Financial Industry Worried About Effects of Border Adjustment Tax Plan

Financial sector leaders are uncertain about how the House GOP’s proposed border adjustment provision, which would tax imports and exempt exports, will affect their industry, according to interviews with industry participants.

The tax proposal, which House Republicans say is necessary to pay for broader cuts in the corporate rate, has both rattled retailers and prompted other industry leaders to come to its defense. It has also created intra-party divisions, with Sen. David Perdue (R-Ga.) criticizing it as “regressive” and a bane to consumers in a letter to colleagues Wednesday.

Financial industry executives don’t know to what extent financial services will be considered a taxable commodity. “We’re still trying to get around border adjustability, and does that apply to services, not just goods?” said Richard Hunt, president and chief executive of the Consumer Bankers Association, in an interview Tuesday.

Critics of border adjustability point to its divisiveness in the private sector as evidence that it’s a bad idea. “Whenever you get to the point of discussing a proposed law’s impact on individual industries, then what it’s really telling you is this particular idea picks winners and losers in the marketplace, using the tax code, in this case,” said Tim Phillips, president of the conservative Americans for Prosperity, in an interview Wednesday. “By definition, that’s not the right idea.”

Emily Schillinger, a spokeswoman for House Ways and Means Committee Chairman Kevin Brady (R-Texas), countered that “the tax code already picks winners and losers,” in an interview Wednesday. She said the House GOP’s plan is aimed at fairer taxation. Republican taxwriters say the provision will keep American businesses competitive globally by rewarding them for keeping manufacturing in the United States.

But the financial sector could be treated differently than other industries, several analysts suggested in background interviews. They noted that some European nations exempt many financial services from their value-added tax systems.

Brady is aware that the financial sector is unique. “Financial services, insurance are two of those areas that we’re looking at thoughtfully to make sure we’ve got the right incentives and the right provisions in place because they are sort of a different animal,” Brady said at a Financial Services Roundtable event on Jan. 25. “They have a different approach than many businesses do. We want to make sure the tax code actually encourages stability in those industries for the long term.”

The financial sector already is subject to specialized rules, which taxwriters are taking into account when drafting a new framework, according to House tax aides.

The financial sector also has to contend with whether border adjustment will harm other parts of the U.S. market. “All the economic agents are customers of the banking industry,” said Bob Davis, an executive vice president at the American Bankers Association who handles tax issues, in an interview Thursday. “If this was negative for certain significant industries, that can create problems with parts of bank balance sheets.”

It’s not clear how much bank executives should care about the proposal. Most banks, except the largest Wall Street giants, might not be touched by the provision because they lack international transactions, according to banking analysts who also said they need more information to understand how it could impact different aspects of their businesses.

“The banking industry is probably looking at this with maybe the broadest eye of any industry group,” Davis said.