The proposed “border-adjustment” tax is meeting furious opposition, threatening to jeopardize another signature legislative initiative.
One conservative group produced colorful flow charts warning millennials that a “border-adjustment” tax proposed by Speaker Paul D. Ryan would raise prices on “the Jose Cuervo tequila that’s in your happy hour margarita.”
Three days later, a second conservative group kicked off a lobbying campaign saying it would amount to a $1.2 trillion tax on seniors and the working poor.
The next day, another group weighed in, issuing a news release that highlighted how Latinos would be “among those hardest hit” by the new tax on imports.
All three organizations share a common lineage: They are part of the political network overseen by Charles D. and David H. Koch, billionaire conservative philanthropists. They are among several conservative organizations mounting a campaign against a new tax on imports proposed by House Republicans, imperiling what is supposed to be a centerpiece of the Republican tax-overhaul effort.
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Their opposition threatens another rupture with President Donald Trump, some of whose advisers see the provision as a critical way to bring about tax reform while protecting U.S. manufacturers.
The battle could jeopardize Trump’s second major legislative initiative and redefine the boundaries of conservative economic policy. Much like the failed repeal of the Affordable Care Act, the import tax is dividing conservatives, the business sector and some of the deepest-pocketed groups funding conservative politics. Along the way, it is exposing the broader ideological divide between nationalist policies embraced by Trump and the traditional small-government movement that his election ejected from the driver’s seat of Republican policymaking.
“Trump ran on a different set of economic issues than traditional conservative Republicans have,” said Stephen Moore, a fellow at the conservative Heritage Foundation who favors the border tax on intellectual grounds, but said he had come to see it as a “poison pill” for broader tax reform.
“The baton has been passed on from Reagan to Trump,” Moore continued, “and there’s no doubt he ran on a much more populist economic message.”
Idea with a history
The idea of a border-adjustment tax has percolated among academic economists and in think tanks since the 1970s, as the United States considered ways of harmonizing its tax code with countries that use value-added taxes. Central to the plan is a provision that would tax imports at a rate of 20 percent while exempting exports from taxation.
In theory, this would buttress domestic manufacturing, make U.S. products more competitive with foreign goods and encourage U.S. companies to bring home cash they have been parking overseas.
“It is a simple and elegant way to get good tax compliance,” said Douglas Holtz-Eakin, a Republican economist and president of the right-leaning American Action Forum, a nonprofit tied to a super PAC that backs House Republicans.
Some conservatives oppose it for the same reason: In their view, such a tax would be too easy to increase, with the potential costs to Americans hidden behind rising prices.
Groups such as Americans for Tax Reform — headed by Grover Norquist, perhaps Washington’s most famous anti-tax crusader — have praised the border-tax proposal, saying it would put U.S. businesses “on a level playing field” with foreign competitors. Retailers that import many of their goods are lobbying against the idea, while domestic manufacturers such as Boeing and Caterpillar — whose interests figure heavily in Trump’s economic thinking — are supporting it.
The Koch network and groups like the Club for Growth, which for years have targeted what they call “crony capitalism” in Washington, have opposed the border tax as an unnecessary tax increase and a form of favoritism that would hurt the economy. But Trump and his team have pledged to target what they see as a more insidious kind of cronyism, including unfettered free trade that some Trump advisers say benefits wealthy elites at the expense of U.S. workers.
The dispute echoes Trump’s battles with his party last year, when the Club for Growth, a group of wealthy conservatives that backs anti-tax candidates in Republican primary races, financed a multimillion-dollar advertising campaign against him. The Koch network, uncomfortable with Trump’s proposals on trade and immigration, sat out the presidential election entirely, turning its advertising dollars and activists to down-ballot races.
The Club for Growth and the Koch network also played a critical role in killing a proposal backed by Ryan and Trump to repeal and replace the Affordable Care Act. In March, as the repeal vote approached, two Koch-aligned groups pledged to spend upward of $1 million on ads defending any Republican who voted against the replacement legislation.
Now, some of the same groups are organizing visits to lawmakers and paying for an online advertising campaign bashing the border-tax proposal.
The roster include Americans for Prosperity, the Koch network’s flagship political-advocacy group; the Libre Initiative, which is aimed at Latinos; and Generation Opportunity, which focuses on young adults. In 2015, the most recent year for which tax returns are available, the three groups took in a combined $34 million from Freedom Partners, an umbrella group representing the Kochs and other donors who pool money for political and educational initiatives.
Policy experts at think tanks financed by the Koch network have also weighed in against the border tax. Veronique de Rugy, a senior fellow at the Mercatus Center, where Charles Koch sits on the board, has clashed with Holtz-Eakin and other right-leaning policy experts, accusing them of misleading the public about the true effects of the border tax on economic growth.
Americans for Prosperity is calling on Trump to rely more on spending cuts, rather than a border-adjustment tax. The group’s list of proposals includes indexing Social Security benefits to inflation, a popular idea in conventional conservative circles but one that could violate Trump’s campaign pledge to protect the program’s beneficiaries.
Last fall, after the House plan for a border tax was first unveiled, lobbyists from Koch Industries circulated a study by PricewaterhouseCoopers showing it would lead to huge new taxes on the petroleum- and coal-products industry, which includes some of Koch Industries’ most profitable subsidiaries.
More recently, Koch has circulated studies indicating the tax would increase the price of gasoline, which the company says would lift its profits in the short term but harm the economy in the long term.
Philip Ellender, a top executive at the company, said in an interview that Koch Industries was lobbying against the new tax out of principle, not for profit.
“In the short term, Koch would profit handsomely from it,” Ellender said. His summary of the company’s case against the tax: “It would stifle free trade, it picks winners and losers, and it raises prices on consumers so that corporations can get a tax break.”
The debate has divided the White House, too.
In an interview with Reuters in late February, Trump embraced the notion of a border tax. “I certainly support a form of tax on the border,” he said, adding that it would encourage companies to bring manufacturing jobs back to the United States, a critical component of his platform.
Trump’s treasury secretary, Steven Mnuchin, and his top economic adviser, Gary Cohn — both former Goldman Sachs bankers — are said to be leery of the tax. Trump’s chief strategist, former Breitbart publisher Stephen K. Bannon, has supported it, as has Peter Navarro, a trade skeptic and top White House trade adviser.
A profusion of strategic and political motives also divides Republicans on the issue. To enact a tax overhaul that doesn’t increase the federal deficit but delivers rate cuts to wealthy taxpayers and corporations, Trump and Congress need to find some source of new revenue — hence the border tax. For Ryan, who holds more conventional free-trade views than Trump, the new tax provides a way to satisfy Trump’s protectionist impulses without imposing punitive, and potentially even more disruptive, tariffs.
Some conservatives are not so sure. In opposing the tax, Sen. Tom Cotton, a Republican from Wal-Mart’s home state, Arkansas, finds himself in the position of defending his local corporate giant and the conservatism that he thought he knew.
“Most conservatives I know have long believed that tax reform would look at all of the carve-outs in the tax code,” Cotton said, “not introduce a whole new concept of taxation.”