What Could a Border Tax Adjustment Mean for Mid-Market Companies?

Taxing imports might not affect half the U.S. manufacturing industry; but it might kill the other half.

As President Trump and the GOP mull taxes on imported goods, mid-market companies should be cognizant of the impacts it could bring. Even for companies that don’t directly import, these taxes could increase the cost of raw materials. And while advocates say a tax on imports would be offset by a stronger U.S. dollar, critics say it could take a big hit on profits if the dollar does not adjust.

As part of the House Republican Tax Reform Blueprint, the House GOP is proposing a destination-based tax where income from goods and services is based on where it is consumed as opposed to where it is produced and sold. It would be facilitated by so-called “border tax adjustments” that would tax imported goods and services while exempting exported goods and services from the tax. It would cause companies to pay 20% more for imports than for domestic goods, while exporters would pay no income tax on revenues they sell to foreign businesses.

Big importers, including retailers, have been rallying to fight a border tax adjustment, while big exporters like GE, Dow Chemical and Boeing, have been spending to support it. Proponents say that while the border adjustment would change effective tax rates, it also would cause the dollar to appreciate so that importers would pay no more than they do now.

J. Bradford Jensen, a professor at Georgetown University’s McDonough School of Business,said that more than 90% of the top exporters in the U.S. are also importers. This includes not just big corporations, but also mid-market and small businesses that buy raw materials overseas, because it’s either less expensive elsewhere or not available in the U.S.

“MID-MARKET BUSINESSES SHOULD PREPARE TO DISAGGREGATE BOTH SUPPLY AND VALUE CHAINS TO PINPOINT POTENTIAL PLACES OF DISRUPTION TO COSTS AND PROFITS.”

Many companies that rely on exports for sourcing have concerns. Brandi Archer, who launched women’s apparel brand Suki + Solaine three years ago, said that a border tax could put the company out of business because they can’t find domestically the woven and knit materials they require. “I would love it if there were more options for American-made textiles to choose from. But from a business standpoint, with what’s available right now, it wouldn’t work,” Archer said.

Joseph Brusuelas, Chief Economist at RSM US LLP, said a border tax adjustment could mean a “sweeping change for the middle market” and amount to “some of the most significant changes to the U.S. tax code since 1986.” While it could have some potential negative ramifications for heavy mid-market importers, Brusuelas said organizations should take it as an opportunity to reevaluate their value and supply chains.

“This carries with it significant implications for middle-market businesses with exposure to the global supply chain across industrial sectors,” Brusuelas said.

Brusuelas said if the dollar doesn’t perfectly adjust, first-order effects in the middle market will be felt “almost immediately” in apparel and retail footwear companies. Mid-market businesses that feed into the auto, aerospace and oil complexes would also see a noticeable increase in operating costs. “Firms with higher-end imported food stuff, commodities and communications equipment could also see an increase in prices,” said Brusuelas.

He also said mid-market businesses should prepare to disaggregate both supply and value chains to pinpoint potential places of disruption to costs and profits. He said these firms need to look to alternative sourcing at reasonable pricing and consider new avenues of inbound logistics and procuring materials. This not only may help the organization mitigate the impact of a border adjustment, but also potentially find increased efficiencies in the process.

Depending on the sector and their operations, American companies remain at odds on the issue. Walmart CFO Brett Biggs recently spoke out against the tax on a recent earnings call while more than 100 companies, including Best Buy, Macy’s and Nike, have joined the opposition. Yet 16 CEOs from such corporations as Boeing, Caterpillar, Dow, GE, Celgene, Oracle and Pfizer, recently wrote Congress in support of it. The letter, from the group American Made Coalition, said that tax reform was needed to end the “Made in America tax.”

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