Tax Reform

business people meeting

The issue

Legislation has been introduced in Congress that could finally unleash hundreds of millions of dollars in retail remodeling projects that have been held up by a mistake in the landmark tax reform law that took effect last year.

Among other job-creating economic stimulus provisions, the law was supposed to encourage remodeling projects by allowing retailers to write off the entire cost in the same year the work is done, eliminating the previous requirement that half the cost be depreciated over 15 years. Doing so was expected to create jobs for construction workers, boost orders for materials and supplies, help revitalize troubled shopping malls and struggling downtowns, and create long-term employment for countless retail workers.

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The cost of remodeling stores is now 40 times more expensive because of a typo in the tax law.

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Instead, a mistake that has become known as the “retail glitch” lumped retail remodeling – which typically takes place every four to seven years – together with other long-term projects like building construction. For more than a year now, that has meant that remodeling projects have to be depreciated over 39 years, dramatically driving up their after-tax cost and forcing retailers to put many of the projects on hold.

Lawmakers immediately acknowledged the mistake and agreed to fix it. But with any attempt to reopen tax reform exposing the measure to demands for other changes in tax policy, efforts to do so were delayed until this March, when the Restoring Investments in Improvements Act was introduced. The bill would allow remodeling costs to be fully written off in the year the projects are done – as intended by Congress under tax reform – and has been introduced in identical versions in both the House and Senate.

NRF welcomed introduction of the bill, saying “Congress has allowed this issue and the economic fallout to fester for too long.” No timetable has been set, but NRF is hoping to see action this spring.

NRF is also pushing lawmakers to fix another mistake in the tax reform law. Under the second provision, Congress meant to allow companies that are losing money to “carry back” the losses to previous years when they had a profit and therefore get a tax refund that would help maintain current operations. Instead, the legislation got the effective date wrong and therefore kept the revision from working as intended. Again, officials have acknowledged the mistake but have yet to correct it. NRF is working to have the issue addressed along with any other fixes passed this year.

Despite those issues, retailers are among the biggest winners under tax reform, which was the first comprehensive rewrite federal tax law in three decades. The Tax Cuts and Jobs Act took effect at the beginning of 2018 and NRF said it would “boost our nation’s economy more than anything we have seen in decades."

The new law eliminated a wide range of corporate tax breaks and used 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 was reduced to 21 percent from 35 percent, and small business “pass throughs” received a 20 percent deduction. The measure also provided relief for middle-class taxpayers.

NRF called passage of tax reform a “major victory for retailers,” who had benefited from few of the deductions and credits that lowered tax bills for other industries under the previous tax code and consequently paid among the highest effective tax rates of any industry. During debate in Congress, 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.)

Why it matters to retailers

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With retailers paying at or close to the full 35 percent corporate tax rate in the past, the industry was a strong supporter of reform that would broaden the tax base and lower rates. As far back as 2013, the NRF Board of Directors adopted a formal set of tax reform principles intended to boost the economy and encourage job growth – many of which can be seen in the tax reform law that is now in effect. Retailers will save an estimated $171.4 billion over 10 years thanks to tax reform, according to the University of Pennsylvania’s Wharton School of Business. And announcements made by retailers show that many are using the savings to reinvest in their businesses and employees, both creating jobs and raising wages.

NRF advocates for corporate tax reform

NRF led the retail industry’s fight for tax reform for years, and played a major role during the months of debate that led to passage at the end of 2017. NRF brought retail CEOs to Washington to meet with members of President 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 address retailers on tax reform at an 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.

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NRF research on tax reform found 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 also argued that lowering the corporate rate would encourage foreign retailers to invest more in their U.S. operations.

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 retailers are small businesses and provide 40 percent of retail employment.

The final tax reform law followed an earlier 2017 proposal that would have placed a 20 percent “border adjustment tax” on imports ranging from retail merchandise to oil to parts used in U.S.-made products. NRF successfully 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 by 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.