 Okay, we're back for a live three o'clock rock. Welcome to Energy in America on Think Tech. I'm your host, Jay Fidel. The show today is called New Issues for a New Administration. I'm going to talk about the border adjustment tax and energy alliances with Russia. Our guests for the show are Lucy and Pulirisi. Thanks for participating, Lucy, and welcome to the show. Good to be here, Jay. So we're in a threshold of a new administration, and this new administration is in Washington one that is already sucking the oxygen out of the prospects of good government, some say. Two issues come to mind on the energy front of this administration. One involves the larger economic implications of the border adjustment tax that Paul Ryan and the new Republican Congress are considering. Will this help our economy? Will it help our energy independence or not? The second issue we'll discuss is Russia, a huge piece of geography with lots of natural resources, including energy resources. So what relationship does Donald Trump have with energy going forward in Russia? What relationship does his choice for Secretary of State Rex Tillerson, CEO of Exxon, have with energy going forward in Russia? So many questions, such confusion, such issues of credibility, so many risks in this increasingly complex and threatening geopolitical world, and we haven't even had an inauguration yet. So our guests and regular contributor, Lucy and Pugirisi, will help us understand today. So welcome back to the show, Lou. Nice to have you here. Let me ask you at first, what's going on with the border adjustment tax? So I think this is the tax no one ever heard of, but it's a very big deal. And the way to start to think about this, I think, which is the important thing is, if you look at most of the economies of the world, particularly the developed world, they have something called a value-added tax. So in Europe it's not uncommon. You buy your chocolate croissant and the guy adds on a 20% tax on that, or maybe through the whole production process, the flour they added a bit. And it's essentially a consumption tax. And the argument goes like this, Europeans have a relatively low corporate tax rate because they shift their taxes onto consumers. Now in the U.S., we have a relatively high corporate tax rate, 35%. Some people get deductions for solar power, yada, yada, yada, yada, all this stuff. But the basic fact is that embedded, at least the theory goes, embedded in the price of goods in the U.S. is a high corporate income tax. It's kind of embedded in this price. And so the way to fix this is to get the corporate rate down in the U.S. But you have to pay for this lower corporate tax rate some way. And so is there a way to impose this cost so it looks a little bit like a consumption tax and puts the U.S. on a more level playing field? So the thinking behind the border adjustment tax is that we're going to tax, we're going to put an adjustment, not really a tax, an adjustment about the corporate tax. The corporate tax goes down to 20%. And all incoming goods in the U.S. will have a 20% tax. And all exports will have that tax removed. And so the thinking behind this is that... But what do you mean removed? How does that work? Yeah, so the corporate tax rate gets lowered by 20%. Businesses would no longer need to depreciate capital investment, by the way. Instead, they will be able to fully write off or expense everything. Businesses would no longer need to pay tax to the IRS on profits from foreign operations. So the idea is to go to a full territorial tax. This is a really big deal with the Republican caucus on the House. This would no longer be able to deduct interest as a business expense. And the corporate tax would be border adjusted as we just discussed. Now, you can imagine certain folks get quite nervous about this, like Walmart and Target, who import large amounts of goods and services, particularly goods, TVs from China, whatever. And what the tax analysts are telling us, they're saying, well, you shouldn't worry about that. Because of the adjustment, the dollar will rise sufficiently to fully compensate for the increased border adjustment tax. So we'll be broadening the tax base. But not everyone is fully on board with this effort yet, as you can well imagine. Some folks are quite concerned that it may be not compliant with the WTO, or that there'll be retaliation. Some folks may view this as a tariff and not a border adjustment. Isn't it a tariff? It's the same thing as a tariff, isn't it? Well, I think the argument is it's not a tariff, but an adjustment tax to make sure embedded in the price of U.S. goods that are consumed domestically is the 20% corporate income tax, and that this tax is not part of U.S. exports. So they're in a way trying to mimic that. But it's extremely complex. I can tell you that there's a huge debate. Different companies have different views on this. And I think it's going to be, it's very important for Hawaii, by the way, when you consider how much of your goods are imported, particularly from the Pacific Rim. Yeah. Well, it's very scary because this is a regressive tax when you do this. All consumption taxes are regressive. And in fact, you might argue that the U.S. tax system is one of the least regressive in the world because we do not have high value-added taxes on consumption tax. Well, I mean, we have a gross tax size tax, 4%, and the special add-on to that is more because of the rail here in Oahu. But that's a regressive tax. And what's interesting about that tax, different, for example, from the New York tax, which is at a higher rate, the sales tax there, the New York tax exempts a lot of things like food and medicine and things that are close to the heart of the consumer. But in Hawaii, the 4% actually generates a lot more income, more for the government, per capita, because it's on everything. There are no exceptions. Yeah. And so that's completely regressive. And