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Tax Reform

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The issue

Four years after Congress passed the first comprehensive rewrite of federal tax law in three decades, a proposal is pending that would return the United States to having one of the highest corporate tax rates in the industrialized world. Rates would rise by one-third, and the increase would come as retail and other sectors of the economy are still working to recover from the recession brought on by the COVID-19 pandemic.

Under the proposal, the corporate tax rate would increase to 28 percent from its current 21 percent, and the majority of the revenue raised would go to President Biden’s infrastructure plan.

While retailers have long supported infrastructure improvements, an Ernst & Young study commissioned by NRF shows the negative impacts of the tax hike would significantly exceed the positive effects of infrastructure spending. Gross domestic product, wages, consumption and investment would all decline, and over 700,000 jobs would be lost. The study warns that the recovery remains fragile and that some sectors, including retail, leisure and hospitality, remain below pre-pandemic employment levels.

Why it matters to retailers

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Retailers benefit from few of the tax incentives, deductions and credits that reduce taxes for other businesses, and consequently pay one of the highest effective tax rates of any industry – at or close to the full statutory corporate income tax rate. That is why NRF strongly supported the Tax Cuts and Jobs Act of 2017, which eliminated a wide range of corporate tax breaks and used the money saved to lower rates for all businesses, large and small alike. With the tax rate lowered to 21 percent from the previous 35 percent, the savings for retailers was estimated at $171.4 billion over 10 years.

Retailers have invested the savings in their businesses and employees, both creating jobs and increasing wages and benefits. Improved wages and benefits cannot be rescinded if Congress takes back the tax cut, and the competitiveness of the retail industry makes it difficult to pass along higher taxes in consumer prices, particularly in the current economy. Instead, the tax increase could force retailers to eliminate jobs, close their least-profitable stores and cut back on investments in ecommerce capability needed to meet the shift to online shopping brought by the pandemic.

NRF advocates for corporate tax reform

NRF was a leading supporter of the Tax Cuts and Jobs Act and is fighting equally hard to preserve its benefits. In a letter to leadership of House and Senate tax-writing committees, NRF said retailers rely heavily on the nation’s roads, rails and ports to move billions of dollars in merchandise each year and consider infrastructure improvement “an essential need.” However, it is “critically important” that funding options for infrastructure “should not have a worse impact on the economy than the benefits that infrastructure spending is expected to bring.”

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NRF commissioned the EY study as a key part of its efforts to show lawmakers the impact of the proposed tax increase.

The study found raising the corporate tax rate to 28 percent would cause net declines in consumption of 0.2 percent, GDP of 0.3 percent, wages of 0.5 percent and investment of 0.8 percent – billions of dollars in impact even after allowing for any increase in economic activity created by infrastructure spending. An estimated 730,000 jobs would be lost.

When state and local taxes are included, the total corporate tax rate in the United States would come to 32.5 percent if the federal rate were increased to 28 percent, according to the study. That compares with 25 percent in China, the United States’ biggest economic competitor, and 23.5 percent among nations in the Organization for Economic Cooperation and Development. Even at the current federal rate, NRF member retailers already pay a total effective tax rate between 22.5 percent and 29.9 percent when state and local incomes taxes are included, according to an NRF survey.

Despite claims that the tax increase would not affect families with annual income below $400,000, the study found about a third of the burden of the economic impact would fall on workers through job losses and lower wages.