Protecting the duty drawback program is vital for expanding American manufacturing and increasing exports for American companies.
President Trump and Republicans' recently enacted One Big Beautiful Bill Act, delivers major wins for U.S. manufacturers with pro-growth tax cuts including permanent 100 percent bonus deprecation and expensing for research and development costs.
As Republicans now look to build on the success of President Trump’s tax cuts with a second reconciliation bill, protecting duty drawback should remain a priority for Congress as it aims to grow our domestic manufacturing.
Congress currently grants U.S. exporters the opportunity to recover tariffs paid on imported products when that product, a product incorporating the imported product as a component, or a like-kind product is exported. This reimbursement is known as a duty drawback.
Today, drawback is used across the world and is available to any industry. Federal law has allowed drawbacks stretching back more than 200 years. The practice is as old as the United States itself and has proven successful in incentivizing domestic manufacturing and reducing the trade deficit.
The practice of duty drawbacks incentivizes American manufacturers to grow their reach in international markets by reducing their tax burden and lowering costs for managing complex supply chains. This allows these businesses to price competitively and ultimately lowers the cost of everyday goods for households.
Without duty drawback, U.S. manufacturers would be at a competitive disadvantage to foreign competitors. The European Union, China, Mexico and Canada are all among the many nations that offer duty drawback.
This is why U.S. manufacturers have fought back against previous efforts to restrict duty drawback.
During the Biden administration, the National Association of Manufacturers (NAM) took the Treasury Department to court over promulgated regulations aimed at curtailing drawbacks allowed for excise tax payments. The case rose all the way to the U.S. Court of Appeals where NAM was ultimately successful.
The judge didn’t pull any punches in rendering his decision against Treasury, finding that the government’s position “produces an absurd result that fails at Chevron step one,” and that the “legislative history of the drawback regime demonstrates that Congress chose to expand access to drawbacks at the expense of excise taxes.”
Past efforts to restrict duty drawback have also gained the ire of conservative grassroots organizations.
In 2018, a coalition of taxpayer and free-market organizations including Americans for Tax Reform, National Taxpayers Union and the Taxpayers Protection Alliance released a letter in opposition to proposed regulations restricting the use of duty drawback for federal excise taxes including alcohol, tobacco, and fuel taxes.
In the letter, the groups warn that restricting duty drawback “undermines American competitiveness by restricting exports, goes against the legislative intent of Congress, and sets a precedent of using tax and trade export programs to discriminate against industries.”
In 2016, with Republicans controlling both the House and Senate, Congress passed the Trade Facilitation and Trade Enforcement Act (TFTEA) with the goal of expanding the duty drawback proposal to promote U.S. exports and reduce compliance burdens for business and the government.
By passing TFTEA, Congress actively chose to retain drawback for excise taxes and made the program easier to administer and comply with by tying drawback eligibility from the vague and subjective standard of “commercially interchangeable goods” to goods that are classified under the same eight-digit Harmonized Trade System (HTS) number.
As Republicans craft policy aimed at growing domestic manufacturing and boosting U.S. exports, they should seek to build upon their own success of strengthening the duty drawback program.
Doing so will increase American competitiveness and build upon the success of the Trump tax cuts to grow our economy.
Mike Palicz is the Director of Tax Policy at Americans for Tax Reform
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