Trying to Swat Away New Anti-Consumer Tax | Eastern North Carolina Now

That $10 pair of pants you find now at your local discount store? Prepare to see the price jump to $12

    Publisher's note: The author of this post is Mitch Kokai, who is Director of Communications for the Carolina Journal, John Hood Publisher.

    That $10 pair of pants you find now at your local discount store? Prepare to see the price jump to $12.

    That's if Congress follows through on a proposal to institute a new national Border Adjustment Tax, also known to friend and foe alike as the BAT. It's a tax that boosts exports at the expense of imports.

    The extra $2 for the pants might not sound like a huge change. But consider the family of four that wants a new pair for each person in the household. That's $8. What if each person really needs to replace a couple of pairs? $16.

    Repeat the process for a range of regular household products affected by the BAT, and the numbers grow substantially. Critics estimate the tax would increase costs by $1,700 per family per year.

    Revisiting a recent discussion of the relative impact of tax changes on an average bank teller and a bank president, the extra costs would consume 6.8 percent of the annual income in a household earning $25,000 a year (a teller's average salary). Even the household earning $120,000 a year (an average bank president) would see 1.4 percent of its annual income eaten up by the BAT.

    The pants example helps explain the BAT's impact. "On a $10 sale, the cost of goods sold may be $6," explained Art Pope, CEO of Variety Wholesalers, during a recent news conference. Pope is also the founding chairman of the John Locke Foundation. "And then you have your operating costs ... sales and general administration expenses ... which is about $3. So you have a total cost of $9, and you have $1 in profit."

    Current federal law calls for taxation only of that profit. Applying the existing 35 percent corporate tax rate to the dollar, the retailer ends up with 65 cents from the $10 pair of pants, Pope said.

    "Under the Border Adjustment tax, though, the cost of those goods sold - that $6 - is going to be added back in to your taxable income," he explained. "So instead of $1 of real profit being taxed, your net income being taxed, they're going to tax you at $7."

    Even with a lower proposed corporate tax rate of 20 percent, the actual tax would climb from 35 cents per pair of pants to $1.40 per pair. Meanwhile, the changing tax calculation doesn't change the fact that the real profit from the sale is still $1.

    "You have $1.40 of taxes on $1 of income, so you're losing money on every pair of pants you sell," Pope added. "That's what's going to force retailers to pass on a huge price increase to their customers, which amounts to a huge sales tax increase."

    That tax increase amounts to 20 percent, according to groups such as the N.C. Retail Merchants Association, Americans for Prosperity, and Americans for Affordable Products.

    Supporters counter that BAT, in combination with other tax changes under consideration on Capitol Hill, would have net positive economic impacts. They also argue the change merely fixes a broken system, which "encourages the import of foreign-made goods while penalizing products made in and exported from America," in the words of the American Made Coalition.

    Critics consider these arguments a bill of goods. (Yes, the pun is intended.) For one thing, many "American-made" goods feature imported raw materials or component parts. Few of the products we make and use today depend entirely on American resources.

    Sound tax analysis argues that all costs of production should be deductible. For taxation purposes, it shouldn't matter whether those costs cover domestic or imported inputs.

    Reports suggest North Carolina would rank No. 22 among the states in "sensitivity" to the BAT. "According to statistics from 2014, the total value of imports coming into North Carolina was around $52.8 billion," said Donald Bryson, AFP's state director. "That's roughly one-ninth of our state's GDP."

    That means a BAT would generate $10.5 billion in new taxes on the state's economy, Bryson added. That's more money than North Carolina businesses pay in federal income taxes now. It's almost half the amount of money state government brings in through taxes each year.

    What about the argument that the BAT would generate revenue to offset other beneficial federal tax cuts? "We should not treat taxes as a pressure valve, where we decrease the pressure over here by lowering the corporate income tax rate only to increase it with another tax," Bryson said. "If we're going to decrease taxes and have tax reform, we should just decrease taxes and have tax reform. We shouldn't create an entirely new tax."

    It's not clear whether the data offer enough power to swat away the BAT. But critics hope people will take time to look the new tax in the eye before it starts taking a bite out of their wallets.
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