Washington Insider -- Thursday

Border Adjustment Tax Hearing Underscores Divisions

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Deep Cuts to EPA Programs Detailed In Trump Fiscal 2018 Budget Proposal

An Environmental Protection Agency (EPA) program to track greenhouse gas emissions nationally faces an 85% budget cut as President Donald Trump looks to slash the agency's funding and rollback climate change efforts.

Trump and EPA Administrator Scott Pruitt have downplayed the agency's climate change efforts, instead focusing on priorities including cleaning up Superfund sites.

In the Fiscal 2018 budget proposal released May 23, EPA faces $336 million in cuts to its climate work compared to estimated funding levels for 2017. The Office of Management and Budget (OMB) compared its Fiscal 2018 proposal to estimated funding based on the continuing resolution for 2017 rather than the recently passed omnibus funding levels for that year.

The $336 million in cuts to EPA's air pollution and climate work include:

$161 million reduction (34%) from 2017 levels to environmental programs and management,

$114 million less (46%) for science and technology programs, and

$60 million in cuts (nearly 18%) to aid to states and tribes from 2017 levels.

Reducing those programs is part of what the Trump administration calls its “commitment to return EPA to its core work.”

Trump's budget plan also maintains his pledge to halt billions in planned international climate aid. The proposal would eliminate a total of $1.59 billion for the United Nations Green Climate Fund, the Global Climate Change Initiative, and other international climate programs.

Infrastructure Plan Gets Some Details Via Trump Budget Proposals

Transportation and infrastructure projects would see a reduced federal footprint in both regulation and funding under President Donald Trump's proposed Fiscal 2018 budget and an accompanying infrastructure principles document released Tuesday.

Federal transportation spending would be cut by 13% while $5 billion would be set aside for a broader infrastructure initiative, under Trump's proposal.

New in the document is a preview of how the administration anticipates achieving the $1 trillion infrastructure investment the president announced during a speech before Congress earlier this year. The infrastructure fact sheet raises the prospect of expanding tolling on highways, allowing private companies to build and maintain interstate rest stops and expanding a program that provides loans for surface transportation projects. “The goal is to see long-term reform on how infrastructure projects are regulated, funded, delivered and maintained,” Transportation Secretary Elaine Chao said, adding her agency will provide the “seed” money to encourage non-federal investment. “The federal government will do its fair share,” Chao said.

Principles for infrastructure provided. Chao responded to calls for more information on the president's infrastructure plan with a promise May 15 that a statement of “principles” would be forthcoming. The fact sheet that accompanied the president's budget is the start of a conversation Chao expects to have with policymakers and stakeholders in the months to come, she said.

The four key principles call for the federal government to:

Make targeted federal investments

Encourage self-help

Align infrastructure investment with entities best suited to provide sustained and efficient investment

Leverage the private sector

The principles reflect the administration's desire for state and local governments, and the private sector to play a bigger role in improving the nation's infrastructure. “We would hope also to provide more details as time goes on,” she said.

A full legislative package should be ready by the third quarter, Chao reiterated.

Washington Insider: Border Adjustment Tax Hearing Underscores Divisions

While there are issues facing the Congress as it attempts to come to agreement on the FY2018 budget, one of the most controversial has been the proposal for a “border adjustment tax,” Informa Economics is reporting this week. The powerful House Ways and Means Committee focused on the proposal on Tuesday and members weighed in heavily on the issue. The result was “more evidence of hurdles ahead for the proposal,” Informa said.

Even Treasury Secretary Steven Mnuchin said publicly that the tax “doesn’t create a level playing field” and “has the potential to pass on significant costs to the consumer.” His concerns appeared to be echoed by some Republican House members during this week’s hearing.

Rep. Erik Paulsen, R-Minn., said he cannot support the border adjustment tax as it is described in the plan. Rep. Jim Renacci, R-Ohio, said he is skeptical of the idea, even though he has “been trying not to be,” adding, “I’m very concerned for the low-margin companies in my district.” Renacci has announced his intent to run for Ohio Governor in 2018.

The BAT is often billed as a key part of House Republicans’ wider tax overhaul plan – known as the "blueprint" – because it would providing an important new stream of revenue that would allow lawmakers to slash taxes in other ways. But while much of corporate America is in agreement that it would like to see a sweeping overhaul of the tax system — there is a deep divide about how best to achieve that.

Divisions, even amongst businesses, were evident during the hearing Informa said. Brian Cornell, the chief executive of Target, said in his testimony that he believed Target’s tax rate would leap from 35% to 75% if this proposal were enacted. That is because the BAT would prevent companies from deducting the cost of imported goods, as they do now. Target bills itself as America’s second-largest importer, and that about half of what it sells comes from overseas. “We – like many others – would be left with only bad options,” Cornell remarked.

Retailers would be forced to raise prices for consumers to cover the higher tax bill, he argued. “Every time your constituents fill up their gas tanks, they would pay more. The people who shop at Target are middle-class working families, whose budgets are already stretched,” Cornell said. “For them, this new tax would be a budget breaker.”

Businesses in the agricultural sector have been losing global market share, said Juan Luciano, the chief executive officer of Archer Daniels Midland, who supports the tax. He said he believes the BAT could help stop that. “This proposal offers the chance to give American farmers, American workers and American agriculture the chance to compete fully and to continue providing American products to customers around the globe,” Luciano argued.

Meanwhile, some economists have pushed back against retailers’ concerns that prices would rise, insisting the value of the dollar would adjust under the new system in such a way that would mitigate the cost. But importers argue that such an adjustment is no sure thing, and that the economics may not play out in the real world like they do in the textbooks. “There’s one word that I continue to hear again and again, which is ‘if,'" Cornell observed.

In addition, opponents of the tax also say that there is a chance the provision could be deemed not compliant with World Trade Organization rules, and could lead to trade sanctions on U.S. exports.

Even if a BAT were to garner broad support in the House, it appears poised to hit stumbling blocks in the Senate, where several Republicans have expressed reservations about it. Sen. David Perdue, R., Ga., said earlier this month said, “Right now, in the Senate, anyway, I think the border adjustment tax is dead on arrival.” In his business career before entering congress, Perdue was CEO of low-cost retailer Dollar General.

So, increasingly the BAT seem to be dividing tax reform advocates, especially based on its potential impacts on consumer prices and potential negative impacts on firms that include important overseas suppliers in their supply chain. In addition, while the trade policy implications have received little attention in the debate to date, it seems likely that trading partners would fight the export marketing implications of the policy in the WTO.

Clearly, the policy implications of the proposed BAT are broad, as well as highly controversial. This is a debate producers should watch closely as it proceeds, Washington Insider believes.

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