Small Businesses Uneasy Over Border-Adjustment Tax Plan
Owners say they may have to raise prices, lay off workers; exporters expect to benefit
Photo: Taylor Glascock for The Wall Street Journal
By Ruth Simon and Richard Rubin
Jan. 29, 2017 12:57 p.m. ET
A proposed overhaul of the U.S. tax code favored by Republicans in the House of Representatives is drawing fire from small-business owners who sell everything from toys to materials used in kitchen cabinets.
Some business owners say they worry that a part of the proposal, known as border adjustment, could force them to raise prices and lay off workers. Others fear it could even put them out of business. The proposal could, however, benefit firms that are exporters or don’t import raw materials or finished products.
Under the plan, imports couldn’t be deducted as a cost of doing business, while exports would be exempted. That could lead to higher tax bills for firms that rely heavily on imports. The proposal is part of a broader tax overhaul that would cut corporate and individual tax rates.
Before his inauguration, then President-elect Donald Trump in a Jan. 13 interview with The Wall Street Journal, criticized the border tax plan as “too complicated,” though he later said the idea was still being discussed. The administration has since moved toward accepting the plan in part by tying it to Mr. Trump’s proposed wall on the U.S.-Mexico border.
“I am expecting disaster if they actually implement this plan,” said Richard Woldenberg, chief executive of Learning Resources Inc. in Vernon Hills, Ill., which employs about 150 people. The company sells rainbow-colored plastic cash registers, kitchen sets and other educational toys, most made in China.
Under a border-adjusted tax, a company that imported $200,000 of foreign made toys, spent $100,000 on domestic costs and sold the toys for $350,000, would only be able to deduct the $100,000 in local costs.
It would then pay taxes—at a proposed lower tax rate of 20%—on $250,000. So its tax bill would be about $50,000.
That same company could currently deduct the costs of imports as well as local expenses, and then pay 35% in taxes on $50,000. That results in a tax bill of about $17,500.
Economists and plan supporters say the dollar will rise to offset the tax change. If that happens, importers would pay less for goods they import, because a stronger dollar would reduce the actual cost of imports, and more in taxes, with their after-tax profits unchanged because of the border adjustment itself.