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A plan hatched last summer by Congressional Republicans could usher in the largest change in 30 years to the way the U.S. government taxes corporations on income, imports, and exports, and it has not gone unnoticed by the global auto industry. GOP leaders including House Speaker Paul Ryan have proposed what they call a “destination basis” tax system, also known as border adjustment, under which corporate profits would be taxed differently depending on whether the goods sold to generate that profit are imported or exported. The proposal seemed to be gaining steam earlier this year with the election of Republican Donald Trump as president and with the same party controlling Congress. As it gathered momentum, companies that rely on imports began to notice.
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Automakers such as Toyota have certainly been paying attention. “Obviously we’re not in favor of a border tax,” Toyota Motor North America CEO Jim Lentz said last month. “We don’t think that it’s good for this industry.” Lentz said Toyota is asking its dealers to “get a lot more involved with the potential ramifications of a border adjustment tax.”
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Price Hikes Expected
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Although no specific action has been taken to implement an actual border tax, several estimates have already been floated on how car prices could be affected by what would effectively amount to a 20 percent levy on imports. The consensus is that prices on a vast majority of cars and trucks would rise. Of course, not all automobiles consumed in the United States are created equal.
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Lentz gave reporters a rough estimate using a Toyota Camry, one of the most American-made automobiles (domestic content is 75 percent), and pegged the price increase at $ 1000. “So if that’s kind of the base level of what everything else goes up, that’s a pretty big hit to consumers, because the manufacturers don’t have margins to absorb that,” he said.
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As American as 40 Percent Mexican Apple Pie
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Industry research firm Baum and Associates went deep on the potential price directions automakers could consider. It took a look at automakers’ wares based on what’s made in the United States, what’s imported, what’s exported, and then how much U.S. content the automakers’ vehicles have, because a border tax would be levied only on the portion of the cars and trucks that are imported, not on parts made in the U.S. or exported from here. So if a Detroit Three vehicle shipped in from Mexico to the U.S. typically has 40 percent of its content made in the U.S., 60 percent of it would be subject to the tax.
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Baum and Associates then took the impact of a 20 percent import tax and compared it against companies’ profit savings expected from a corresponding tax cut. Cautioning that the numbers are a purely speculative “thought exercise,” Baum and Associates then looked at the price hike needed per vehicle to balance out the tax hit:
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“The automakers will make their own decision in order to maximize their profits,” Alan Baum, principal of Baum and Associates, told Car and Driver. The figures above reflect average costs across the carmakers’ entire lineups, but individual models might see much greater or lesser price changes based on where each vehicle is produced, profit margins, and competitive positioning. These are all factors in current car pricing, but they’d be applied under a different set of rules and assumptions, Baum said.
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In any case, Baum and Associates’ research shows just how much the companies’ lineups are (or are not) American made—and how vulnerable some automakers could be to an adjusted import tax. It’s why the lobbying against such a proposal has already begun. It’s worth noting that Geely (owner of Volvo), Mazda, Mitsubishi, and Tata Motors (owner of Jaguar and Land Rover) import vehicles to the U.S. with zero percent U.S. content.
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Low-Priced Cars Disproportionately Hit?
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Carjojo, which tracks car-sales data, has found that 35 percent of all vehicles with a base MSRP below $ 20,000 sold in the past six months were made south of the border. Those same cars represented about 5 percent of all new-car sales volume in the United States. The 20 percent import-tax adjustment proposed by Republicans would not apply only to Mexico, of course.
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On the Mexico-made cars, though, Carjojo estimates the average tariff would lead to price increases of about $ 2679. Carjojo calculated the import tax at 15 percent to account for items such as automakers eating some of the cost along the way. The 12 cars Carjojo analyzed were these models, with their 2017 base prices:
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Fiat 500 $ 15,990
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Ford Fiesta $ 14,535
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Honda Fit $ 16,965
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Honda HR-V $ 20,405
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Jeep Compass $ 20,935
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Kia Forte $ 17,495
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Mazda 3 $ 18,720
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Nissan Sentra $ 17,855
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Nissan Versa Note $ 16,345
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Nissan Versa $ 12,855
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Toyota Yaris iA $ 16,840
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- Volkswagen Jetta $ 18,715
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In its study, Carjojo pointed out that a border tax on these low-priced cars would hit working-class families hardest, with CEO Peter Levy saying, “If this tariff is put in place, at least $ 1.8 billion annually would be redirected from the pockets of economy-car buyers to the government—whether to build a border wall with Mexico or for anything else.”
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By Carjojo’s estimate, the import levy would require $ 3302 of pretax income. “So if the median-income family bought one of these vehicles and had to pay $ 3300 more to buy it, that represents 5.9 percent more of their income—just this tax,” Levy told C/D.
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So what are people in this situation likely to do? As Levy pointed out, the choices would be to buy used vehicles, keep their own cars running with any necessary repairs, or simply pay more for new cars. It’s worth noting that used-vehicle prices are coincidentally expected to drop this year and also that many U.S.-assembled vehicles have high imported-parts content; the Chevrolet Cruze, for instance, one of the few economy cars still assembled in the United States, lists 60 to 80 percent domestic content. The remaining 20 to 40 percent would be subject to the proposed tax adjustments.
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So What Is the Border Adjustment All About?
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While there have been utterances about applying tariffs only to products coming from Mexico, or on all imports into the U.S. in general, the Republicans’ proposed border adjustment would not be such a tax. Rather, it would change the way corporations’ profits are taxed, essentially putting greater levies on imports while subsidizing exports. These kinds of border adjustments would also “create a level tax playing field for domestic and overseas competition,” according to University of California at Berkeley economics professor Alan Auerbach, who is considered one of the main authors of the idea.
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One would think such a setup would lead to more exports and fewer imports with favorable implications for the U.S. balance of trade. But some economists theorize that if these border adjustments are enacted, the domestic currency—in this case the U.S. dollar—would simply adjust accordingly. Hypothetically, the dollar would strengthen, so importers would get goods for fewer dollars despite the adjusted tax structure. Before that happens, though, critics say consumers would pay more for all imported goods, including new cars and trucks coming from abroad.
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On Life Support?
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The border adjustment would also help offset a corporate tax cut that Trump and the Republicans are keen to implement. The corporate tax rate has been at 34 to 35 percent since 1986, and Trump has said he wants it down to 15 to 20 percent. The Republican plan with the border adjustments calls for cutting the corporate tax rate to 20 percent.
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- The Good News: It’s a Buyer’s Market for Used Vehicles; The Bad News: Your Car Is Depreciating Faster
- Foreign Automakers Really Beat the Patriotism Drum at the Detroit Auto Show
- Trump Was Right: There Are Mexico-Built Chevrolet Cruzes on U.S. Dealer Lots (Although It’s Not Exactly That Simple)
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But this is not something that is poised to become the law of the land quite yet. Recent chatter in Washington suggested that the Republicans’ tax proposal was expected to be taken up in earnest this spring, with the earliest actual movement coming in June. The latest news reports indicate the border-adjustment plan could even be on life support, not because carmakers oppose it, but following a meeting with the president in which large chain retailers voiced their concerns.
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