Border Adjustment Tax Could Produce Oil, Gas Cash Flow Bonanza

Border Adjustment Tax Could Produce Oil, Gas Cash Flow Bonanza
House Republicans' tax reform pitch could be a windfall for US oil and gas producers, but a contentious border adjustment tax element will need bi-partisan support for lawmakers to make a deal.

House Republicans’ overhaul of the tax code – for the first time since Ronald Reagan was in the White House – would be a windfall for U.S. oil and gas producers, analysts say.

But a major shift in tax code might require more charm than even the Great Communicator could muster.

Republicans led by Speaker Paul Ryan, R-Wisconsin, and House Ways and Means Chairman Kevin Brady, R-Texas, have proposed to cut the U.S. corporate tax rate from 35 percent to 20 percent and pay for it with a border adjustment tax (BAT) to toll imports. Domestic companies’ exports wouldn’t be penalized and certain deductions would be included.

Ryan and Brady defend the plan as one that would level the playing field for U.S. companies. Around the world, different countries apply corporate tax rates on their domestic companies, and many of those rates are significantly lower than the 35 percent rate in the U.S. Then, they levy a value-added tax (VAT), which inspired BAT, on all other business.

It’s an approach to taxation that deviates from the longtime focus on simplification and remaining revenue neutral to a formula designed to promote economic growth, said Deborah Byers, U.S. oil and gas leader and managing partner at EY.

“Underpinning border adjustability is this shift to a consumption-based type tax with the goal to incentivize investment, which in turn, should then incentivize growth,” she said. “That’s why you see border adjustability coupled with things like 100 percent deductibility for capital expenditures, which in the abstract, is good for the oil and gas industry as well because it’s a very capital intensive industry.”  

But industries that rely on imports to produce their goods and services – such as mid-continent refineries – fear BAT would ruin their business model. Lawmakers – some of them already hesitant to sign onto the Ryan plan – will also have to answer to constituent business-owners. And the specter of an increase in gasoline prices remains.

As such, an import tax may not be probable, but it is possible, said analysts at R.W. Baird in a strategy note. Winners and losers would be found throughout the oil and gas supply chain.

“A crude oil import tax could represent a windfall for domestic oil producers and logistics firms at the expense of refiners, fuel distributors, multinationals, foreign oil companies and consumer-driven equities,” analysts said.

During the current discussion and debate portion of the bill-making process, many industries – including oil and gas – have asked for a carve-out, which would mean the import tax doesn’t apply to them. Oil states represent a key voting group that led President Donald Trump to victory in November, and insiders suggest he might be inclined to reward them.

Fueling Concerns

But the chief reason oil might escape the border adjustment tax, Baird said, is the expected rise in fuel prices.

“U.S. consumers can stomach higher prices at the pump in a slowly rising environment, particularly as fuel sales tend to correlate to employment and economic activity,” the analysts wrote. “But higher energy prices are much like a regressive tax and would particularly impact the blue-collar voting block that helped propel Trump into office.”

Such shocks are harder to absorb when the implication is a consistent, fast decline in consumer buying power.


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