Washington Retail Insight - February 3, 2006

Volume 11, Number 1
February 3, 2006

In Today's Edition:

• Bush Addresses Tax, Trade, Health Care in State of the Union

• NRF Says Bush Health Care Proposals More Effective than State Legislation

• Final House Vote Sends Byrd Amendment Repeal to Bush

• Senate Approves Two-Year Extension of WOTC, Depreciation

• Deadline Extended for Claims in Visa/MasterCard Settlement

• Retail Container Ports Quiet But Could See Challenges Ahead

• Congressional Outlook

• NRF Events

Bush Addresses Tax, Trade, Health Care in State of the Union
     President Bush addressed some of retailers' top concerns in his State of the Union address this week, asking Congress to make tax cuts permanent rather than backing risky tax reform, cautioning against protectionism in international trade and proposing initiatives to lower the cost of health care.

     With 4.6 million new jobs created in the past two-and-a-half years, Bush said the economy is "healthy and vigorous." NRF-supported tax relief that put $880 billion back into the pockets of consumers, businesses and investors played a major role in that prosperity, but needs to be made permanent, he said. The series of personal and business tax cuts were passed from 2001 to 2003 with various implementation schedules and expiration dates but all expire after 2010.

     "If we do nothing, American families will face a massive tax increase they do not expect and will not welcome," Bush told a joint session of the House and Senate meeting in the House chamber Tuesday night. "We need more than temporary tax relief. I urge the Congress to act responsibly and make the tax cuts permanent."

     Bush made no mention of recommendations submitted to Treasury Secretary John Snow last fall by the President's Advisory Panel on Federal Tax Reform. The panel offered two options, one an update of the current income tax system and the other moving the nation to more of a consumption tax system. NRF has strongly opposed the consumption tax proposal, particularly a provision that would subject imported goods to a 30 percent tax by taking away the ability to deduct the cost of imports as a business expense.

     Tax reform was one of the top priorities of Bush's State of the Union address a year ago, but its absence in this week's speech appeared to confirm earlier White House indications that substantive action on the issue would be delayed until at least next year. Advisory Panel Co-Chairman John Breaux, reacting during congressional testimony on Wednesday, said Bush has apparently put the panel's report "in a closet somewhere, on the shelf." 

     Bush, whose administration has often ruled against retailers on international trade by granting U.S. manufacturers' demands for restrictions on imported apparel and other consumer products, urged "people everywhere to buy American." But he issued a warning against protectionism, and specifically mentioned China, whose growing importance in retail sourcing has been the focus of manufacturers' attempts to restrict trade.

     "We are seeing new competitors like China and India, and this creates uncertainty, which makes it easier to feed people's fears. So we're seeing some old temptations return. Protectionists want to escape competition, pretending that we can keep our high standard of living while walling off our economy," he said. "These are forms of economic retreat, and they lead in the same direction: toward a stagnant and second-rate economy."

     Bush stopped short of announcing any concrete changes in Administration policy on trade with China or other nation.

     Bush also offered a multifaceted package of initiatives to expand the availability of health insurance, including Association Health Plans, expanded Health Savings Accounts, malpractice reform and other measures backed by NRF. Pledging to "help people afford the insurance coverage they need," Bush outlined the proposals during his speech, and the White House issued a position paper spelling out details. (See separate story in today's Washington Retail Insight.)

     Further details of many of Bush's proposals are expected to be revealed when he submits his Fiscal Year 2007 budget proposal to Congress next week.
     For more information, contact NRF Senior Vice President for Government Relations Steve Pfister at (202) 783-7971.

NRF Says Bush Health Care Proposals More Effective than State Legislation

     NRF this week welcomed President Bush's State of the Union proposals for making health care more affordable and available, saying federal action would be more effective than special interest legislation pending in several states that requires large employers to spend a certain percentage of payroll on worker health benefits.

     "It's very appropriate that the President is talking about health care as a national issue," NRF President and CEO Tracy Mullin said. "This is a nationwide problem that needs a nationwide solution. The proposals being put forth by the President can make a real difference in the lives of the millions of Americans who desperately need health care coverage as soon as possible. Association Health Plans in particular could provide almost immediate benefits for employees of the small retailers that are the backbone of job creation. Many of these ideas have been considered by Congress before, only to hit political roadblocks, particularly in the Senate. Now is the time for Congress to act."

     "The states have begun to overreact because Congress hasn't acted," Mullin said. "President Bush's emphasis on health care is a signal of the urgent need for Congress to demonstrate leadership before the anti-business, anti-consumer legislation that started in Maryland can spread. Addressing our nation's health care challenges is a vital concern that clearly begs for a comprehensive solution. The retail industry stands ready to work with all stakeholders to ensure that workable and effective solutions are developed and implemented to address this national priority."

