On Sept. 27, 2016, U.S. Representative Bill Pascrell, Jr. (D-NJ), a member of House Ways and Means Committee, and U.S. Representative Walter B. Jones (R-NC) introduced the bipartisan Border Tax Equity Act, which would mitigate the negative impact of border tax adjustments on U.S. exporters.

The congressmen said in a press release that “the bill addresses disadvantages for American exporters – estimated to be $204 billion annually in trade with the European Union alone.”

H.R.6183: Border Tax Equity Act of 2016

The official website of the U.S. Congress gives the following summary for H.R. 6183:

“This the bill amends the Internal Revenue Code to impose a tax on imports from any foreign country that: (1) employs an indirect tax system, and (2) grants rebates of indirect taxes paid on exports from that country. This tax shall be collected by the U.S. Customs and Border Protection (CBP) and deposited into a special account.

“The bill also amends the Tariff Act of 1930 to require the CBP, upon request of a U.S. exporter, to pay to the exporter from this special account an amount equal to the amount of indirect taxes imposed by the importing foreign country, minus any U.S. taxes rebated or funded upon exportation.”

How will U.S. refiners fare if the bill passes?

Refineries would be strongly affected by Congress’s proposed border tax adjustment, however effects would vary by region according to a white paper released by Genscape. In general, refineries that are able to are likely to decrease imports in favor of domestic crude oil.

Gulf Coast, Midcontinent reliant on imported heavy crude from Canada and OPEC countries

U.S. Border Tax Adjustment would Increase Refineries’ Use of Domestically Produced Crude

U.S. Border Tax Adjustment would Increase Refineries’ Use of Domestically Produced Crude

Many refineries in the Gulf Coast made upgrades to run heavy crude about a decade ago. This was done before the shale revolution, when it appeared that the U.S. would require large amounts of imports from other countries to supply demand. Now production from formations like the Permian and Bakken are supplying much of U.S. demand.

However, the vast majority of production from U.S. shale plays is light, sweet crude oil, not the heavy crudes that Gulf Coast refineries are designed for.

U.S. Border Tax Adjustment would Increase Refineries’ Use of Domestically Produced Crude

This means that most refiners in Texas and Louisiana rely on heavy crude imports for daily operations. They would be strongly affected by a border adjustment tax that taxed the crude they import to function. It is likely, however, that these refineries would attempt to maximize exports to take advantage of their tax-exempt nature.

U.S. Border Tax Adjustment would Increase Refineries’ Use of Domestically Produced Crude

Refineries in the Rockies and Midwest often rely on Canadian heavy crude oil, presenting them with the same problem Gulf Coast refineries face. Midcontinent refineries, however, have very little export potential and will find it difficult to offset the effects of the tax.

East Coast refineries set up for light sweet crude

East Coast refineries, like others, import a large amount of crude from other nations. Unlike other regions, though, East Coast refineries are mostly configured to run light sweet crude. In recent years these refineries have taken advantage of narrowing global price spreads to increase imports. U.S. crude, especially from the Bakken, became less competitive as the spread between WTI and Brent fell. The cost of transporting crude by rail made foreign imports more attractive.

U.S. Border Tax Adjustment would Increase Refineries’ Use of Domestically Produced Crude

A border tax adjustment would likely reverse this trend, as untaxed domestic crude replaced imports. East Coast refineries do not just import crude oil, though, as refining capacity in the region is not enough to meet demand. Gasoline is regularly imported both from the Gulf Coast and abroad. Therefore, while taxes on imported crude will be less of a factor on the East Coast, gasoline and other refined products will increase in cost for local consumers.

On the West Coast imports of crude have increased to offset declining production from Alaska. West Coast refineries may respond to increased import costs by replacing imports with rail-delivered domestic crude. Unlike the East Coast, however, the West Coast has limited crude-by-rail unloading capacity. Project to increase this capacity are mostly awaiting permits and are regularly challenged by environmental groups.

Overall effects of border tax adjustment not certain

The border tax adjustment is one part of a wider tax regulation overhaul proposed by Congress. In short, this proposal would render domestic exports tax-exempt while imposing a 20% tax on imports. The precise details of this plan are currently unclear, as legislation has not yet been written. No matter the specifics of the implementation, though, this tax will make imports more expensive, a cost which will probably be passed on to the consumer.

Some argue that the border tax adjustment will strengthen the dollar in proportion to the tax rate. Theoretically, the dollar would rise such that U.S. consumers, buying taxed imports with a stronger dollar, would not be affected by the tax. How much and how fast the dollar would rise is hotly debated, though.

Additionally, oil and refined products are traded in dollars, so what applies to other goods may not be applicable for oil. Currently, while there are likely outcomes it is difficult to know with certainty exactly what effect border tax adjustments would have on refineries and the oil market in general.

 


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