The Koch brothers are taking on a proposed border tax that could crop up in the Republican plan for a monumental tax overhaul, arguing that such a tax would hurt American motorists by leading to a spike in gasoline prices.
The Koch brothers do not typically wage huge fights against the Republican Party, and they are keen to see the promised overhaul to the U.S. tax code proceed, which could lead to huge corporate tax cuts. But the Republicans are also considering a provision that would tax imports in order to provide a jolt to American manufacturing for export. In a Koch-funded report released last week, the so-called "border adjustability" proposal that Republicans are considering would lead to a 30 cent per gallon rise in gasoline prices. The Koch brothers said the border tax "could be devastating" to the economy.
If passed, the tax would have huge consequences for the U.S. oil industry, the report from The Brattle Group says. Exporting tax-free would mean that U.S oil producers would rather export than sell to domestic refiners, which would be subjected to tax. The tax for domestic sales would mean that oil companies would demand a higher price from refiners to sell domestically. Ultimately, those higher costs would be passed on to consumers in form of higher prices at the pump. In other words, the border adjustment tax would increase gasoline prices. Related: Oil Prices Edge Lower On Crude Inventory Build
That would certainly be a political headache for Republicans and the Trump administration, but Trump has also vowed to champion the U.S. domestic energy industry. And the border adjustment would certainly be a boon to U.S. oil drillers, who would receive a windfall from the higher prices that they could command from refiners. The refining industry, however, would not be as excited about the policy change. It should not come as a surprise then, that the Koch brothers oppose the measure.
But the effects of a border adjustment tax are even more complex than outlined above. As Bloomberg Gadfly notes, the tax would have global ramifications as well. The resulting higher prices for domestic U.S. oil producers would definitely lead to more drilling and more output. That could add to global supplies, suppressing crude prices. However, cutting down on U.S. imports and boosting exports could also strengthen the U.S. dollar, which would have a depressing effect on U.S. exports, but also on commodity prices more generally.
The debate could be a moot point if the border adjustment tax proves to be too much of a political hot potato. The Republican Party has traditionally been very pro free-trade, so the tax would be a departure from Party orthodoxy, and it might not even be legal under WTO trade rules. It therefore, could be an uphill climb in Washington. The Koch brothers have laid down a marker on this issue, hoping to scare Republicans away from moving forward.
By Charles Kennedy of Oilprice.com
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