Retail executives are meeting with Treasury Secretary Steven Mnuchin on Tuesday morning in an effort to reiterate what they say would be harmful effects to consumers and business from the border adjustment tax touted by Speaker Paul Ryan (R-WI) and House Republicans, a spokesperson from the Retail Industry Leaders Association told Retail Dive.
The 11 executives that will be in attendance hail from J.C. Penney, VF Corp., Energizer Holdings, AutoZone Inc., Chico’s FAS Inc., Dollar General Corp., Ikea North America Services, PetSmart Inc., Tractor Supply co., PVH Corp and Coca-Cola. Representatives from RILA, including President Sandy Kennedy, will also attend the meeting.
The proposed tax, which would install a 20% tax on imported (but not exported) goods, including those manufactured overseas for U.S. retailers, was floated last summer by Ryan as part of the House Republicans' "A Better Way" tax plan and has been hailed by President Donald Trump, though it was absent from the one-page tax outline released by the White House last month.
Although the president didn’t include the border adjustment tax in his tax plan released last month, uncertainty about the fate of the proposal remains.
The plan includes lowering the corporate tax rate to 20%, switching to a territorial system and implementing the so-called “border adjustments” (taxes on imports but not exports), which proponents say will deter U.S. companies from instituting so-called inversions. For most large retailers, the lower tax rate won’t sufficiently make up for lost sales due to the higher prices wrought by import taxes, analysts said.
Retailers have a lot to lose if the proposal becomes law: RBC Capital Markets analyst Scot Ciccarelli found that the earnings risk to six major U.S. retailers could result in a $13 billion blow to their balance sheets, while Best Buy alone could see its annual earnings completely wiped out by such a tax.
Japanese apparel retailer Uniqlo last month threatened to shutter its U.S. stores if faced with the tax. "If I was directly told to do so, I will withdraw from the United States,” Tadashi Yanai, chairman and president of Uniqlo owner Fast Retailing Co., told Japanese newspaper The Asahi Shimbun.
While taxing imports and exempting exports (the nut of the plan) appears to target foreign businesses, because U.S. retailers depend so much on overseas manufacturing, including apparel, home goods, electronics and other products, they too would face the prospect of raising their prices or — if that approach threatens sales — reducing profits.
Proponents of the tax reform plan argue it will broaden the tax base, prevent profit-shifting to countries with lower corporate tax rates and bring manufacturing back to the United States. Additionally, they predict that the move would result in a stronger dollar, which could offset the effect on importers.
The proposal is essentially a consumption tax, a notion floated by Republicans for years as a way to make up shortfalls that come from the income tax cuts they also favor, similar to the value-added tax (VAT) imposed in Europe. By definition, a tax on consumption has the effect of curtailing consumer purchasing by raising prices without raising value; at the moment consumer spending is the backbone of the U.S. economy.
The tax and its effects run “very counter to the way consumers are feeling at the moment,” David French, the National Retail Federation’s senior vice president for government relations, said recently. The NRF earlier this year released its economic forecast for 2017, projecting that retail industry sales (excluding automobiles, gas stations and restaurants) will grow between 3.7% and 4.2% over year-ago totals, but warned that prediction relies on a continued stable economic environment.