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Erik Paulsen once worked for Target. Now he’s working on a tax plan the company hates.

The so-called “border adjusted tax” overhauls the way U.S. companies pay taxes by easing the tax burden on exports while making companies pay up for imports. 

Minnesota companies like Target and Best Buy import billions of dollars of cheaper consumer goods from other countries to sell to U.S. customers, and they’re looking at the GOP’s proposal with apprehension.
REUTERS/Mike Blake

As far as well-known companies from Minnesota go, few are more iconic than Target. Many Minnesotans have worked for Target — in their many stores, of course, but also at their corporate headquarters in downtown Minneapolis. One of those former Target employees is now in Congress, and he’s mulling a huge tax change that the retail giant thinks could deal it a devastating blow.

Rep. Erik Paulsen, the Republican from the 3rd Congressional District and one-time Target analyst, is in a predicament. He’s a member of the House Ways and Means Committee, the tax-writing panel where GOP leadership hopes to pass sweeping tax reform this year.

That would include a so-called “border-adjustment,” a proposal that overhauls the way U.S. companies pay taxes by easing the tax burden on exports while making companies pay up for imports.

Shelling out more for the imported electronics, toys, and consumer goods that keep Target humming is not the company’s dream scenario. Its CEO, Brian Cornell, went to D.C. to lobby against the tax — and reportedly passed on a meeting with Paulsen.

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Why would Paulsen, who represents many Target employees and has received more Target campaign cash than any other lawmaker, consider a policy that would increase the company’s tax bill by billions? Like with a lot of tax questions, the answer is complicated.

What is border adjustment?

Comprehensive tax reform has been on Congress’ agenda for years, but with the GOP in control of Capitol Hill and the White House, Republican leaders are itching to scratch it off the to-do list.

Reforming the corporate tax system is an essential part of that effort. Republicans believe companies’ taxes are too high, which prompts them to move production to other countries and practice complicated international bookkeeping to skirt the U.S. tax code.

The full name of the policy that Speaker Paul Ryan and the Republicans want to implement is the “border-adjusted, destination-based cash flow tax.” That doesn’t exactly roll off the tongue, so it’s being called a border-adjusted tax, which is creating confusion with the border tax that the White House suggested in January, which would put a 20 percent tariff on Mexican imports.

The plan would likely tax corporations’ overall cash flow at 20 percent, with “ border adjustments” so that the tax burden shifts to imports away from exports. When companies import goods for sale in the U.S., those transactions will be subject to taxation, while the sale of domestically-produced items overseas will be exempt from taxes.

That’s a pretty big change from what happens now. Currently, corporate income is taxed at 35 percent, but exemptions mean there are plenty of ways to get around it abroad. The effective tax rate is much lower — probably in the teens — but nevertheless, as much as $2.5 trillion in American corporate cash is sitting untaxed in overseas tax havens. Beyond that, U.S.-made products that are sold overseas are subject to taxation, both under the U.S. corporate tax code and applicable taxes in the country where goods are sold.

Republicans see border adjustment as a multi-faceted way to crack down on the corporate avoidance of U.S. taxes, lower the rate corporations pay in the U.S., and bolster the U.S. economy. It is projected to bring in $1 trillion in revenue, which Republicans plan to off-set with the major tax cuts they want in a tax reform package.

Border adjustment is popular among companies that manufacture products in the U.S. and sell them abroad. Industrial companies like GE and Boeing and pharmaceutical companies like Pfizer and Eli Lilly, all major exporters, support border adjustment.

Minnesota industries that could stand to benefit from border adjustment are steel and agriculture; some medical technology companies do a lot of exporting, but may also have to import parts, so they could be affected unevenly.

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Importers lose

Not everyone believes border adjustment will boost the economy and their bottom lines, however — particularly, businesses that rely on imports. The fiercest opponents to border adjustment have been big retailers and oil and gas companies, whose products largely come from overseas and are sold in the U.S.

Minnesota companies like Target and Best Buy import billions of dollars of cheaper consumer goods from other countries to sell to U.S. customers, and they’re looking at the GOP’s proposal with apprehension.

