The GOP Tax Bill's Hidden Consumer Tax

With the Senate tax bill passing after an all-night vote-a-rama of handwritten additions and changes, we are one step closer to reconciling the House and Senate bills by Christmas. Middle-class families should be rejoicing at this great holiday news, as a modernized tax code will rightfully remove some financial burdens currently weighing them down. But there are still some sticking points in tax reform that could potentially harm both the business community and consumers.

The House tax bill included a hidden consumer tax that is alarmingly similar to the Border Adjustment Tax (BAT) that had consumers and businesses up in arms when it was first introduced. As with the BAT, increased excise taxes could unduly burden businesses by impacting the cost of individual items. The result? Consumers could see the costs of everyday goods increase dramatically.

This “Backdoor BAT” is known as Section 4303 of the House tax bill. It would apply a 20 percent tax on deductible payments made from a U.S. corporation to related business units that are outside of the country, if the corporation doesn’t agree to submit its foreign subsidiaries to IRS jurisdiction. As with the BAT, some companies could end up paying the excise tax on goods twice, unless there are changes to the bilateral tax treaties (which is unlikely).

This excise tax will greatly impact the complex global supply chain that multinational companies rely on. As a result, companies will have no choice but to pass along the new tax to consumers, lay off workers, or shut down business altogether to cover the increased costs. The pharmaceutical, technology, and automotive industries will be affected in particular. That means, consumers could see the prices associated with medicine, cars, and televisions rise in response to the 20 percent tax on items imported by companies’ foreign subsidiaries.

After much talk, now is the time for the appointed House-Senate conferees to show through action they will be champions for the middle class and consumers. For example, both Representatives Black (R-TN) and Noem (R-SD) have a seat at the final tax reform table to reconcile the House and Senate bills and both are running for Governor in their respective states. What they do at the conference table will define their record in the eyes of voters, who can then decide if rhetoric meets reality. This is a critical test for them to follow through on their promises of supporting families and a stronger future for all through tax reform.

What’s more, the excise tax won’t make a huge impact on reducing the deficit gap, likely increasing revenue by a measly $154 billion from 2018 to 2027. So it can be excluded easily from the final tax bill without injury to the final revenue needed. By contrast, if Republican lawmakers include the “Backdoor BAT,” they will not truly have put voters first — and may find themselves in hot water next election.

Overall, Senate and House Republicans have done an exceptional job by writing tax bills that substantially lowers the corporate tax rate to 20 percent — which will stimulate economic and wage growth — and the rates for individuals and families, placing middle-class families and consumers above special interest groups. But it is critical that the excise tax be removed from the final bill, or else Republicans risk undoing the positive financial gains that would otherwise result from a modernized and simplified tax code.

Matthew Kandrach is President of CASE - Consumer Action for a Strong Economy, a free-market oriented consumer advocacy organization.