Washington Retail Insight - February 10, 2006

Volume 11, Number 2
February 10, 2006

In Today's Edition:

• Bush Budget Focuses on Permanent Tax Cuts, Not Reform

• Bush Signs Legislation Repealing Byrd Amendment

• Senate Approves Postal Reform Legislation

• Congressional Outlook

• NRF Events

Bush Budget Focuses on Permanent Tax Cuts, Not Reform

     President Bush proposed the creation of a small Treasury Department office to study federal tax reform in the $2.77 trillion budget presented to Congress this week, but the spending plan focused on making permanent the tax cuts passed during Bush's first term rather than any fundamental overhaul of the nation's tax code.

     Marking a 180-degree turn from last year's debate over a National Retail Sales Tax, Value Added Tax and other economically risky proposals, a Treasury Department spokesman said the Bush Administration plans to "live within the tax code as it exists" until reform can be more fully studied.

     "The bipartisan and unanimous report of the President's Advisory Panel on Federal Tax Reform has provided a strong foundation for a national discussion on ways to ensure that our tax system better meets the needs of today's economy," the Bush Administration said in the "Blue Book," a 146-page summary of the budget proposal. "In the coming months, the Treasury Department will continue to study tax reform and engage in a public dialogue on this important issue."

     The Advisory Panel, chaired by former Senators Connie Mack and John Breaux, was one of Bush's top priorities in 2005, holding months of hearings but twice delaying its recommendations before issuing a final report in November. The report, originally expected to be the foundation for sweeping reform initiatives in 2006, recommended one option to update the current income tax system and another moving the nation to more of a consumption tax system. Bush has not mentioned the report in public since it was submitted and made no mention at all of fundamental reform in last week's State of the Union address.

     Rather than presenting a proposal for reform, the budget submitted on Monday asks for $513,000 to create a six-person Dynamic Analysis Division in the Treasury Department Office of Tax Policy that would provide analysis of reform proposals and other major tax initiatives.

     Deputy Assistant Secretary for Tax Analysis Robert Carroll told reporters that Treasury had done similar work for the Advisory Panel last year but that the new office would provide additional resources. The office will allow officials "to have a much fuller understanding of the dynamic effects, the macroeconomic effects, associated with major tax policy changes," he said.

     NRF lobbied heavily against last year's NRST and VAT proposals because of the devastating impact they would have had on consumer spending and retail sales. The NRST was rejected by the Advisory Panel but the consumption tax option recommended in its report is similar to a VAT. It also includes a provision opposed by NRF that would eliminate the ability of retailers and other importers to deduct the cost of imported goods as a business expense. Doing so would subject those costs to the proposal's 30 percent tax rate.

     Reflecting remarks made in Bush's State of the Union address, the budget proposal asks Congress to make permanent the $1.35 trillion in tax cuts for individuals, businesses and investors that were passed in 2001 and 2003. The cuts in personal income tax rates, relief from the estate tax and marriage penalty, cuts in capital gains and dividend taxes and other provisions have various implementation schedules and expiration dates but all expire by 2010. The doubling of small business expensing limits would also be made permanent.

     Speaking in New Hampshire on Wednesday, Bush reiterated his State of the Union argument that failure to make the cuts permanent would amount to a tax increase.
     "If Congress doesn't act, your taxes are going to go up and you're not going to like it," Bush said. "It's going to hurt the economy, and so Congress needs to make the tax relief we passed permanent."

     Bush also proposed steps intended to make health care more affordable by expanding Health Savings Accounts. The proposals would make premiums deductible and eliminate taxes on out-of-pocket spending among other provisions.

     The budget also proposes that that the Welfare to Work and Work Opportunity Tax Credit programs widely used by retailers to help move unemployed individuals into the workforce be combined into a single program and retroactively extended through the end of 2006. Both programs expired on December 31, 2005, and are in limbo until renewed by Congress.

     For more information, contact NRF Vice President and Tax Counsel Rachelle Bernstein at (202) 626-8168.

Bush Signs Legislation Repealing Byrd Amendment

     President Bush this week signed legislation that will repeal the Byrd Amendment, a controversial trade law that has driven up prices of consumer products by encouraging the abuse of antidumping laws.

