WASHINGTON – Target CEO Brian Cornell told the House Ways and Means Committee Tuesday that a proposed border adjustment on products imported by U.S. companies would raise Target's tax rate to 75 percent and would increase the prices of "everyday essentials" for Americans by 20 percent.
Cornell faced off with other executives in a debate over a part of a Republican tax reform plan that tries to encourage U.S. corporations to sell American-made products and create American jobs by forcing those who import products to pay taxes on the cost of those foreign-made products, not just on the profits earned from their sale. The proposal, known as a border adjustment tax, aims to offset tax cuts elsewhere in the tax reform plan being considered in the House.
In a hearing focused on keeping existing American jobs and creating new ones, Cornell, whose Minneapolis-based corporation imports a significant portion of its inventory, strongly opposed the border adjustment. He called it a plan that wagered "paychecks on an untested theory."
But other committee witnesses, including former Wal-Mart CEO William Simon, backed the border adjustment plan.
"Properly implemented, it is in the best interest of our country for this to be considered," Simon told the committee.
Simon called for a "safety net" for retailers like Target, suggesting an extended phase-in for the border adjustment to blunt its negative impact. He also talked about transforming worker training.
"Let's bridge the gap," Simon said.
But he maintained that the country must recover a manufacturing sector it has lost over the past three decades. For the American economy to prosper, Simon said, "we have to make things."
Juan Luciano, CEO of global food processing and commodities giant Archers Daniels Midland, offered support for the border adjustment based on what he said were current inequities in the world market. Those inequities had led to pricing advantages that allowed places like Ukraine to wrest from the U.S. the title of "bread basket of the world."
Businesses in other countries "enjoy tax systems with lower rates and border adjustments that give them an advantage," Luciano said in his statement to the committee. "When investment in agriculture moves to other countries, jobs move there, too."
Cornell made the opposite argument, emphasizing Target's plans to invest $7 billion in American communities. He also tried to draw in the range of businesses that rely on imports — "car dealers, grocery stores and gas stations."
Cornell said consumer price increases driven by the border adjustment would need to be offset by increases in the value of the U.S. dollar in order not to hurt Americans. He said experts he has talked to have "grave doubts" that currency exchange rates can offset price hikes in things like clothing, groceries and medicine.
Target supported tax reform and was willing "to put every tax break we receive on the table," but he insisted that the border adjustment would not spur growth.
Ninety-seven percent of the apparel sold in the U.S. is not made in this country, Cornell told the committee. "Those supply chains don't exist in the U.S."
"No one is growing bananas in Ohio or coffee beans in Michigan," Cornell added.
The supply chain for electronics is similarly limited in the U.S.
It will take time to bring back manufacturing and in the case of low-end products it may not make economic sense even with a border adjustment.
Despite those limitations, another witness, economist Lawrence Lindsey, cited research that said the border adjustment would cause a "one-time price increase of just 1 percent."
The committee's Republican majority appeared of two minds about policies that in essence make importing products and parts more costly and less desirable than selling American-made. They liked the idea of rebuilding American manufacturing and creating American jobs, but worried about consumer pricing.
No member of the witness panel could say that the dollar would appreciate fast enough to neutralize negative effects on consumers.
Rep. Erik Paulsen of Minnesota said he could not support border adjustment as it was introduced in the Republican tax plan last December. In February, he told the Star Tribune that he supported border adjustment but had reservations. Paulsen on Tuesday asked Cornell to suggest policies that might make the country's corporate tax structure better.
The Target CEO stressed a need for certainty, noting that there are too many "ifs" in the current tax plan. "I can't sit with my employees and say if all these [policies] pass, our company will be OK," he said.