A “border-adjusted tax proposal” floated last summer by Republican Speaker of the House Paul Ryan (R-WI) and touted by President-elect Donald Trump during and after the presidential campaign could hit retailer earnings by driving up the cost of imports, analysts told The Wall Street Journal.
The proposal includes a lowered 20% corporate tax rate, a switch to a territorial system, and 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.
The earnings risk to six major U.S. retailers could add up to as much as $13 billion, The Journal reports. Retailers at risk include Wal-Mart Stores Inc., Costco Wholesale Corp., Genuine Parts Co., Best Buy and Dick’s Sporting Goods Inc. Scot Ciccarelli, RBC Capital Markets analyst, said Best Buy’s annual earnings would be “wiped out.”
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.
“[S]ales to U.S. customers are taxed and sales to foreign customers are exempt, regardless of whether the taxpayer is foreign or domestic,” according to the “A Better Way” document from the Republican House of Representatives, which contains the most comprehensive description of how the proposal would work. Neither the Senate nor Trump has yet endorsed any such particulars.
Analysts who spoke with The Journal note that the bottom barrel prices on apparel that U.S. consumers have become accustomed to would not likely be possible under such a proposal. Apparel prices could increase as much as 15%, “with specialty apparel being the category most at risk given the mix of imported merchandise,” according to a note Wednesday from Hedgeye Risk Management LLC retail analyst Brian McGough.
In a note to clients Wednesday cited by the Journal, Instinet LLC analyst Jessica Schoen Mace said any retailer “with a higher percentage of goods sourced from abroad, as well as those with lower product margins, will be more pressured.” That describes most if not all major retailers selling apparel, home goods and office supplies, among other merchandise.