Under the new plan, for example, Best Buy’s taxable income would go from under $1 billion to over $14 billion, wrote Lee Schafer, the Star Tribune business columnist. Taxing that $14 billion at a 20 percent rate makes close to $3 billion the Richfield-based company would owe to the IRS.

At least some of that cost would be passed onto consumers in the form of more expensive imported goods — making it, effectively, a sales tax, which hurts poorer people.

Katheryn Russ, an economist at the University of California-Davis, estimated that the tax could lead to significant increases in how much low-income households pay for staple goods.

Proponents of the policy counter that it will strengthen the U.S. dollar enough to offset those increased costs to companies and consumers.

By encouraging exports and discouraging imports, some economists believe border adjustment will increase demand for U.S. products abroad, and thus, demand for U.S. dollars to buy them with. Supply would theoretically go down, too, with fewer U.S. firms buying foreign products with dollars. A stronger U.S. dollar would mean importers could buy more foreign goods at the same price — more bang for their buck.

According to Robert Kudrle, a professor at the University of Minnesota who studies international trade, “There won’t be any impact on the trade balance, nor will it disadvantage importers. The apparent impact it has in discouraging imports and encouraging exports will be totally canceled by increased value of the dollar.”

So, if the tax is set at 20 percent and the dollar’s value increases by the same amount, writes Quartz’s Tim Fernholz, it’ll be a wash. “But if the dollar doesn’t behave as expected,” he explains, “the change in plans will mean a big new tax burden for American importers.”

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The chair of the New York Federal Reserve, William Dudley, backed up the notion that the pro-adjustment economics argument doesn’t totally add up.

Border adjustment, he told members of the National Retail Federation, “will probably lead to a lot of changes in the value of the dollar, the prices of imported goods in the U.S. I’m not sure that that would all happen very smoothly and I also think there could be lots of unintended consequences.”

Paulsen in difficult position

To import-reliant businesses, just hoping that the dollar will adjust enough to save their bottom lines is a big ask.

A coalition of companies who believe they’ll be hurt most by border-adjustment are beginning to lobby Congress against the policy.

On Wednesday, over 100 retailers and trade groups, including Best Buy and Target, joined to start an advocacy group, called Americans for Affordable Products, to oppose border-adjustment plans.

Border adjustment, the group says, “slaps outrageous taxes on imported goods… products Americans rely on every day.” It claims the tax is a “trillion-dollar tax break for a few corporations” and a $1,700 hike in expenses for U.S. households.  (A day later, a group of pro-border adjustment companies launched a lobbying group, called the American Made Coalition.)

This is where things get difficult for Paulsen. The House Ways and Means Committee, on which Paulsen serves, is where the border-adjusted tax seriously picked up steam last year. Ryan, the former chair of that committee, and Texas Republican Kevin Brady, the current chair, both strongly back border adjustment. (President Donald Trump is reportedly on the fence about the idea, once calling it “too complicated.”)

Beyond Paulsen’s personal ties with Target, the 3rd District is home to many Target and Best Buy corporate employees, as well as the headquarters of SuperValu, the grocery store chain.

But Paulsen is confident he’ll be able to broker some kind of compromise between his largely pro-adjustment committee and his apprehensive constituent companies. “We need tax reform that puts us on a level playing field with our competitors,” Paulsen told MinnPost. “We’ve got to have equal taxation, we’ve got to stop companies from moving jobs,” he explained, adding that’s a big reason why Brady has backed border adjustment.

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“The U.S. is one of only a few countries that doesn’t border adjust in some capacity,” Paulsen went on. “There’s been a strong evaluation of how should we do this concept to make sure we’re taxing exports the same as imports.”

At the same time, Paulsen said, “there’s some concerns raised about the border adjustment component. Those are fair concerns. We’re trying to weed through that right now and hear those concerns, and bring in those folks directly.”

As negotiations over tax reform continue, retail advocates are planning to make their case directly and forcefully to lawmakers.

According to Brian Dodge of the Retail Industry Leaders Association, a D.C.-area trade group, “There is a fundamental lack of understanding about what this proposal is and what it’ll mean for consumers… We believe that the more policymakers know about this, the more uncomfortable they will become.”

“I think members are going to have to decide at some point whether they are blindly following the will of leadership or listening to the constituents in their district.”