Will the Border Adjustment Tax survive?

One key element of the House GOP tax reform proposal has significantly contributed to the delay. The border adjustment feature of the GOP proposal has polarized taxpayers and caused concern among U.S. trade partners. As currently configured, the border adjustment denies a deduction for payments made to non-U.S. suppliers while exempting revenue from non-U.S. customers.

In Washington, Congressmen Paul Ryan (R-Wisconsin) and Kevin Brady (R-Texas) have steadfastly supported the border adjustment feature. They’ve received a great deal of support from U.S. manufacturers with significant export revenue such as Boeing and GE.

However, Senate Majority Whip John Cornyn (R-Texas) said in an interview with Bloomberg that the border adjustment tax is on “life support” and indicated that there wasn’t broad support in the Senate. Other U.S. multinationals also oppose the tax, including most companies in the auto, oil, and retail sectors.

President Trump indicated some early opposition, calling the tax “too complicated,” but hasn’t said much recently. Indications are that Trump’s staff is divided; chief strategist Steve Bannon is in favor while chief economic adviser Gary Cohn is opposed.

There is, however, one element of the border adjustment tax that just might allow it to survive, if perhaps in diminished form. Whatever form tax reform ultimately takes, lawmakers have pledged that it will be revenue neutral — that it won’t diminish U.S. tax revenues. A recent study from the Office of Tax Analysis indicates that the border adjustment would create enough net tax revenue to allow for an overall rate reduction, so the border adjustment tax could be revenue neutral. Can this feature “trump” the other considerations fueling opposition? Time will tell.