The proposed border adjustment tax has been dividing U.S. lawmakers. It is also dividing companies into those who support it and those who do not, as the simplified theory of the proposal – tax imports and exempt export revenue from taxable income – is expected to create clear-cut winners and losers among U.S. businesses.
It is also dividing the U.S. states into two groups: states that are expected to benefit, and states who stand to lose from the tax plan. The state of Texas and its economy are expected to be on the losers’ end should the border tax pass as-is, even though the probability of the plan passing all legislative vetting is not considered to be very high.
Because of its physical location, adjacent to Mexico, along with its vast energy industry, Texas’ economy is a global one. Texas is the home of energy giants ExxonMobil, Valero Energy, and Phillips 66, just to name a few. In the border adjustment plan, U.S. refiners who import oil stand to lose.
According to The Dallas Morning News contributor Richard Parker – who is also the author of ‘Lone Star Nation: How Texas Will Transform America’ – the border tax plan would basically transfer around $1 trillion from the companies importing goods in the big importing states to the less competitive Midwest. And Texas, being one of the top international trading and importing states alongside California, Florida and New York, would likely lose.
Texas has a gross state product of nearly $1.6 trillion, and its international trade portfolio is almost evenly balanced; that is, the value of exports and the value of imports are very close in terms of dollar figures. Related: Will Trump Send Oil Prices Crashing?
According to the United States Census Bureau, state exports from Texas stood at $232.6 billion in 2016, accounting for 16 percent of all U.S. exports last year. State imports for Texas were $229.3 billion in value last year. The no.1 import commodity was crude oil. The no.1 and no.2 export commodities were also oil products. Mexico is Texas’ no.1 trade partner, both in exports and imports. Oil companies and refiners in Texas are importing crude oil, including heavy crude from Mexico. The border tax would be a hit to their business, because even if they wanted to switch to buying American-only crude oil, it is light crude and not suited for all kinds of refining processes and products.
Senate Majority Whip John Cornyn, a Texas Republican, criticized the border adjustment tax at the end of January.
“The United States imports into our refineries a lot of the heavy crude that our refineries are outfitted to deal with. Those would all be subject to the tax. One refiner told me that they thought that might increase the cost of gasoline by 30 cents. I want to make sure we know what the consequences would be and exactly how this would work,” Cornyn said. He stressed that he supports a tax overhaul that would spur economic growth, but called for further discussion on the border tax consequences for U.S. companies. Related: Saudi Arabia’s War On Shale Never Ended
A couple of weeks later, Cornyn said, as quoted by Bloomberg:
“The hard reality is the border tax is on life support, and given the imperative of 51 senators and 218 House members and one president, I think we need to look for other options.”
President Trump, who had initially criticized the border tax proposal, calling it “too complicated”, seems to have been warming to the plan, telling Reuters at the end of February that the tax plan could boost U.S. exports and job creation, but stopped just shy of endorsing it.
Should the border tax pass as-is (currently not a very likely scenario), many companies relying on imports, such as retailers and refiners processing foreign oil, could take a hit, as could a globalized and foreign trading economy such as Texas.
By Tsvetana Paraskova for Oilprice.com
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Sure, forcing manufacturing to return to the US will help the relatively small percentage of people who will work in the new plants, but the wages they must earn to live in the US will be so much higher than the wages of people working in factories located in low wage countries like Vietnam, that all consumers here will end up paying much more, than if they could buy the cheap imports. A few benefit, while the rest suffer.
Some economists say that the value of the US dollar will go up enough to not raise the cost of imports. That theory reminds me of the Long Term Capital Management professors who thought they could predict interest rates. They ended up needing a government bailout when they got surprised by a 'black swan' from Russia.
And if the dollar does rise a lot against other currencies, foreigners would be fools to buy anything made in the US, which they could then get cheaper from Europe, Japan, Canada, or Korea. A border tax could end up being a jobs program for high end foreign manufacturers.
Retailers in the US employ many millions of people. Should the dollar only gain a little value against foreign currencies, retail prices inside the US will go up a LOT. People won't be able to consume as much stuff at higher prices. That means a lot of retail people will find themselves unemployed. Selling less volume, means you need fewer workers. Will they all be able to find work in the new automated factories? I doubt it.
A lot of other things could go wrong with a border tax. But I'm tired of typing.