it's that the surtax I mentioned, because a rail is likely to be extended in this year's legislature, so there'll be more and more regress—and then if you add this on top, this order adjustment tax, you have another consumption tax. And that'll also be regressive, and we will suffer by having a fairly stiff combination of consumer, consumption, regressive taxes now. So if you believe the economic theory on this, which is the dollar will adjust by the full amount of this tax, and that the dollar will rise by 20%, and this is of course—it's actually a Martin Feldstein wrote a piece in the Wall Street Journal about this two or three days ago, and it's, in theory, correct. However, you could see where the dollar starts to rise, and all of a sudden people think it comes under threat, because the WTO or some other countries are going to retaliate. But I think for Hawaii, there's another point. If you're going to have a more expensive dollar, that's great for Hawaiians who want to travel to Asia. But think about all the tourists that come to Hawaii. Absolutely. Foreign countries would now are facing a 20% higher effective cost for getting hotel rooms, buying food on the islands, but this is actually a pretty interesting problem if you're highly dependent on foreigners to buy your services, which is why the tourist industry— Yeah, and it flies in the face of what Donald Trump was saying before, namely that he wanted to increase American exports to go overseas, because if the dollar is stronger, right, it's those exports are more expensive overseas, and that diminishes the possibility of selling those exports overseas, doesn't it? Right, but the argument on this, and this is actually a plan that's been in the works under, you know, Leader Ryan, under, you know, the House majority leader, Ryan, who has been working on this for years. And part of this is a kind of—the motivation of this is quite, I think, positive. The idea is how do you get a strict territorial tax? How do you quit getting—how do you change the gaming of American companies that want to show high costs in the U.S. and high profits in other countries when the tax rates are lower? So they're trying to level the playing field on this issue by getting to make it quite neutral. So you can bring these no longer worry about where you do your R&D, no longer worry where you take your profits, and that if you can take more of the profits here in the U.S., you will go ahead and do so, so you'll get a big revenue bump from this. So it has some positive aspects, but there might be a disparity between theory and execution. It hasn't been tried in this country before, and I think what's interesting is that, like so many other initiatives that now are under consideration, if you look at it in the silo all by itself, you know, it might have some appeal, but we don't know how it affects other things. Right. And I can tell you in Washington, the various interest groups, the retail guys, the auto guys, they're all over the map on this thing. No one can really decide where they want to be. This is true for the auto companies. You think about the oil companies. If you're a domestic producer, this thing's pretty great, you know, you'll try to, the price of oil will rise in the U.S., right? So you can, but if you're a refiner who's importing oil and then exporting it, you might not view this as so positive. Yeah. Well, if you're in Hawaii, we import $6 billion worth of fossil fuel, and imports to us would be subject to the import adjustment tax, right? The border adjustment tax. And so you would have to hope that the dollar adjustment makes it appear neutral. I think you would. That's a hope. You thought of that. Your exports, which are generally would go out of Hawaii tax-free, right? You'd get this rebate, or you'd get, you wouldn't have this tax on the exports. The interesting thing about that is a lot of your exports are consumed in Hawaii when foreigners come to buy those services, which is to stay in a hotel. Yeah. I think it's really interesting when you put it that way, Lou, because, you know, what happens is we have our $6 billion, so we add, what, 20% on top of that? That'd be that much more expensive. And we do not export anything. I mean, if we had, we ever had a manufacturing sector, that's gone for decades. And so we don't have any benefit in the export side. And to the extent we, you know, you conceptually treat us as an exporter of tourist services, the tax or the reduction of tax would not apply to that. So we pay on one side of the ledger, but we don't get benefit on the other side. So if I were the Hawaiian delegation, I would be in there talking to the House committees and saying, look, we understand that this is a way to rebalance the U.S. trade deficit. And to find a different corporate structure, but we need to have the consumption of Hawaiian tourist services by foreigners treated as an export. That would be the cutout. Yeah, no, then it would work, at least according to its original intention. I think the other thing that you mentioned that I'd like to explore for a minute is the notion that foreign income, American corporations would not be taxed on foreign income. And that troubles me because a lot of these multinationals, Exxon, for example, you remember them, Rex Tillerson's Exxon, that Exxon, has a lot of foreign income. And indeed, multinationals, which began in the U.S., are into multinational activities. And it's been four years now, many decades, it's been their modus operandi to try to push their income offshore and try to get the best tax break. But they still have to pay U.S. tax in some cases. Now this would exclude that. This would change the picture for them. And regardless of all the other provisions in this sweeping change of the tax code, they get a huge break in not having to pay taxes at any rate for offshore income. Am I right? Right. They're buying his tax now. They're worried