By Michael Carroll
Michigan business organizations want to put the brakes on a section of the GOP tax reform plan that would tax goods imported into the country, arguing that the measure could burden import-dependent companies such as car makers.
A study released this month by Freedom Partners, a nonprofit, nonpartisan policy institute, found that Michigan would be ground zero in terms of potential new tax burdens imposed by the proposed border adjustment tax (BAT). That tax proposal would impose a 20 percent tax on everything imported into the United States, including parts and raw materials for manufactured goods.
“Michigan – perhaps not coincidentally – is both the most sensitive state to a border adjustment tax and the state with the most auto manufacturing jobs,” says the Freedom Partners report, which found that imported goods represent 27.4 percent of Michigan’s Gross Domestic product.
That puts Michigan’s “sensitivity rank” for the border tax at No. 1 in the nation, the report said. The state has 124,500 motor vehicle manufacturing jobs on the line, according to a 2014 estimate.
“It’s going to seriously rock the boat,” Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University, told Watchdog.org.
Although de Rugy, who is also a syndicated columnist, supports reforming the federal corporate tax system, she expressed concern about potential BAT effects on the auto industry.
“Parts of cars made in America come from abroad,” said de Rugy, predicting that the border adjustment tax could disrupt a lot of companies that depend on imported parts for their products.
Michigan in particular will be hit hard by the tax, she said, although other parts of the Republican tax package could offset that burden somewhat.
The border adjustment tax has the support of House Ways and Means Committee Chairman Kevin Brady, a Texas Republican. Brady and other supporters have argued that the tax would strengthen the dollar to the point of offsetting the increase in the corporate tax bills. But de Rugy said that empirical research has shown otherwise – that the strengthening of the currency would not be enough to offset the tax burden.
“This is an untested idea,” she said, expressing doubt that the currency would adjust as perfectly as supporters claim. “It is so focused on importers. The burden is on that group of producers.”
The net effect, said de Rugy, could be on millions of American consumers.
“Companies will pass on costs to consumers in the form of higher prices,” she said.
U.S. companies that export their goods tend to support the border adjustment tax, but de Rugy said that economic research indicates that they too would be affected.
“Exporters are behind it because they see it as a potential source of income growth,” she said. “But it’s not going to be the bone they’re hoping for.”
A Motor and Equipment Manufacturers Association (MEMA) position statement also expresses concern about the proposal. The association concludes the plan would boost costs for car manufacturers, reduce the amount of capital invested in new product development, bump up consumer prices, cut sales and possibly lead to an erosion of manufacturing jobs in the nation.
“The BAT issue does seem to bump up against larger trade issues,” MEMA spokeswoman Cindy Sebrell said in an email.
Sebrell pointed to a MEMA position statement expressing concern about possible changes to the North American Free Trade Agreement.
“During the last four years, MEMA member companies have invested more in the U.S. than in any other NAFTA country,” the statement said. “NAFTA has been a key contributor to this investment and U.S. growth. As such, any changes to NAFTA should not risk disrupting motor vehicle supply chains.”
Both the National Retail Federation and the Michigan Retailers Association have come out in opposition to the tax.
“The BAT would be felt immediately in the pocketbooks of middle-class Americans, effectively amounting to a $1 trillion tax that would punish employers, consumers and the American economy,” the Michigan Retailers Association said in a statement this spring.
And a business coalition against the tax called Americans for Affordable Products predicts dire consequences if the tax is approved, including a 35-cent-per-gallon boost in the cost of gasoline and added new car costs of $2,500.
“The border adjustment tax will push the cost of a new car out of reach for middle-class consumers, who will already be saddled with higher costs on everyday necessities like food, clothing and medicine,” said George Sharpe Jr., general manager of The Sharpe Collection, a car dealership in Grand Rapids, Mich., in a prepared statement.