Wednesday, March 15, 2017
With tax reform high on the agenda of the 115th Congress, NPGA Government Affairs Committee members were recently advised of a Republican-sponsored tax policy paper introduced in the summer of 2016 that includes a provision to establish a border adjusted tax (BAT) designed to exempt exports while taxing all imported goods at the corporate tax rate. The paper, “A Better Way,” by House Speaker Paul Ryan (R-Wis.) and House Ways and Means Committee chairman Kevin Brady (R-Texas), has several key implications for propane marketers.
As outlined by Michael Sloan, head of ICF Oil, Gas, and NGLs Advisory Services, the BAT is expected to increase the price of domestic propane by the amount of the tax preference for exports. The price of U.S. wholesale propane for export will be set by the international propane price. The price of U.S. wholesale propane for domestic use will be set by the international price of propane after adjusting for the export tax advantage.
Further, the decrease in the cost of exporting propane will increase competition for supplies with domestic use that will likely raise wholesale and retail propane prices. However, the increase in domestic price may be partially offset by a decline in the international propane price, caused by an increase in the U.S. Exchange Rate and by increased exports into the world market. However, the degree of the change in exchange rate is unknown.
Sloan said economists supporting the BAT expect that the increase in domestic prices — across all products — would be offset by a change in currency exchange rates. Trump economic policy objectives include maintaining a lower exchange rate to promote exports, which would partially offset the impacts of the BAT. However, Sloan asserts, “I do not expect to see a full offset for propane prices. Imports from Canada will be subject to the full import tax, increasing propane costs in regions that rely on Canadian imports.”
Cindy Belmont, vice chair of the Government Affairs Committee, noted that propane isn’t the only product that would be affected by the BAT, and observed that “no tankless water heaters are made in the U.S.” Rather, most are manufactured in Mexico. Numerous other equipment items and appliances used in everyday propane industry operations and manufactured abroad also stand in the line of fire.
Alternately, other provisions of “A Better Way” would provide significant benefits to propane markets: a reduction in corporate tax rates to 20% and full and immediate write-offs of investments for both tangible and intangible assets. “As with all tax proposals, the devil is in the detail,” Sloan comments, “and we still don’t know the final details.”
Due to the high levels of exported propane relative to domestic consumption, the BAT, which operates as a destination-based, value-added tax on consumption, has the potential for significant impacts on the retail propane industry. Under the plan, border adjustments will exempt exports from corporate income taxes, but will not allow the cost of imports to be deducted from taxable income. In addition, regardless of what country a company is incorporated in, all sales to U.S. consumers will be taxable while sales to foreign customers will be exempt. As a result, the market price for most goods sold to U.S. consumers will rise by up to 25% relative to the cost of exported products.
“The details of the BAT are not clearly explained in Ryan and Brady’s ‘A Better Way’ plan,” Sloan said. “However, the Tax Foundation, a think tank focused on business tax policy, clarified that the strategy would make revenue from sales to non-U.S. residents non-taxable, while preventing importers from deducting the cost of imported goods from their taxable income. Brady has been quoted as saying that border adjustability would ‘virtually eliminate’ any tax incentive for U.S. companies to move operations overseas.”
Sloan’s assessment acknowledges that the BAT is designed to promote exports, and the increased profitability of exports would likely result in an increase in the market price of propane due to increased competition for export volumes. The level and pace of how this wholesale price increase is passed along to consumers is still uncertain, and would depend on the response of propane retailers. Given the likely boost in the incentive to export — and the ramped-up profitability of exports — compared to propane import volumes, ICF expects to see additional propane moving toward export terminals and a resulting rise in pressure on propane transportation and processing infrastructure.
In addition, with respect to the BAT’s impact on domestic propane prices, marketers may be expected to pay refinery acquisition costs and wholesale prices for propane that may be up to 25% higher than what they would otherwise have been. The increase in price is likely to impact retail propane sales volumes. From a competitive standpoint, the market price for propane may not rise as much as the market price for fueloil, a derivative of the refining industry that is much more reliant on imports, but the price of propane will likely increase by more than the price of electricity. The higher price is also expected to stimulate additional energy efficiency measures.
