Entrepreneurs

Border adjustment tax could crush millions of businesses, retailers fear

Amid the battle over tax reform, some small businesses that import goods are focused on a key proposal in the House Republican blueprint, the border adjustment tax, which levies a 20 percent tax on imports.

Certain retailers who rely on getting their goods from overseas are dreading the possible repercussions.

Ledbury, based in Richmond, Virginia, imports 98 percent of its high-end men's shirts from Europe. It does about $10 million a year in business, but the border tax might mean it would have to raise prices or cut workers' hours.

The company is reinvesting its capital into the business in order to continue growing. It retails imported shirts starting at $145 and bespoke shirts made in the U.S. beginning at $225.

"For a business like ours that is running [to] break even, it's going to have negative impacts. I would say this is absolutely the wrong thing to be doing right now — we are in a challenging time, particularly in the retail business," CEO Paul Trible says. The company already pays more than 19 percent in duties on the cotton shirts it imports. Shifting production to the U.S. would be too costly, while moving to an Asian manufacturer would affect quality, Trible argues.

A worker sews a bespoke shirt at Ledbury’s storefront in Richmond, Va. The company imports 98 percent of its products and is against the border adjustment tax.
CNBC
A worker sews a bespoke shirt at Ledbury’s storefront in Richmond, Va. The company imports 98 percent of its products and is against the border adjustment tax.

Economists in support of the proposal argue the dollar will strengthen to offset costs to retailers, meaning consumers won't be hit with higher taxes in stores. An "American Made Coalition" has emerged, with big names including Dow Chemical, Eli Lilly, GE and Boeing backing the House GOP plan.

One of the most outspoken critics of the proposal has been the National Retail Federation, the world's largest retail trade organization, which warns that the tax would "crush" small retailers, adding that 99 percent of retail businesses employ fewer than 50 workers and 95 percent of them operate in a single location.

"In the face of limited U.S. manufacturing, America's small retailers rely heavily on imports and do not have the ability to cut their prices or pass along these increased costs to consumers. For example, specialty apparel stores, which import approximately 97 percent of their inventory, would end up with a tax bill that is three to five times larger than their profits and would have to raise their prices by 15 percent or more to maintain current profitability," David French, NRF's senior vice president for government relations, tells CNBC.

"The million-plus small retail companies in the U.S. would be hit especially hard by the BAT, and many would be forced to lay off employees or even close their doors," he says.

"I would say this is absolutely the wrong thing to be doing right now." -Paul Trible, CEO of Ledbury

Concerns over the proposal have also cropped up even from those who are generally enthusiastic about tax reform. Some say it further complicates a system that has long frustrated America's smallest businesses. Tax complexity ranked the number two issue for small business owners in 2016, according to a survey from the conservative lobbying group National Federation of Independent Business.

"I'm encouraged that the overarching points are focused on bringing down tax rates for all types of businesses and individuals, on the expensing of capital expenditures for all businesses, on killing the death tax and on reducing capital gains levies," says Ray Keating, chief economist for the Small Business & Entrepreneurship Council. "But there are real problems with a border adjustment tax, including raising costs for importers and firms that use imported inputs, increasing tax complexity. Tax reform should do the exact opposite."

The GOP tax plan may not be possible without the inclusion of the border tax. House Ways and Means Committee Chairman Kevin Brady told CNBC last month that what makes the reform package so "pro-growth" are all of the elements taken together.

"The million-plus small retail companies in the U.S. would be hit especially hard by the BAT, and many would be forced to lay off employees or even close their doors." -David French, senior vice president of the National Retail Federation

"The border adjustment proposal has to be viewed within the context of the larger tax proposal it is advancing within," says Todd McCracken, president and CEO of the National Small Business Association, a nonpartisan advocacy group. "It has lots of other really good things for small companies in it: unlimited or no depreciation of expenses on capital equipment, lower tax rates, an elimination of the estate tax. These things are made possible because there is border adjustment."

At Ledbury, Trible is hopeful lawmakers will consider the concerns of importers large and small before moving forward.

"I think if this goes through, we will probably do a hiring freeze and have to spend a lot of time and money that could be invested elsewhere into new stores and a new supply chain," Trible said. "The question for us is, how much can we raise our prices without negatively impacting our business?"