Red sky at morning, sailors take warning.
- from an ancient rhyme often repeated by mariners
It's almost morning in the Trump administration and I see a red sky!
Tax reform is a recurring threat in DC. Every politician that runs calls for tax reform and every incumbent up for reelection calls for tax reform. It's a standard line in every candidate's stump speech. There's been much lip service paid to the topic and very little elbow grease expended.
That could be changing. It would appear that the Republican Congress and the Trump administration are both serious this time - as in they want real tax reform!
House Ways and Means Chairman Kevin Brady (R-Texas) released a "Tax Reform Blueprint" in July 2016 that outlined the general provisions of a comprehensive tax reform package. When the new Congress convenes in January, the House Ways and Means Committee, the Senate Finance Committee, and the Trump Administration will begin developing the actual text for a tax reform bill.
Here's where it gets complicated...One of the provisions included in the Tax Reform Blueprint, the “Border Adjustment Tax” (BAT), has generated significant concern among several industries, including the automotive sector. The BAT is not a tariff. Tariffs are taxes imposed on specified imported products (e.g., the 25% chicken tax imposed on the import of light pickup trucks since 1963).
The House Republican proposal (including the BAT) would modify business income taxes in several ways: reduce the rate from 35% to 20%; accelerate depreciation schedules, eliminate all interest deductions; exempt the cost of exported goods from the taxable receipts subject to income tax (they would be taxed in the jurisdiction in which they were sold); and disallow the cost of any imported goods as a deductible business expense.
For example, if a $24,000 vehicle were imported to the U.S. and sold for $25,000, under current tax law the $1,000 profit would be subjected to a 35% corporate tax rate ($350). Under the BAT proposal, the entire $25,000 would be subject to a 20% tax ($5,000). The proposed tax would apply to all imported goods, including any part used in a vehicle assembly in the U.S. or any imported part purchased by a dealer.
Foreign vehicle tariffs have historically been supported by domestic auto manufacturers and opposed by "import manufacturers". NADA has traditionally sat out tariff battles. This is not the case with the BAT, it is opposed by virtually all the auto manufacturers and the entire retail community.
The auto industry now uses global supply chains and the minimum amount of foreign parts included in U.S. assembled vehicles is now 25% (many use 50% or more).....all of those parts would be subject to the proposed BAT. If the BAT proposal were to become law, the price of U.S. assembled vehicles utilizing 25% imported parts would most likely go up by $850 to $1,000 a piece, imported vehicles would probably go up by $3,000 to $5,000 (much more for luxury vehicles) and many foreign models would probably not be imported, plus imported parts bought by dealers would effectively go up by 20%.
As the tax reform process unfolds in the coming months, NADA will continue to work with members of Congress, the Trump transition team, and the new Trump Administration to advocate for tax policies that enable dealers to continue to drive the economy.