     Bush offered a wide range of initiatives to expand the affordability of health care during Tuesday's speech, proposing tighter limits on medical malpractice lawsuits, establishment of Association Health Plans that allow small businesses to band together for large-group rates on health insurance, expansion of Health Savings Accounts and other measures supported by NRF. The HSA expansion would make premiums deductible and eliminate taxes on out-of-pocket spending among other tax provisions, and HSAs would become portable from job to job. Bush also proposed more use of information technology in health care and improvements in the availability of information about pricing and quality of health insurance plans.

     "Keeping America competitive requires affordable health care," Bush said. "We must confront the rising cost of care, strengthen the doctor-patient relationship, and help people afford the insurance coverage they need."

     NRF is strongly opposed to legislation pending in a number of states modeled on recent action in Maryland. The Maryland General Assembly last month overturned a gubernatorial veto of a bill requiring companies with 10,000 or more employees to spend at least 8 percent of payroll on health care benefits. The AFL-CIO is pushing similar legislation in 30 other states, and some of the pending bills would go significantly beyond the Maryland legislation, applying to smaller employers and/or setting higher percentage requirements.

     For more information, contact NRF Vice President and Government and Industry Relations Counsel Maureen Riehl or Director of Government Relations Alison O'Donnell at (202) 783-7971.

Final House Vote Sends Byrd Amendment Repeal to Bush

     The House this week gave final approval to legislation that would repeal the controversial Byrd Amendment trade law, sending the measure to President Bush for his signature.

     "This is a major victory for retailers, consumers and common sense," NRF Vice President and International Trade Counsel Erik Autor said. "By encouraging the abuse of antidumping laws, the Byrd Amendment has driven up prices of consumer products while achieving no purpose other than to line the pockets of companies that bring and support antidumping cases. Byrd is an example of corporate welfare that has given hundreds of millions of dollars in no-strings-attached government subsidies to a handful of companies at the expense of national security, natural disaster recovery and a host of other critical spending priorities."

     The House voted 216-214 Wednesday to approve a House-Senate conference report on S. 1932, the Deficit Reduction Omnibus Reconciliation Act of 2005, sponsored by Senate Budget Committee Chairman Judd Gregg, R-N.H. Both the House and Senate approved the bill in December, but Senate changes unrelated to Byrd meant that a final vote in the House was still necessary. The bill now goes to the White House, where Bush is expected to sign the measure.

     The bill is a wide-ranging budget-cutting measure but includes language that would repeal 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. 

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

    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.

     For more information, contact NRF Vice President and International Trade Counsel Erik Autor or Director of Government Relations Alison O'Donnell at (202) 783-7971.

Senate Approves Two-Year Extension of WOTC, Depreciation

     The Senate voted this week to extend both the Welfare to Work/Work Opportunity Tax Credit programs and a reduced depreciation time for improvements to leased stores by two years rather than the one year approved earlier.

     The legislation has a number of conflicts with the House version of the same bill, however, so negotiators from the two chambers will have to draft a compromise measure before it can go to President Bush. It is unclear whether the programs will ultimately be extended for two years or just the one year originally proposed in each chamber.

     The Senate's amended version of H.R. 4297, the Tax Relief Extension Reconciliation Act, was approved 66-31 Thursday night. The wide-ranging tax-cutting measure provides $70 billion of relief under the Senate version but $60 billion under the House version.

     The House bill would give a two-year extension to a tax cut for capital gains and dividend income currently scheduled to expire in 2008, but the Senate bill does not. In another major difference, the Senate bill includes language to reduce the impact of the Alternative Minimum Tax on middle-income families while the House has passed its AMT relief as a separate bill.

     Of key interest to retailers are extension of WWTC/WOTC and extension of a reduction in the depreciation period for improvements to leased stores. Under the House bill and under an earlier Senate version, both would be extended by one year, through December 31, 2006. Under the new Senate version approved Thursday, both would be extended through the end of 2007.

     WWTC/WOTC offer businesses a tax credit equal to 40 percent of the individual's first-year wages up to $6,000 (for a maximum of $2,400 per employee) to hire welfare recipients and other disadvantaged individuals, and have been widely used by retailers to help those individuals move into the workforce. NRF has been a longtime supporter of the programs. While they would be revived retroactively once the current legislation is signed into law, the programs officially expired at the end of 2005 and are in limbo until then.

     The depreciation provision would extend a measure passed in 2004 that reduced the depreciation period for improvements to leased store properties to 15 years instead of the previous 39 years. Like WWTC/WOTC, the provision expired at the end of 2005 and needs final action by Congress in order to remain in effect. NRF has lobbied for extension of the 15-year depreciation life, but has also urged lawmakers to expand it to include owned stores as well.

     Also extended by two years instead of one year under the new Senate bill is a provision allowing taxpayers to elect to deduct state and local sales taxes.

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

Deadline Extended for Claims in Visa/MasterCard Settlement

     The deadline for most merchants to file claims to receive their share of the $3.1 billion settlement of NRF's lawsuit against Visa and MasterCard debit card rules passed in December, but some merchant may still be able to file.

