US: The BAT and the Trump Factor

Published on February 2, 2017

A flurry of meetings at the White House on corporate tax reform today and tomorrow, as well as intensive lobbying efforts rapidly being geared up are all but certain to ratchet up the speculation over the odds on the hugely consequential border transaction tax issue in the coming weeks.

But the most immediate question surrounding the fate of the BAT is whether President Trump will support the ambitious House Republican corporate tax reform proposal, of which the border transaction tax is pivotal to its prospects for passage since its estimated revenue offset allows the legislation to move through reconciliation rules that protect against Senate filibuster.

*** While it is impossible to know with any reasonable certainty, we believe the President is starting to lean towards supporting the BAT legislation. We understand that senior policy advisor Stephen Bannon is starting to favor the bill once rebranded as a “nationalist tax,” while the President’s other senior advisor, Jared Kushner, is likewise said to be sympathetic to the scheme. As the two most trusted advisors, that could prove critical to President Trump’s decision. ***

*** And how President Trump comes down on the House Republican-proposed BAT will be critical to the probabilities of its passage on Capitol Hill, though it is still not a simple binary outcome. If the President comes out against the BAT, or punts the heavy lifting back to the Republican leadership, we believe House Speaker Paul Ryan may not go forward with the BAT. But even if Trump does endorse the BAT proposal, it still does not ensure its passage. ***

*** With that in mind, we still give the BAT one in three odds of passing in Congress as it stands (SGH 1/20/17, “US: The Politics of the BAT”), but that those odds would flip to perhaps two in three with Trump’s endorsement. Those odds would climb even higher if the President commits significant personal political capital to win over key votes for its problematic passage, particularly in the Senate. ***

BAT as a “Nationalist Tax”

To say the views within the White House on the BAT are still “evolving” would be an understatement. The inner sanctum of the President’s policy advisors in the White House are known to be still divided over the BAT issue, with some still leaning toward targeted trade tariffs as the means to fulfilling one of Trump’s key campaign promises, even though the BAT is really tax not trade policy.

But we think it telling that senior policy advisor Bannon is said to be leaning towards support if the BAT legislation can be rebranded as a “nationalist tax.” Along a parallel path of winning over the President, Speaker Ryan last night had a one on one dinner with Jared Kushner, Trump’s other influential advisor, which we understand was intended to map out a tax reform timeline among other issues, and to help smooth over some of the jagged political edges of the BAT.

In addition, President Trump was scheduled to meet with the key Committee chairs and ranking members on tax legislation to hear the pros and cons of the House Republican tax reform ambitions.

Of the four – House Ways and Means Chairman Brady and Democratic ranking member Richard Neal, Senate Finance Committee Chairman Orrin Hatch, and Ranking Democratic member Ron Wyden — Hatch is lukewarm at best on the BAT proposal, while the Democrats are opposed, leaving Brady to make the case.

What’s more, President Trump may get another earful of assessments and criticisms about the tax reform and the BAT during his scheduled meeting tomorrow with his newly formed Business Advisory Group this Friday. Among those executive attending will be the President and CEO of Walmart.

Well-funded Lobbying Efforts Underway

That is potentially significant because Walmart is among the 120 US retailers who earlier this week formed the Americans for Affordable Products, a new lobby group to oppose the House GOP plan for a border transaction tax. Among the retailers represented are Best Buy, Macy’s, Rite Aid, Nike, the Gap, Target, and Saks Fifth Avenue.

Their lobbying and eventual advertising campaigns targeting the Senators and Congressman in pivotal states and districts will focus on how their vote could drive up what consumers pay for gasoline and every retail purchase from TVs and computers, to clothing and furniture. One of the more aggressive tactics being considered is putting up end of aisle signs in the big outlets that would note how a yes vote on the BAT by the local congressman would add x% to what the shopper pays in the cost of their purchases.

Democrats will likewise play hard to win back House seats in 2018 by asserting the GOP is giving away huge tax breaks to a handful of big corporations and making working class families pay for it with higher consumer prices.

Countering the sway and cash of the retailers and the oil and gas interests is a newly formed American Made Coalition, which so far comprises about 25 US companies — General Electric, Oracle, Pfizer, and Eli Lily, Dow among them — that would greatly benefit from the tax exemption for exports under the proposed BAT.

Two Pivotal Drivers

While the flow of lobbying dollars will be a boon for the lobbying industry in Washington — so much for “draining the swamp” — the outcome of the BAT battle is likely to hinge more on two factors.

As we noted, the first is whether President Trump will endorse the BAT if it is included in the tax reform legislation, and more to the point, how much time and political capital will he be willing to commit to help the Republican leadership find the needed votes among reluctant Republicans (and a handful of Democrats) to get to 218 votes in the House and 50 votes in the Senate (Vice President Pence can provide the vote to put the total to 51 if necessary).

President Trump enjoys high popular popularity in many Republican-controlled states and congressional districts, but historically it tends to be very difficult to translate that popular support into votes on a specific bill. An example often cited is when President Clinton used his then popularity to push a per BTU-used tax on energy use in a close House vote, only to see the bill get crushed in the Senate and the backlash to cost Democratic seats in the House.

And we are equally unsure if the President and his closest advisors will be willing to risk his political capital for a proposal that originated from outside the White House, where there in fact remains strong support for trade tariffs.

At the end of the day, BAT passage may depend on attracting enough Democrats in the House and Senate to offset the high likelihood that as many of a quarter of the House and Senate Republicans may end up opposing the BAT “tax on consumers.” Appealing to nationalism might work, but it also draws a smaller crowd among the voting public when it comes to higher retail prices — and it has far fewer donors and lobbyists promoting it.

Moreover, that Speaker Ryan will delay tax legislation until after the vote on the planned amendments to the Affordable Care Act means that the opponents to BAT have that much more time to work against it. It also means that tax reform will take center stage when the relations between congressional Democrats and Republicans will be more, not less, bitterly divided.

No BAT Markup until March

The other factor is to what extent the BAT leg of the eventual tax reform legislation being drafted by Ways and Means Committee Chairman Brady will be revised after a month’s worth of behind closed door lobbying by key interest groups. We understand Brady will not be marking up the corporate tax bill until probably early March, if then.

Throughout this month, Brady will be conducting a steady stream of “listening sessions” with various business groups to hear their assessment and concerns over the BAT. He is already positioning on the margin for modifications to the original thrust of the BAT, increasingly describing the BAT as a “Made in America Tax” to align the bill with Bannon’s preferred rhetorical framing.

What’s more, those meetings are invariably going to result in new exemptions or extended transition periods for crude oil refiners, for instance, or retailers and manufacturers already heavily invested in global supply chains.

But with each exemption, the revenues needed to offset the cost of the corporate tax cuts decreases. What’s more, we understand that many of the BAT proposal’s supporters are conceding the estimated $1.3 trillion that would be generated by the BAT is almost certainly on the high side.

Until there is an actual bill to be marked up, the Joint Taxation Committee cannot score the costs and revenue gains of the proposed tax reform.  And while the JTC does include a dynamic scoring that might lift the projected revenue gains, the Committee staff will be careful in those estimates to protect the committee integrity. And from what we understand, the static scoring is still used for the base case estimates.

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