ICF reports there may be regional issues for wholesalers and marketers as a result of the BAT. While the U.S. currently has an excess amount of propane supply given the large increases in shale supplies, the U.S. still imports a sizable amount from western Canada. In 2015, net Canadian imports to the U.S. totaled 1732 MMgal. While a minor portion of the overall supply balance, the Midwest and Northeastern states import the majority of Canadian propane and may experience a larger increase in propane prices should the price of Canadian imports increase as a result of the BAT.
Additional impacts to the consumer may also include a rise in the cost of propane appliances, which are predominately imported. While it is likely that all appliance categories will be impacted by any increased import tariffs, the net result will be an increase in the cost of any new or replacement device, which may hike the cost of switching fuel systems or encourage people to choose the lowest capital cost option.
ICF concludes that any plan that taxes imports but allows tax-free exports will reduce the demand for imported goods for U.S. consumption while increasing the supply of exported goods to the global market. “In general, import-based companies that would be barred under the new tax plan from deducting a substantial portion of their business expenses oppose the border adjusted tax. Supporters of the tax, including many major exporters, are liable to overstate the provision’s potential to boost U.S. production, since input costs rise in step with the price of sale able products.”
The consultancy adds that the act of reducing demand for foreign goods concurrently reduces demand for foreign currencies, causing the currencies of major U.S. trade partners to depreciate relative to the dollar. “At the same time, increasing the supply of U.S. goods in the global market is expected to increase total demand for these goods from foreign buyers, causing an increase in the global demand for dollars, which causes the dollar to appreciate relative to foreign currencies. Although the appreciation of the dollar would have a positive impact on U.S. companies by increasing their purchasing power, that appreciation will nevertheless make U.S. goods relatively more expensive to foreign buyers, dampening the impact….” Finally, the appreciation of the dollar generally discourages foreign investment in the U.S. since capital projects become relatively more expensive.
NPGA views the BAT has having “a draconian effect” on the propane industry that will “drive negative consequences on the backs of American consumers.” The association is scheduling meetings on Capitol Hill with Speaker Ryan and others, while at the same time seeking to join allies in the fuel and petrochemical industry such as the American Fuel and Petrochemical Manufacturers Association to oppose approval of the proposed border adjusted tax.
As outlined by Michael Sloan, head of ICF Oil, Gas, and NGLs Advisory Services, the BAT is expected to increase the price of domestic propane by the amount of the tax preference for exports. The price of U.S. wholesale propane for export will be set by the international propane price. The price of U.S. wholesale propane for domestic use will be set by the international price of propane after adjusting for the export tax advantage.
Further, the decrease in the cost of exporting propane will increase competition for supplies with domestic use that will likely raise wholesale and retail propane prices. However, the increase in domestic price may be partially offset by a decline in the international propane price, caused by an increase in the U.S. Exchange Rate and by increased exports into the world market. However, the degree of the change in exchange rate is unknown.
Sloan said economists supporting the BAT expect that the increase in domestic prices — across all products — would be offset by a change in currency exchange rates. Trump economic policy objectives include maintaining a lower exchange rate to promote exports, which would partially offset the impacts of the BAT. However, Sloan asserts, “I do not expect to see a full offset for propane prices. Imports from Canada will be subject to the full import tax, increasing propane costs in regions that rely on Canadian imports.”
Cindy Belmont, vice chair of the Government Affairs Committee, noted that propane isn’t the only product that would be affected by the BAT, and observed that “no tankless water heaters are made in the U.S.” Rather, most are manufactured in Mexico. Numerous other equipment items and appliances used in everyday propane industry operations and manufactured abroad also stand in the line of fire.
Alternately, other provisions of “A Better Way” would provide significant benefits to propane markets: a reduction in corporate tax rates to 20% and full and immediate write-offs of investments for both tangible and intangible assets. “As with all tax proposals, the devil is in the detail,” Sloan comments, “and we still don’t know the final details.”
