As potential tax reform legislation is being crafted by politicians in Washington, D.C., it is worth taking a moment to analyze how an important provision of this legislation may impact the agricultural industry in Kern County.
While some provisions of potential tax reform legislation involve items that would reduce the annual tax revenue received by the United States Treasury (i.e., the reduction of tax rates for both individuals and corporations), the “border adjustment tax” is intended to increase tax revenue. The border adjustment tax (i.e., destination-based cash flow tax with a border adjustment) is a significant component of potential tax reform legislation currently being considered by the House GOP and President Donald Trump.
Aside from the general desire not to want tax reform to increase the debt or annual deficits, the projected increased revenue from the border adjustment tax could allow tax reform legislation to comply with the Byrd rule (i.e., the United States Senate rule prohibiting legislation passed using budget reconciliation from increasing the deficit in any year beyond the budget window, which is 10 years). The intent would be for the additional tax revenue raised by the border adjustment tax to offset the loss of tax revenue related to reducing tax rates for individuals and corporations.
The United States tax system is currently an income tax. The implementation of a border adjustment tax would likely require a shift from an income tax model to a cash flow tax model in order to be in compliance with rules set forth by the World Trade Organization. Some general details have been set forth in a document entitled “Better Way for Tax Reform” released in June 2016 by Republican House of Representatives members serving on the Ways and Means committee, but the specific provisions of this new cash-flow-based tax model are currently sparse. However, the basic premise of the border adjustment tax is that exports will be taxed less and imports will be taxed more — potentially 20 percent more.
Many economists are predicting that currency exchange rates would completely adjust to a border adjustment tax causing the U.S. dollar to strengthen. The result of a stronger U.S. dollar being that the effective cost of U.S. exports would increase (decreasing demand) and the effective cost of imports into the U.S. would decrease (increasing demand) leaving the balance of trade relatively unchanged in total.
According to the USDA, after five years of continual growth in U.S. agricultural exports, in 2015, U.S. agricultural exports declined as a result of a variety of factors including a stronger U.S. dollar. If the border adjustment tax causes a further strengthening of the U.S. dollar, then there may be a continued decline in the volume of U.S. agricultural exports.
At this time, the likelihood of a border adjustment tax is uncertain. Trump has sent mixed signals regarding the tax. In an interview in January, he stated that the tax was “too complicated” but in another January interview stated that it was “still on the table.”
More recently, he stated, “It could lead to a lot more jobs in the United States.”
Currently, the primary opposition to the tax from the business community comes from large retailers like Wal-Mart.
Recently, Treasury Secretary Steven Mnuchin stated that the objective of the Trump administration is to have tax reform done before the August recess. While this timing may be ambitious and the effective date currently unknown, you should expect to hear much more regarding this issue in the months to come.
Please consult your tax adviser to determine how tax reform may impact your specific situation.
— Joel A. Bock, CPA, MST, is a partner in Daniells Phillips Vaughan & Bock, a Bakersfield accounting firm.