     The repeal was part of S. 1932, the Deficit Reduction Omnibus Reconciliation Act of 2005, a wide-ranging budget-cutting measure signed at a White House ceremony on Wednesday.

     The bill includes language that would end the six-year-old Continued Dumping and Subsidy Offset Act as of October 1, 2007. Better known as the "Byrd Amendment" after its author, Senator Robert Byrd, D-W.Va., CDSOA mandates that duties collected in antidumping and countervailing duties cases be distributed to the companies that bring or support the cases.

      NRF has opposed the Byrd Amendment since its passage because it encourages abuse of antidumping laws. The measure subsidizes the filing of antidumping cases, encourages the inclusion of products not available from U.S. producers, and makes it difficult to terminate existing antidumping sanctions when it would otherwise be appropriate to do so. NRF has cited Byrd as an example of corporate welfare that has given hundreds of millions of dollars in government subsidies to a handful of companies at the expense of national security, natural disaster recovery and other critical spending priorities.

     A 2005 Government Accountability Office report revealed that nearly half the $1 billion in payments made under CDSOA had gone to only five companies, and that two-thirds had been paid to only three industries: bearings, candles and steel. The World Trade Organization has ruled that CDSOA violates international trade rules, and U.S. trading partners have begun imposing retaliatory duties on U.S. exports.

     For more information, contact NRF Vice President and International Trade Counsel Erik Autor at (202) 626-8104.

Senate Approves Postal Reform Legislation

     Stalled postal reform legislation that could help retailers avoid future rate increases finally cleared a logjam in the Senate this week, but House-Senate conferees will still have to negotiate a final version of the measure before it can see enactment.

     S. 662, the Postal Accountability and Enhancement Act, sponsored by Homeland Security and Governmental Affairs Committee Chairwoman Susan Collins, R-Maine, was approved by voice vote on Thursday. Passage came after Collins and co-sponsor Senator Tom Carper, D-Del., worked to clear holds put on the bill by senators concerned about rates that would be set for consumers and other issues.

     "As evidenced by the recent postal rate increase that will cost postal users billions of dollars over the next few years, it is crucial for the future of the U.S. Postal Service, postal customers and the economy that postal reform be enacted," Collins and Carper said in a joint statement. "Under its current business model, the Postal Service's financial future is not viable."

     The legislation was introduced last March, and backers hoped to see it passed in time for the Postal Service to avoid a rate increase needed to fund a $3.1 billion escrow account USPS was required to establish under legislation passed in 2003. The House passed its version in July, but the Senate holds prevented that chamber from acting in time, and Postal Service Board of Governors approved a 5.4 percent rate increase that went into effect last month.

     The Collins-Carper legislation would repeal the escrow requirement, which was established to pre-fund retiree health benefits although Congress reserved the right to determine the use of the funds.

     The measure would not roll back last month's rate hike, which increased the price of a first-class stamp to 39 cents. But it would place a cap on future rate increases by tying them to the Consumer Price Index, eliminate an additional increase in 2007 and enable retailers to further reduce costs through enhanced worksharing agreements.

     Despite House and Senate passage, the bill faces White House opposition to a provision that would return to the Treasury Department a $27 billion liability for paying pension benefits to military retirees who are Postal Service employees. The liability was shifted to the Postal Service under the same 2003 law that established the escrow requirement. Without returning the liability to Treasury, USPS says it could be forced into a 20 percent rate hike.

     NRF supports the legislation because increases in postal rates represent a significant added cost for retailers. Retailers are among the nation's largest mailers, using the Postal Service to ship merchandise, mail catalogs and advertisements, send bills and receive payments. 

     For more information, contact NRF Director of Government Relations Allison O'Donnell at (202) 626-8193.

Congressional Outlook:

House: Returns 2 p.m., Tuesday, February 14.

Senate: Returns 12 noon, Monday, February 13.

NRF Events:

• February 15-16, Policy Council, Washington, D.C.
• March 29-30, Taxation Committee, Washington, D.C.
• April 26-28, Committee on Employment Law, Longboat Key, Fla.

     For information on NRF events, contact Eileen Pryor at (202) 626-8114 or pryore@nrf.com.

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