The dollar would have to spike to offset 'border adjustment' tax, retailers say

Key Points
  • Anti-border tax group says US dollar won't rise enough to offset higher import costs
  • Dollar would need to rise 25 percent, but that much of a spike is unlikely, consulting firm says
  • Manufacturers support — but retailers oppose — the border tax proposal
Retail CEOs meet with Mnuchin on Capitol Hill
Retail CEOs meet with Mnuchin on Capitol Hill

The retail industry is wielding a new weapon in its long-running battle against a border adjustment tax: the U.S. dollar.

The Retail Industry Leaders Association, one of the trade groups leading the fight, commissioned a study slated to be released Monday arguing that the border tax proposal — which would effectively impose a 20 percent tax on imports — could disrupt foreign exchange markets and result in higher prices for consumers. The analysis by Capital Economics, an independent consulting firm, estimated the U.S. dollar would need to appreciate by 25 percent in order to offset the new tax. But it predicted the greenback would likely rise by only single digits instead.

For consumers, that could translate into a price hike of 2.1 percent, the report warns, with even bigger jumps for certain types of goods, such as apparel.

"Like all things that seem too good to be true, it is," the report states. "There are many reasons to believe that this adjustment is unlikely to occur, especially in the short run, but even over the medium to long run."

Shoppers carry bags while walking through the Scottsdale Quarter shopping mall in Scottsdale, Arizona.
Caitlin Ohara | Bloomberg | Getty Images

The study will likely become a key talking point during the hearing Tuesday in the House Ways and Means committee on leveling the tax playing field for American businesses. The border adjustment tax is expected to dominate the discussion, and the retail industry has led the charge to get rid of the idea. Executives from national chains such as AutoZone, Target and JCPenney have descended on Washington in recent months to express their opposition in meetings with President Donald Trump, Treasury Secretary Steven Mnuchin and Republican leaders on Capitol Hill.

The border tax idea generally is opposed by big U.S. chain retailers, which largely import what they sell, but widely supported by U.S. manufacturers, which say they can't compete with cheap imports.

"The new border adjustable tax is a dangerous and untested proposal built upon deeply flawed economics," RILA spokesman Brian Dodge said. "The report shows the inevitable harm it will cause American families and businesses and it should give pause to lawmakers considering taking such a gamble with America's economy."

The border adjustment tax is a centerpiece of the tax reform blueprint outlined by House Speaker Paul Ryan and championed by Ways and Means Chairman Kevin Brady (R-Texas). It allows U.S. businesses to deduct the cost of goods made in America but not those purchased overseas, which in effect raises the price of doing business. The measure is expected to raise more than a trillion in tax revenue, which would help finance a cut in the headline corporate rate to 20 percent.

Border tax seen boosting US investment

Mnuchin has cited currency adjustment as one of his chief concerns with the proposal, arguing that it does not work in its current form. Even Brady has acknowledged that he is seeking a new design for border adjustment, though he has not cited any alternatives or tweaks.

Backers of border adjustment — which include big manufacturing companies such as Boeing and Dow Chemical — sent a letter to lawmakers last week highlighting support for the measure from prominent economists. Among the signatories were Alan Auerbach of the University of California-Berkeley, who is credited with coming up with the idea; Steve Moore of the Heritage Foundation, who advised Trump on the campaign trail, and Brian Reardon, who was a special assistant to President George W. Bush.

"The result would be increased investment here in the United States and a level playing field where products imported into the United States are assessed the same tax as those made in America," the letter stated.

The White House did not mention border adjustment in the broad principles for tax reform released last month. The measure faces stiff opposition in the Senate, where several Republican lawmakers have voiced concern.