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Retailers are among the biggest winners under legislation passed by Congress and signed by President Trump that provides the first comprehensive reform of federal tax law in three decades.
The Tax Cuts and Jobs Act is based on the “Unified Framework for Fixing Our Nation’s Broken Tax Code” released in September by the Trump administration along with House and Senate GOP leadership. After Trump asked Congress to have legislation on his desk by Christmas, the House passed its version of the bill on November 16 and the Senate followed with its own on December 2. Lawmakers then worked to resolve differences between the two measures, and both chambers approved a final bill on December 20. Trump signed the legislation into law on December 22, and NRF said reform will “boost our nation’s economy more than anything we have seen in decades.”
The final legislation eliminates a wide range of corporate tax breaks and uses the money saved to lower rates for all businesses, large and small alike, a goal long sought by NRF and the retail industry. The corporate tax rate is reduced to 21 percent from 35 percent, and small business “pass throughs” will receive a 20 percent deduction. The bill also provides relief for middle-class taxpayers.
NRF called passage of tax reform a “major victory for retailers,” who benefit from few of the deductions and credits that lower tax bills for other industries and consequently pay among the highest effective tax rates of any industry. During the three months of debate, NRF called tax reform “the key to prosperity that small businesses, large employers and middle-class workers have all been waiting for more than a generation.” (The last comprehensive rewrite of the tax code took place in 1986.)
NRF has led the retail industry’s fight for tax reform for years, and played a major role in its passage. NRF brought retail CEOs to Washington in the spring to meet with members of Trump’s cabinet, and NRF President and CEO Matthew Shay met with Trump at the White House to voice retailers’ commitment to reform and explain the impact it would have on the industry. NRF arranged for Treasury Secretary Steven Mnuchin to speak on tax reform at an Ohio Council of Retail Merchants event moderated by Shay, and Shay praised benefits for small businesses during a news conference at the U.S. Capitol with Senate Majority Leader Mitch McConnell, R-Ky.
NRF campaigned heavily for reform, saying that reducing business taxes would free up resources for companies to create jobs and bring back investment that has gone overseas to countries with lower rates while middle-class tax cuts would put money into consumers’ pockets. NRF believes the now-passed combination will create a ripple effect throughout the economy.
Why it Matters to Retailers
Retail benefits from few of the tax breaks that lower tax bills for other industries, and pays the highest effective corporate tax rate of any sector of the U.S. economy – at or close to the maximum 35 percent. Because of that, the retail industry has been a strong supporter of income tax reform that would broaden the tax base and lower the corporate tax rate. Based on economic studies performed by the congressional Joint Commission on Taxation and conducted for NRF by Ernst and Young, doing so would increase gross domestic product, wages and consumer spending. The NRF Board of Directors adopted a formal set of tax reform principles nearly five years ago that would boost the economy and encourage job growth.
NRF Advocates for Corporate Tax Reform
NRF research on tax reform finds that reducing the corporate rate would free up enough money that employers could potentially create between 500,000 and 1.5 million new jobs. NRF has also argued that lowering the corporate rate would encourage foreign retailers to invest more in their U.S. operations.
In a recent blog post on NRF.com, Shay outlined “Why Passing Tax Reform is Good for Retail.” Earlier, NRF Vice President and Tax Counsel Rachelle Bernstein outlined half a dozen times policymakers have unsuccessfully tried to pass tax reform since the 1986 update of the tax code but said “the politics and the policy may finally be aligning for the first time in 30 years.”
While much of the debate over business tax reform focused on the corporate tax rate, NRF pushed for tax relief for small businesses as well because 98 percent of retailer are small businesses and provide 40 percent of retail employment.
In a September letter to the Senate Finance Committee, NRF set out a series of principles for tax reform. NRF said reform should be neutral among types of businesses so that companies are not favored on their form of legal entity (such as C corporations vs. “pass through” businesses that pay taxes as part of owners’ personal income tax), how they hold their property (leased stores vs. owned) or distribution channel (online vs. bricks-and-mortar). NRF said an adequate transition time should be provided after passage, and that reform should not shift the burden to consumers as would have happened under the border adjustment proposal.
The United Framework proposal and the Tax Cuts and Job Act superseded the “Better Way” tax reform plan proposed last year by House Speaker Paul Ryan, R-Wis., and House Ways and Means Committee Chairman Kevin Brady, R-Texas, both of whom supported the new approach. The Better Way plan also would have cut corporate taxes, but included a 20 percent “border adjustment tax” on imports ranging from retail merchandise to oil to parts used in U.S.-made products. NRF argued that the BAT would have driven up prices for consumers while driving some retailers out of business and putting their employees out of work. NRF helped defeat the BAT proposal, taking retail CEOs to Washington and producing an “As Seen on TV” commercial that aired on Saturday Night Live and went viral on the internet.
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A report from Ernst & Young examines the potential impact on consumers and the overall economy of inaction on tax reform in the United States over the past several decades and the potential economic benefits that could arise from reform of the U.S. tax system.