The Border Adjustment Tax (BAT) or no BAT roller coaster continues with today’s CNBC interview with Kevin Brady (Ways and Means Committee Chairman) [LINK], which will bring some BAT worries back on the screen. The House Republican leadership didn’t waste much time in clearly stating that BAT is a critical element of tax reform and that it will be included in any tax reform, at least from the House Republican leadership side. So much for the one day BAT relief that we highlighted in our Feb 14 blog on Trump’s comments that he only needed to tweak Canada’s trade relationship [LINK].
The question of BAT can be settled very quickly, one way or another, especially if Trump comes out, as CNBC suggests, with a tweet or a comment specifically saying where he is on BAT. There is still the Senate (where a number of Senate Republicans are against or at least questioning BAT), but if Trump says he is onside with BAT, the momentum will clearly go in that direction. It would be very interesting to see what happens if Trump comes out with a No BAT position. As of our sign off at 8pm mountain time, we have not seen any Trump tweet. Until that happens, we have to wait for his tax reform unveiling sometime in the next couple weeks.
Brady’s reaffirming that BAT is part of tax reform is not a surprise. BAT is part of the House Republican overall tax reform plan and is a term from the House Republican “A Better Way” tax plan released on June 24, 2016. This was not a joint House/Senate plan nor a Trump plan, but a House Republican plan. BAT is only part of the plan, which included the full picture of tax reform items such as corporate tax cuts, personal tax cuts, bring back money from foreign subs, etc. The BAT language is pretty clear “sales to US customers are taxed and sales to foreign customers are exempt”. The BAT fears are that all countries are included, including Cdn oil and gas exports to the US would end up being hit by a 20% tax.
But what may surprise in the interview was that Brady did not make BAT seem like a potential negotiating point, rather he was firm that BAT must be included and is a critical component of any tax reform, at least from the House Republican leadership perspective. It is important to note that Brady does not say he has the necessary votes in the House or Senate, nor is Trump specifically onside. This was a great interview and worth the 6:53 to watch it. Some of Brady’s specific comments were:
Asked if BAT was “definitely” part of tax reform. Brady replied “it is. look if you don’t’ have that in there, tax rates on our local businesses, small or large, will go up. Our tax code will continue to favor foreign products over American made products. Continue to have major incentives to drive jobs and headquarters overseas. That can’t continue. That’s why this is a critical component of our tax reform blueprint.
Asked if there was a Plan B if BAT wasn’t part of tax reform. Brady replied “I will tell you. There is no real tax reform that keeps in place tax breaks for foreign products over American products. No one yet has convinced me that equal taxation is a bad way to go. No one yet has convinced anyone that we should defend the current code that forces jobs overseas. Border adjustability along with lower rates, full unlimited expensing and no longer taxing worldwide. That accomplishes it so this is a critical part of tax reform, and I predict its going to be part of the overall tax reform.”
Asked if BAT was defeated, does that mean corporate tax reform won’t happen this year. Brady replied “I tell you what. At the end of the day I continue to make this prediction. I am confident that border adjustability which is equal taxation of all products in the US, regardless of where they come from or who produces them, that level playing field at the end of the day is going to be in tax reform.”
Our Feb 14 blog provided a graph showing the under-performance of Cdn oil and gas stocks vs the US peers. And we highlighted that the under-performance was driven by BAT fears that caused US investors to pull back from Cdn E&P and be followed by Cdn investors watching this move. The pull back in capital is a major reason why we haven’t seen the expected IPO market in Q1/17 to date. For Cdn natural gas stocks, this has been compounded by the forecast for warm Feb weather and weaker AECO gas prices relative to HH prices.
Absent a Trump tweet on BAT, the Brady comments place an increasing importance on Trump’s upcoming reveal of his tax reform plan. Last week, Trump noted he was coming out with his phenomenal tax reform in the next few weeks, a likely day is Feb 28, when he addresses a joint session of Congress. The BAT story isn’t over yet until we see an alignment of the White House, House and Senate. And there seems to be a sizeable contingent of Senate Republicans against or at least questioning BAT. But the firmness of Brady’s position will likely cause a hesitation in a return of capital to Cdn E&P following Trump’s tweak. Everyone will be waiting for Trump to give a specific comment on BAT.