Due to the high levels of exported propane relative to domestic consumption, the BAT, which operates as a destination-based, value-added tax on consumption, has the potential for significant impacts on the retail propane industry. Under the plan, border adjustments will exempt exports from corporate income taxes, but will not allow the cost of imports to be deducted from taxable income. In addition, regardless of what country a company is incorporated in, all sales to U.S. consumers will be taxable while sales to foreign customers will be exempt. As a result, the market price for most goods sold to U.S. consumers will rise by up to 25% relative to the cost of exported products.
“The details of the BAT are not clearly explained in Ryan and Brady’s ‘A Better Way’ plan,” Sloan said. “However, the Tax Foundation, a think tank focused on business tax policy, clarified that the strategy would make revenue from sales to non-U.S. residents non-taxable, while preventing importers from deducting the cost of imported goods from their taxable income. Brady has been quoted as saying that border adjustability would ‘virtually eliminate’ any tax incentive for U.S. companies to move operations overseas.”
Sloan’s assessment acknowledges that the BAT is designed to promote exports, and the increased profitability of exports would likely result in an increase in the market price of propane due to increased competition for export volumes. The level and pace of how this wholesale price increase is passed along to consumers is still uncertain, and would depend on the response of propane retailers. Given the likely boost in the incentive to export — and the ramped-up profitability of exports — compared to propane import volumes, ICF expects to see additional propane moving toward export terminals and a resulting rise in pressure on propane transportation and processing infrastructure.
In addition, with respect to the BAT’s impact on domestic propane prices, marketers may be expected to pay refinery acquisition costs and wholesale prices for propane that may be up to 25% higher than what they would otherwise have been. The increase in price is likely to impact retail propane sales volumes. From a competitive standpoint, the market price for propane may not rise as much as the market price for fueloil, a derivative of the refining industry that is much more reliant on imports, but the price of propane will likely increase by more than the price of electricity. The higher price is also expected to stimulate additional energy efficiency measures.
ICF reports there may be regional issues for wholesalers and marketers as a result of the BAT. While the U.S. currently has an excess amount of propane supply given the large increases in shale supplies, the U.S. still imports a sizable amount from western Canada. In 2015, net Canadian imports to the U.S. totaled 1732 MMgal. While a minor portion of the overall supply balance, the Midwest and Northeastern states import the majority of Canadian propane and may experience a larger increase in propane prices should the price of Canadian imports increase as a result of the BAT.
Additional impacts to the consumer may also include a rise in the cost of propane appliances, which are predominately imported. While it is likely that all appliance categories will be impacted by any increased import tariffs, the net result will be an increase in the cost of any new or replacement device, which may hike the cost of switching fuel systems or encourage people to choose the lowest capital cost option.
ICF concludes that any plan that taxes imports but allows tax-free exports will reduce the demand for imported goods for U.S. consumption while increasing the supply of exported goods to the global market. “In general, import-based companies that would be barred under the new tax plan from deducting a substantial portion of their business expenses oppose the border adjusted tax. Supporters of the tax, including many major exporters, are liable to overstate the provision’s potential to boost U.S. production, since input costs rise in step with the price of sale able products.”
The consultancy adds that the act of reducing demand for foreign goods concurrently reduces demand for foreign currencies, causing the currencies of major U.S. trade partners to depreciate relative to the dollar. “At the same time, increasing the supply of U.S. goods in the global market is expected to increase total demand for these goods from foreign buyers, causing an increase in the global demand for dollars, which causes the dollar to appreciate relative to foreign currencies. Although the appreciation of the dollar would have a positive impact on U.S. companies by increasing their purchasing power, that appreciation will nevertheless make U.S. goods relatively more expensive to foreign buyers, dampening the impact….” Finally, the appreciation of the dollar generally discourages foreign investment in the U.S. since capital projects become relatively more expensive.
NPGA views the BAT has having “a draconian effect” on the propane industry that will “drive negative consequences on the backs of American consumers.” The association is scheduling meetings on Capitol Hill with Speaker Ryan and others, while at the same time seeking to join allies in the fuel and petrochemical industry such as the American Fuel and Petrochemical Manufacturers Association to oppose approval of the proposed border adjusted tax.
