cut tax rates for individuals and businesses, eliminate the estate tax and offer a corporate tax break designed to bring to the U.S. roughly $2.6 trillion in untaxed profits now held by American companies’ offshore subsidiaries.

House Republicans have been working with Trump’s transition team to meld their tax proposals as they try to pass the biggest tax overhaul in three decades next year. Trump’s plans for corporate taxes include a major rate cut -- to 15 percent from 35 percent -- and ending companies’ ability to defer taxes on their overseas earnings. Economist Stephen Moore, an adviser to Trump during the campaign, has said several times recently that the border-adjustment provision is the biggest difference between the two plans.

Border adjustments would mark a seismic shift in U.S. corporate taxation. Under current law, U.S. companies face a statutory tax rate of 35 percent on their global profits, regardless of where they’re earned. They can use credits for foreign taxes they pay to reduce their U.S. taxes -- and they can defer U.S. levies indefinitely by leaving the earnings overseas.

The House’s corporate tax plan moves from that “origin-based” approach to a “destination-based” system. U.S. companies would no longer be taxed the profit they earn all over the world, a feature of the current system that makes the U.S. an anomaly. Instead, companies would be taxed based on their sales inside the U.S. The blueprint says that such a system, combined with the 20 percent rate, would remove the incentive for companies to shift profit overseas to low-tax countries like Ireland.

Koch Industries, a Wichita, Kansas-based conglomerate with interests ranging from oil and ranching to farming and the manufacturing of electrical components, would benefit from the change because it produces many products domestically, according to its statement, which was released by Koch’s lobbying arm, Koch Companies Public Sector LLC. However, “the long term consequences to the economy and the American consumer could be devastating,” the statement said.

House Ways and Means Chairman Kevin Brady, a Texas Republican, said he was glad to get Koch’s input.

‘Shared Goal’

“This pro-growth idea is a key provision that improves our global competitiveness and helps level the playing field for exports and imports,” Brady said in an e-mailed statement. “It also meets our shared goal to eliminate any tax incentive to move our jobs, headquarters and innovation offshore. I look forward to working with Koch Industries and all job creators as we continue to turn our blueprint into legislation.”

The border adjustments provision may face another hurdle: The World Trade Organization, whose members include the U.S., might conclude that the new approach is applying the adjustments to a direct tax, which isn’t allowed, rather than to an indirect tax, like a value-added tax, which is permitted.

That concern has diminished somewhat since Trump’s victory -- and his threats to renegotiate trade agreements and slap tariffs on products of companies that send U.S. jobs offshore. “The idea that it might not be legal is now less important,” said Rachelle Bernstein, a tax lobbyist for the National Retail Federation, a powerful lobbying group whose members include Wal-Mart, Macy’s Inc. and Neiman Marcus Group Inc.

But that doesn’t mean the retailers approve. “We want tax reform that spurs economic growth, but this one particular provision is very negative,” Bernstein said.

Economists Alan Auerbach and Douglas Holtz-Eakin, both proponents of border adjustments, argued in a recent paper that “unlike tariffs on imports or subsidies for exports, border adjustments are not trade policy. Instead, they are paired and equal adjustments that create a level tax playing field for domestic and overseas competition.”

Curt Beaulieu, a tax policy lawyer at Bracewell LLP in Washington, said that the adjustments “are not a tariff” and instead are a so-called “destination-based cash flow tax” -- what he called “mumbo jumbo” for taxing companies on revenues from sales in the U.S.

Retailers, who rely heavily on imports from China and elsewhere, are particularly concerned about the provision. Bernstein said that specialty apparel stores that import 90 percent or more of their inventory could face tax bills that are much larger than their actual profits.

Imported Cars

“It’s going to slam clothing manufacturers hugely,” said Peter Barnes, an international tax lawyer at Caplin & Drysdale in Washington and a former senior tax lawyer at General Electric Co. Prices for U.S. consumers on everything from t-shirts to imported cars would increase by 15 percent to 20 percent, he said.

U.S. companies that are net exporters “could end up in a perpetual tax loss position” under the provision, wiping out their tax bills permanently, accounting firm EY, formerly Ernst & Young, wrote in a Nov. 9 research note.

House Republicans argue that the provision, combined with a lower corporate rate of 20 percent, will end the current incentive for U.S. companies to shift profits to their overseas subsidiaries and will boost manufacturing -- and exports -- at home.

Still, many issues weren’t spelled out in the House Republicans’ blueprint. For example, it doesn’t indicate whether flows of financial assets out of the country would count as exports. Nor does it define precisely when a sale would be deemed to have taken place.

Big multinationals are neither purely importers nor exporters; as such, the provision would introduce complex accounting issues over what percentage of a sold product came from taxable imported materials. Under the provision, companies like Apple Inc. and Pfizer Inc., which use sprawling global supply chains to make iPhones and prescription drugs for sale in the U.S., would pay the 20 percent rate on their domestic sales -- but not on their foreign ones, though they’d still pay the tax on any imported materials.

The proposed system “is a game-changer,” said Kenneth Kies, a Washington tax lobbyist whose clients include General Electric, Microsoft Corp. and Pfizer. “It’s a really big deal.”

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