The Trump Administration and the Republican-controlled Congress could bring about major changes in tax law and, if passed, Texas would be the state most affected by the proposed border tax, according to Vadim Blikshteyn, financial service senior tax manager with Baker Tilly Virchow Krause.
Capital gains and dividends are taxed at 23.8 percent of which 3.8 percent is a net investment income tax as a result of the Affordable Care Act. Trump will reportedly leave the current rate for capital gains and dividends at 20 percent and repeal the 3.8 percent surcharge.
“The 3.8 percent surcharge that many high-net-worth individuals pay on investment income will very likely be repealed or reduced depending on what the next health care plan will look like and that would move the maximum statutory rates for capital gain investment income to 16.5 percent under the House Republican Tax Reform Blueprint,” said Blikshteyn, who lectured at the New York Hedge Fund Roundtable on Jan. 26.
The Republicans are proposing setting the capital gains rate at half the maximum income tax rate. They also want to cut the top income tax rate to 33 percent, down from its current 36.5 percent. If both points were approved, that would lead to a 16.5 percent capital gains rate.
“This is really reminiscent of what the tax policy was before Obama and the Democrats came into office,” Blikshteyn said.
Another topic broached at the New York Hedge Fund Roundtable event was the House Republican plan to impose a 20 percent tax on imported goods, which is perceived by the Trump Administration to be an effective tool to incentivize the production of goods manufactured and sold in the U.S.
“The border tax adjustment will encourage businesses to export and motivate businesses that rely on imports to buy from U.S. manufacturers simply because there's going to be a deduction denial for any imports coming from foreign countries,” said Blikshteyn.
The border tax is similar to the Value Added Tax (VAT) that is imposed on European countries and most of the Organization for Economic Co-operation and Development (OECD).
“Texas is the largest exporter of products that we have in the United States,” Blikshteyn said. “Clearly, the energy companies, Shell Oil in particular, that export natural gas and oil to foreign jurisdictions would be prime beneficiaries.”
Texas has increased exports to Canada and Mexico by up to $16 billion since 1993 when the North American Free Trade Agreement (NAFTA) was enacted, according to the Texas Public Policy Foundation (TPPF).
“Texas is also the largest state from a nominal standpoint and from a volume standpoint that receives imports from Mexico so the proposed border tax is going to adversely impact importers there especially in the retail and auto space,” said Blikshteyn.
For example, Toyota Tundras are manufactured in the Lone Star state and if Toyota imports auto parts from Japan and Mexico, the automaker could be denied a deduction for importing those components.
“That could clearly increase the price of this vehicle to that of the ultimate end U.S. consumer,” Blikshteyn said. “I think it's going to be a detriment to importers and exporters in Texas. It will be interesting to see how the border tax pans out."
Juliette Fairley is a business and finance journalist who has written four personal finance books and has written for major newspapers and financial media. Juliette can be reached at firstname.lastname@example.org.
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