Fed Up With Tax Stalemate, FedEx CEO Pushes Alternative Solution

(Bloomberg) -- FedEx Corp. Chief Executive Officer Fred Smith has spearheaded the creation of an alternative tax overhaul plan amid divisions in Washington over the proposals that Congress and President Donald Trump’s administration have offered.

Smith, also FedEx’s founder, has been directly involved in pitching his plan across corporate America as well as to the White House and congressional leaders, said Bobby Brown, the delivery company’s vice president of tax. FedEx decided to devise its own plan after the debate over the controversial border-adjusted tax on imports that House leaders favor bogged down the legislative process.

“We at FedEx, like many major U.S. companies, are concerned the window for tax reform is closing,” Smith said in an email. “Our current federal tax system is simply not globally competitive, retarding investment and the high paying jobs that follow.”

The FedEx plan begins with many of the provisions from a blueprint that House Republican leaders released a year ago -- with one major difference. It eliminates the much-maligned border-adjusted tax, according to a copy obtained by Bloomberg News and confirmed by FedEx.

The BAT, which Smith has criticized, calls for replacing the 35 percent corporate rate with a 20 percent tax rate on companies’ domestic sales and imports, while excluding their exports. The provision has been estimated to generate more than $1 trillion over a decade, which would help to pay for cutting tax rates. The FedEx initiative proposes several revenue raisers, including increasing employer Medicare taxes. It would also limit the tax cut available to high-income “pass-through” entities like limited liability companies.

Finalizing Details

The company is still working on finalizing the details and is having its impact on the federal deficit assessed -- or “scored” -- by a Washington tax consulting firm, Brown said. So far the goal hasn’t been to get other companies’ approval, just their feedback and suggestions, he said.

“Everybody was happy to see a different way to get there, but nobody is beating the bushes saying this is the way to go,” Brown said. “The purpose of it was to get the discussion started with another plan because the House plan was the only game in town with any kind of detail. It seemed like border adjustability was sucking the momentum out of tax reform.”

With Republicans controlling the White House and Congress, party leaders saw overhauling the tax code as a realistic goal -- one that corporate America has been chasing for decades. But retailers and other importers have been on a mission to kill the border-adjusted tax because they say it would destroy their business models. That’s created opposition to the House plan and left the White House and the Senate struggling to figure out alternatives. Regardless, congressional leaders and the White House are now meeting regularly and say they’ll have a unified plan by September.

It’s unclear how much support Smith’s plan may garner once it’s finished. At least one facet of his proposal is likely to stir controversy: A pitch for increasing gasoline taxes that will be spent on infrastructure. Such tax hikes have been political non-starters in the past. That’s one of the primary reasons some big-name companies have balked at supporting it, according to two people who have seen the plan.

Gas and diesel user fees would be increased over five years to be in line with inflation levels, and subsequently indexed to inflation. Scott Greenberg, a senior analyst at the Tax Foundation, said indexing to inflation after five years could mean less opposition to the proposal.

A White House spokeswoman said National Economic Council Director Gary Cohn is aware of the FedEx tax plan, but declined to comment on whether or not the president and his advisers support its proposals. The aide added that the White House is pleased people are engaging and bringing forth their ideas.

Interest Expenses

The plan also calls for a 10 percent minimum tax on offshore passive income -- such as interest, dividends, rents and royalties -- in locales with a tax rate below that threshold. It allows for companies to write off only half of their net interest expenses on future loans -- down from a full write-off now. Ryan’s plan would completely eliminate this deduction, which is valued in debt-fueled industries like private equity. In another change from the House plan, which would allow for full, immediate expensing of companies’ capital investments, the FedEx initiative would allow companies to immediately deduct half that cost.

While he confirmed the authenticity of the plan that Bloomberg News obtained, Brown said it will almost certainly change in the future.

“We’re not saying this is the only way to get there,” Brown said. “It’s just a way to show revenue can get there without border adjustability. We’re going to keep playing with it as we get feedback from companies.”

Smith, who has a long history of fundraising for Republicans and lobbying for business-friendly policies, met with Trump in November after the election. FedEx hasn’t joined the coalition of companies opposing the border-adjusted tax, but Smith did criticize its potential effect on trade because it taxes imported goods.

“This is just very destructive,” to international trade, Smith said on an earnings conference call in December. “It’s not the proper solution.”

--With assistance from Ben Brody and Sahil Kapur

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Alexis Leondis, John Voskuhl