about the debt. The proponents of this bill would argue that there would be a huge incentive for the U.S. to be the cost center for those taxes now, because the corporate rate has gone down to 20 percent. So that you would want to account for as much revenue as you can in the U.S. As a better rate than overseas. Yes. This would be the theory behind it. This is one of the motivations behind this legislation. I see. Well, you know, again, it's in a silo. That sounds pretty good, but it's untested, at least in this country or for this country and for our revenue code in general. And I really wonder, maybe you've seen some of this, whether anybody has conducted the kind of testing, you know, the kind of think tank testing on this kind of possibility so we can model what would happen to the tax structure and the economy. Yes. So there are pretty substantial efforts underway at the American Enterprise Institute. We're not really tax guys. That's a real dark art. Dark art. Thank you. But I would be shocked if someone in Hawaii who worries about the corporate structure and the nature of the economy hasn't started to look at this. It would make a lot of sense to me. We should be doing some work on it. Absolutely. Lou, that's a great idea. Thank you for that. We're going to take a short break. That's Lupu Uriisi. He is the CEO of E-Princk, which is the Energy Policy Reachers Foundation in Washington, D.C. And we join him. He joins us by Skype, and we are delighted to have him. So much so, we take a short break. We'll be right back. Hi. I'm Stephen Philip Katz. I'm the host of Shrink Rap Hawaii. We are here every Tuesday at 3 o'clock on Think Tech Hawaii, talking to and about shrinks and mental health. Please join us. Aloha, and happy New Year. It's 2017. Please keep up with me on Power Up Hawaii, where Hawaii comes together to talk about a clean and just energy future. Please join me on Tuesdays at 1 o'clock. Mahalo. Good afternoon, Howard Wiig, Code Green, ThinkTechHawaii.com. I appear on Mondays at 3 o'clock, and my gig is energy efficiency, doing more with less. It's the most cost-effective way that we in Hawaii are going to achieve 100 percent clean energy by the year 2045. I look forward to being with you. Aloha. Bingo. We're back with Lucian Fugirisi of E-prink, the Energy Policy Research Foundation in Washington. He joins us by Skype, and we're talking about changes in energy policy that are coming in this new administration yet to be inaugurated. Okay. So, we talked briefly about the tax changes and how they might affect energy and especially energy in Hawaii. But let's talk about Russia. I haven't thought so much about Russia in many years. All of a sudden, we're all thinking about Russia. We hear about Russia as much as we hear about Donald Trump. And so, can we take a minute and get a little praisey about where Russia has gone with energy loop? Yeah. So, I think that Russia has an enormous endowment of both crude oil and natural gas reserves. And its natural gas reserves are truly enormous. And during the Soviet era, it had a rather inefficient but extensive petroleum industry. It was really built under a Cold War kind of framework in which all the pipelines and all the refiners and everything were well defended and made to run the central economy. It was a real mercantile. And anything left over was export. They really didn't think about it that way. But then in about the 1974-75, we had the first Arab oil embargo. The world price of oil shot up quite high. People thought that was high from $3 to $12 a barrel. That's high. At one point, it got up to as high as $40 a barrel. And the U.S. and the European allies had enormous discussions. And one of the things we did was to encourage the Europeans to get off of OPEC oil, to not use it for industrial activities, to not use it for utilities. And the Europeans began a kind of sustained program, not for coal, but also to begin to import gas from Russia. And if you're from the Soviet Union, that kind. And if you remember, you probably don't remember, but under Jimmy Carter, the Russians invaded Afghanistan and we actually withdrew technology and equipment for the expansion of the Russian pipeline system. But the Europeans, over time, became, I wouldn't say heavily dependent, but somewhat in many cases, depending on which country you are in, you're reliant on Russian gas. The collapse of the Soviet Union, of course, oil production fell dramatically. Eventually, Russia was reconstituted in a more top-down system under Vladimir Putin. And Russian production recovered, actually. Russian oil production today is 10 million barrels a day, quite large, one of the largest producers in the world. Russia provides extensive natural gas to the European Union. And the European Union has had a, since the disruptions in the Ukraine, the European Union has had an active program to try to lessen its dependence on Russian gas. But you know, what interests me is that there was a time, and my recollection is imperfect, but there was a time when Russia was using the supply of gas as a geopolitical weapon. And if they didn't like something that was happening, they turned it off. And then Western Europe, you know, had to come to the table. But lately, even with Ukraine, Russia hasn't done that, have they? No, and I think, look, if you think about this in terms of a kind of bilateral high-risk scenario, if you're Russia, that's a very risky, you know, you have this large natural gas asset. And in many ways, the resurgence of the American shale gas revolution has substantially obliterated the value of that asset. I mean, gas prices, until just very recently with the cold sort of polar vortex taking place in Asia and Europe have been very low, including internationally traded gas prices. And so the Europeans have also had an active program on renewables, which has resulted in them in using a lot more coal. It's a kind of funny system, you