How the Koch Network Could Sink Tax Overhaul

Lobbying network poised for policy win

WASHINGTON, DC - NOVEMBER 04: Americans for Prosperity Foundation chairman and Koch Industries Executive Vice President David H. Koch (C) listens to speakers during the Defending the American Dream Summit at the Washington Convention Center November 4, 2011 in Washington, DC. The conservative political summit is organized by Americans for Prosperity, which was founded with the support of Koch and his brother David H. Koch. (Photo by Chip Somodevilla/Getty Images)
WASHINGTON, DC - NOVEMBER 04: Americans for Prosperity Foundation chairman and Koch Industries Executive Vice President David H. Koch (C) listens to speakers during the Defending the American Dream Summit at the Washington Convention Center November 4, 2011 in Washington, DC. The conservative political summit is organized by Americans for Prosperity, which was founded with the support of Koch and his brother David H. Koch. (Photo by Chip Somodevilla/Getty Images)
Posted May 22, 2017 at 5:00am

The lobbying and political network of Charles and David Koch, bogeymen to Democrats for years, is poised for a significant policy win — but it will come at the expense of fellow conservatives on Capitol Hill.

Their victory also could derail a policy goal they share with those same Republican lawmakers: a permanent comprehensive overhaul of the nation’s tax code.

Koch Industries and the network of conservative advocacy groups funded by the billionaire brothers, such as Americans for Prosperity, have spent months working to tear down a crucial element of the House GOP leaders’ tax blueprint, which would impose a new levy on imports. The tax is best known as a border adjustment, and it would help raise more than $1 trillion over 10 years to fund a big corporate tax cut.

House Speaker Paul D. Ryan of Wisconsin and Ways and Means Chairman Kevin Brady of Texas say their proposal to tax imports but exempt exports would lure more companies to manufacture in the United States. Though the House committee will hold its first hearing on the border adjustment tax Tuesday, it may already be dead.

Senate Majority Leader Mitch McConnell said just days ago that the proposal probably wouldn’t pass his chamber, though the Kentucky Republican noted that talks continued. The Trump administration hasn’t maligned the idea, and even Ryan conceded lawmakers are discussing alternatives. Brady has talked of phasing in the border adjustment tax over time.

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The Koch network, along with a robust, multimillion-dollar opposition campaign from the retail industry, has helped convince a number of Republicans that the BAT would result in higher prices for U.S. consumers. In short, the Kochs have successfully divided members of the party they are most closely associated with politically.

Retailers say the conservative groups, led by the Koch network, give their cause a boost and complement their own intense effort that has included multiple trips to Washington with CEOs of Wal-Mart, Target and other stores. The broader business lobby in Washington, meanwhile, is largely silent because of internal conflict.

“They have an approach to this that is more ideological or more philosophical,” said David French, the top lobbyist for the National Retail Federation, which considers fighting the border adjustment proposal its No. 1 issue. “They bring a healthy skepticism to the growth of government spending.”

In an effort to be for something, rather than just against border adjustments, Koch-affiliated groups announced a new advocacy effort this month to buoy a tax overhaul effort that does not include the centerpiece of the House GOP plan.

The Koch network is not new to the tax debate. It has been working to tear down the BAT since late last year after the November election results catapulted the House GOP tax blueprint from the realm of legislative fantasy to being the plan itself.

“Our policy team understood very quickly that it was, in fact, a tariff on imported goods,” said Tim Phillips, who runs Americans for Prosperity.

Proponents of the border adjustment concept strongly disagree with that characterization and say it would end tax incentives for moving production abroad or keeping offshore profits out of the United States. Brady, for one, said it would reverse current policies that favor foreign products and hurt Americans by driving “businesses and jobs overseas.”

It’s also a way to pay for a sweeping tax overhaul, which aims to lower the average corporate rate to 20 percent, without ballooning the deficit.

The influence of the Koch advocacy nonprofits comes largely from an organized grass-roots operation around the country, as opposed to paid K Street lobbying. Americans for Prosperity reported a sharp uptick in its federal lobbying tab in the first quarter of 2017, but it still was only $40,000.

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Both Koch Industries and the outside groups have shared or produced studies that aim to show the downside of the border adjustment proposal, specifically the projected higher costs to consumers, even if those costs might eventually even out with an expected higher value of the dollar.

Koch Industries, which imports crude oil, may see some of its costs rise under the proposal, but a spokesman for the company said its own internal analysis found that, overall, the company’s bottom line would actually benefit from the BAT. The company has a problem on ideological grounds.

“We are opposed because we think it’s bad policy,” said company spokesman David Dziok. Koch Industries was one of the first major companies to come out in strong opposition to the BAT with a statement on Dec. 7.

Dziok said the for-profit corporation was in agreement with the advocacy groups, such as Americans for Prosperity, but were not working in collaboration.

For its part, AFP has run cable and digital ads against the border adjustment proposal. “It’s safe to say it’s been a seven-figure effort in total, so far,” Phillips said. “It’s been more than just ads. Our state directors and activists back home have met with a number of House members.”

AFP’s activists have also come to Capitol Hill. They’ve met with lawmakers from Ohio, North Carolina, Florida and Virginia, among others.

The Libre Initiative, the Koch affiliate that focuses on Hispanic outreach, has done interviews and ads in Spanish and English, said group spokeswoman Marilinda Garcia.

Generation Opportunity, the millennial-focused advocacy arm of the Koch network, too, made its own pitch against the border adjustment tax with a Facebook Live event on Valentine’s Day where it featured imported chocolate, wine and other staples of the holiday that it said would be more expensive under the proposal, said David Barnes, director of policy engagement.

The free-market Mercatus Center at George Mason University was also an early and vocal font of opposition to the BAT. Charles Koch is a member of the Mercatus board.

“For me, it was completely independent of the retailers or even that of Koch,” said Mercatus’ Veronique de Rugy, who has written extensively against the proposal, including a National Review article from Nov. 30. “The pro-BAT side wasn’t prepared at all. They didn’t think about the optics.”

A longtime supporter of the border adjustment proposal, academic Alan Auerbach of the University of California, Berkeley, admits to being caught off guard by the intense opposition.

“I must say, as someone who has favored this idea for a long time, I was quite surprised,” the economics professor said. “I guess I shouldn’t have been because there’s a lot of money at stake.”