     The Amended Plan of Allocation approved by the court granted Constantine Cannon, the lead counsel in the case, discretion to accept or reject late claims. Accordingly, Constantine Cannon has continued to accept claims, challenges, and consolidation requests submitted after the December 28, 2005, deadline. Because consolidations require extensive additional work to complete and delay the process of making payments to all class members, the last date that all class members may submit requests to consolidate their multiple forms will be March 31, 2006.

     A Merchants Advisory from Constantine Cannon is available on the NRF web site at www.nrf.com/debit and additional information is available at www.inrevisacheckmastermoneyantitrustlitigation.com. 

     More than 8 million claim forms were mailed in September to merchants believed to have accepted Visa and MasterCard debit cards during the October 25, 1992-June 21, 2003, time period covered by the lawsuit. The forms include an estimate of merchants' share of the settlement, where available. More than 700,000 claim forms have been submitted, some representing individual stores and others representing chains.

     Retailers with questions should contact the claims administrator, Garden City Group Inc., at (888) 641-4437. NRF members who need additional assistance may also contact NRF Member Relations Manager Angelica Rodriguez at rodrigueza@nrf.com.

     The case was settled in 2003, but distribution of funds could not begin until the final deadline for appeals passed in May 2005. The 1996 class-action lawsuit, brought by NRF and about 20 of the nation's largest retailers, alleged that the "Honor All Cards" rule -- which required retailers who accepted Visa and MasterCard credit cards to also accept their debit cards -- violated federal antitrust law. Among other reasons, merchants objected to being required to accept signature-based debit transactions because they carried higher transaction fees, were slower and more fraud-prone than debit transactions activated by a PIN number.

     Under the settlement, Visa and MasterCard agreed to initially lower transaction fees for signature-based debit cards by at least one-third effective August 1, 2003. As of January 1, 2004, the Honor All Cards policy ceased to exist, freeing retailers to negotiate what rates -- if any -- at which they would be willing to continue to accept the cards.

     For more information, contact NRF Senior Vice President and General Counsel Mallory Duncan at (202) 783-7971.

Retail Container Ports Quiet But Could See Challenges Ahead

     In the middle of the slow season for container imports, the nation's major retail container ports are operating without congestion but could face challenges ahead, according to the February Port Tracker report released this week by the National Retail Federation and Global Insight.

     "Looking ahead to the coming 2006 peak season, we see continued challenges to system performance due to continued growth in trade that will start again within the next two months," Global Insight Economist Paul Bingham said. "As we must every year, we can expect some shocks to the system. However, their nature and timing is unknown just as the 2005 natural disasters and fuel price spikes couldn't be predicted. There will also continue to be rail capacity constraints and trucking concerns. But with quick decision-making and rapid mitigation steps, we hope the industry will be able to repeat the overall success we saw in 2005 and keep any terminal or network congestion to a minimum."

     "Being able to detect the unexpected and respond accordingly is one of the reasons we launched Port Tracker," NRF Vice President and International Trade Counsel Erik Autor said. "We don't yet know what we will face in 2006, but Port Tracker is an important tool providing retailers with the most up-to-date information to help keep their supply chains free of disruptions."

     All ports covered by the report – Los Angeles/Long Beach, Oakland, Tacoma and Seattle on the West Coast, and New York/New Jersey, Hampton Roads, Charleston and Savannah on the East Coast – are currently rated "low" for congestion, the same as in the January Port Tracker report. A low rating means "business as usual" with no serious congestion, delays or diversion of cargo anticipated.

     The current six-month outlook is for slower growth at West Coast ports than during the same months in 2005. Market share gains that were seen in Oakland, Seattle and Tacoma are not likely to continue at the same pace. The many new high-capacity vessels being added to transpacific services may also affect all-water routes through the Panama and Suez canals. On the East Coast, growth at the ports of New York/New Jersey, Hampton Roads, Charleston and Savannah has been driven in part by new regional distribution centers built for Asian imports that will not revert to West Coast ports. For railroads serving ports, the few lingering hurricane impacts on the national rail system are being cleared. Despite continued high diesel fuel prices, port trucking is operating smoothly.

     Nationwide, ports surveyed handled 1.21 million Twenty-foot Equivalent Units (TEUs) of container traffic during December, the most recent month for which numbers are available. The figure is down 4.1 percent from November, but still up 4.8 percent from December 2004, reflecting the seasonal downturn but an increase in year-to-year levels. Over the report's six-month forecast period, traffic is expected to decline slowly to a low of 1.1 million TEU in February, still up 0.4 percent from a year ago, before climbing to 1.39 million TEU in June, up 10.7 percent from June 2005. One TEU is a 20-foot cargo container or its equivalent.

     Port Tracker is produced each month for NRF by the economic research, forecasting and analysis firm Global Insight. Subscription information is available at www.nrf.com/porttracker.

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

Congressional Outlook:

House: Returns 2 p.m., Tuesday, February 7.

Senate: Returns 2 p.m., Monday, February 6.

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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Copyright 2006 National Retail Federation