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<i>The Week in Public Finance:</i> New Steel and Aluminium Tariffs May Impact Red States the Most

President Trump's "Buy American" policies are expected to cause the most harm to states such as Florida, Michigan and Texas.

tariffs-us-auto-industry
U.S. automakers face "double whammy" under the new tariffs Trump rolled out Thursday.
(TNS/Louis DeLuca)
President Trump’s new tariffs on steel and aluminum could hurt the same states that helped carry him to the presidency.

The 25 percent tariff on steel imports and 10 percent surcharge on imported aluminum that Trump rolled out yesterday could cost states much as $9 billion in import taxes this year. Florida, Ohio, Texas and Utah would pay the bulk, according to an analysis released this week by the conservative Tax Foundation.

Those four states represent nearly 28 percent of the nation’s aluminum and steel imports, while Texas businesses alone could spend more than $1 billion in additional import taxes this year. (California and New York would also be affected; they combine to represent more than 14 percent of total imports.)

Trump’s goal with these tariffs is to make U.S.-made steel and aluminum more price competitive. But as Governing’s Michael Maciag reported this week, experts are worried that they'll negatively impact local economies.

From a policy perspective, imposing such a huge increase on the cost of doing business -- on the heels of passing a major corporate tax break -- doesn’t make much sense, says the Tax Foundation’s Scott Hodges. “We just lowered the corporate income tax by 40 percent," he says. "Why don’t these U.S. manufacturers either pass along those tax savings to their workers or their consumers? Why do they need a tariff in order to be more competitive?”

The tariffs are just the latest Trump trade policy that stand to damage economies in Republican-held states the most. His ongoing threat to withdraw from the North American Free Trade Agreement is expected to hurt states in the Midwest and Southwest that do a lot of business with their international neighbors. 

That threat has already soured relationships with Canada and Mexico. Now, the new tariff could make things worse. That’s because although it was billed as something that would reduce China’s role in U.S. imports, Canada is actually the top trade partner for steel and aluminum while Mexico ranks third in U.S. steel imports.

A withdrawal from the 1994 pact would result in the re-imposition of tariffs on specific goods between the U.S., Canada and Mexico. A report this week from Fitch notes that higher tariffs on both sides, “would mean lower tax revenues, likely leading to constrained budgetary flexibility and higher unemployment.”

Among those with the most to lose are Arizona, New Mexico and Texas, which each send roughly 40 percent of their exports to Mexico. Fitch says Michigan would get hit twice as it sends 43 percent of its exports to Canada and 22 percent to Mexico. “Michigan's critical role as the center of the North American automotive supply chain,” says the agency, “ensures that its economy would be disproportionately affected.”

Other big exporters to Canada are North Dakota, which sends more than two-thirds of its goods there, and Maine and Ohio, which send nearly half of exports there, according to an analysis by RBC Capital Markets. When it comes to imports from Canada, about half of that country’s goods end up here in the U.S. Illinois and Michigan are the top destinations, absorbing 11 percent and 16 percent, respectively. Arizona, Colorado and Texas are the top U.S. destinations for Mexican imports.

 

Other news in public finance this week:

 

Louisiana’s Fiscal Cliff

The Louisiana Legislature ended its special session early this week after failing to agree on a solution to fix a projected $994 million budget shortfall for the next fiscal year beginning in July. The gridlock prompted S&P Global Ratings to warn that the state is heading toward a self-manufactured “fiscal cliff.” The shortfall is mainly due to the expiration of temporary tax hikes; roughly $800 million alone from a sales tax increase. The failure to come to an agreement, says S&P, “has the potential to stunt what otherwise has been recent positive momentum in the state” buoyed by the rebound in oil prices and a $300 million revenue boost thanks to federal tax reform.

 

SCOTUS to Hear Internet Sales Tax Case Next Month

Next month, the U.S. Supreme Court will hear oral arguments on a case that could have dramatic results for governments’ sales tax revenue. The case, South Dakota v. Wayfair, has been scheduled for April 17. A ruling in South Dakota’s favor could extend sales taxes to all online purchases and add up to $13.4 billion in new annual revenue, according to the U.S. Government Accountability Office. Many government and policy groups support such a ruling, as does the Trump administration.

Still, Fitch Ratings this week warned the new revenue -- if it comes -- wouldn’t be a cure-all. At best, “it would have a modest effect on sales tax collections nationally,” Fitch says, “but would not be sufficient to reverse the long-term credit challenge arising from diminished sales tax growth.”

 

Federal Spending Deadline Looms

Those who thought a shutdown crisis was avoided when Congress reached a two-year spending deal last month might want to think again. In their latest policy note, Wells Fargo’s team of health-care analysts report that negotiators seem to be struggling with how to divide up the newly authorized funding. Unfortunately, having a spending rubric doesn’t seem to help smooth over those age-old political flashpoints -- immigration, guns and health care. “While we are not ready to start talking about a government shutdown just yet, it would be important to start seeing some progress this week,” the note says.

This appears in "The Week in Public Finance" newsletter. Subscribe for free.

Liz Farmer is a former GOVERNING fiscal policy writer.
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