know, because the system isn't executed that well. And so I would say the dependence issue from the perspective of the Russians are, look, the real problem was that we only had one outlet to get that gas to Europe, and that was through Ukraine. And the Ukrainians stiffed us. So we, and I think for the Russians, it was a big mistake. We said, we're telling Ukrainians, look, you can't have the gas, we're good. You have to keep pushing this gas through Europe. But your gas, you can't have that. And the Ukrainians said, fine, we're just not passing any of that gas to Europe. We'll just use it, probably. Now, there's different views on what the Russians did and the Ukrainians did in this case. And in fact, and as a result, the Russians have had a very active program to do two things. I mean, the Russians have tried to build pipelines outside Ukraine. So you have the Nord Stream, South Stream. You have an active program to bypass the Ukraine. And then you have an active sort of diplomatic initiative on the part of the United States to encourage the Europeans to diversify their gas accounts, including getting access to US That's good business, isn't it? It can be a good business. And I think that as we discussed, we're going to see some major initiatives to expand LNG, particularly in the Pacific. And LNG would come largely from what, the US? So I think the Gulf Coast of the US is going to be the biggest. Lots of shipments have made it to the European Union, from where we've only begun to export LNG from the US in the last year. I mean, we used to have small volumes from Alaska and then from the Kenai Peninsula many years ago. And just last week, the first shipment of US LNG made its way to Japan. Very interesting. So can LNG from the Gulf or parts of America, can that be at a lesser price than the gas that Russia would deliver through gas from these pipes across the border? Yeah, so it's very tough to beat the Russians on price because they have the built-in infrastructure and the main gas reserves feeding the European continent are pretty low-cost. Now, you can. So I think the US policy of the Europeans has been, look, this dependence of Europe is very uneven. Countries like Bulgaria and some of the Baltics are highly dependent. Germany, other countries, much less dependent. And what we should do is encourage the Europeans to have better interconnection, more storage, and a more open and competitive market. And the Europeans as well have been going after gas prom in recent years as a kind of monopolist. And so they've made them diversify some of their holdings. Well, that's good. That's healthy. I think if Europe is dependent on the Russians these days, the Russians are very, what do I say, strategic. And Europe could be sorry if they rely on them in this particular environment. Yeah, and it's an ongoing. And in many cases, the Europeans are not undertaking the things they need to do to be more resilient. Well, let's move to Mr. Trump. So he's got Rex Tillerson. Rex Tillerson received the Friend of Russia Award from Mr. Putin not too long ago. He's involved in fuel and energy in Russia. He's participated in partnerships with the Russian government, probably in fossil fuel. I don't know about gas. Maybe you do. But it would seem to me that part of what's at stake here is the relationship of Exxon and Russia. And maybe Trump and Putin and Tillerson all together now. What's happening here? Are we involved somehow in energy in Russia? Yeah, so Rex Tillerson was actually in the chair all day to day in front of the Foreign Affairs Committee in the Senate. And I think he spent at least 10 hours. I think they let him go to the bathroom by that halfway through, but he was there for about 10 hours. That's because they like him so much. And there was a huge discussion on sanctions. Because as you know, after the acquisition, shall we say, of Crimea by the Russians and then the sort of incursions within eastern Ukraine, that the U.S. placed a lot of energy sanctions on Russia. And but those sanctions were really on future development and technology. And the Exxon position actually is quite interesting in Russia. It was drilling a very expensive and arctic well, which Tillerson got grilled. But I think his position on that was, look, we went into the State Department when the sanctions had moved. We can't pull out from this well until it's done because it's unsafe. If we left and we left it for the Russians, that would be very dangerous. We don't want to do that. And I think one of the interesting things about Exxon's operations in Russia is they're one of the few that really didn't get beat up very bad financially. And one of that is they're pretty good at negotiating deals. So what do you think? One final question here before we go, and that is given this relationship between Tillerson and maybe Trump, but depending on how accurate those memorandas are of his involvement in Russia and what they might have on him, you think he's going to lift the sanctions or let him stay in place? No, I think actually, I don't know what's just going to happen on the sanctions. We could talk about that. But Tillerson made it quite clear. And actually, I've met him several times. I know him. You know, he's a leader of the Boy Scouts. I think he was an Eagle Scout. He severed his ties completely from Exxon. And as he said, all the reasons for me not to take this job are selfish, right? I mean, the guy's got $400 million. He could lie on the beach. I don't think it'd be a big problem. And so I don't think the notion that he's taking this job to enrich himself, I think that's just a bunch of hope. OK, we're going to have to see. I hope we can come back to this next time, Lou. This is very interesting stuff. Next time we can look back at this hearing and see how it worked out. That's a good report. Thank you, Lou Fudirisi, the president of the Energy Policy Research Foundation. Aloha. Till next time.