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Just over two months after agreeing on an outline of legislation, Congress is on track to pass the first comprehensive reform of federal tax law in three decades by the end of the year.
The House and Senate versions of the Tax Cuts and Jobs Act vary in a number of details but both are based on the “Unified Framework for Fixing Our Nation’s Broken Tax Code” released in September by the Trump administration along with House and Senate GOP leadership. Both bills would eliminate most corporate tax breaks and use the money saved to reduce the corporate tax rate to 20 percent from 35 percent, a goal long sought by NRF and the retail industry. The cut would take effect in 2018 under the House version and 2019 under the Senate version. The House would tax small business “pass throughs” at 25 percent while the Senate would give pass throughs a 23 percent tax deduction. Both bills would also provide relief for middle-class taxpayers.
The House passed its bill by a vote of 227-205 the afternoon of November 16, and the Senate approved its version 51-49 December 2. The two chambers now need to reconcile differences between the two versions, and President Trump has asked lawmakers to have a final bill on his desk by Christmas.
Despite differences in the two versions of the bill, NRF said “there is far more that the two chambers agree on than they disagree on” and urged lawmakers to complete their work quickly.
NRF said the quick action on Capitol Hill “goes a long way toward passing tax reform by the end of the year” and that tax reform is “the key to prosperity that small businesses, large employers and middle-class workers have all been waiting for more than a generation.” (The last comprehensive rewrite of the tax code took place in 1986.)
Just days before the Senate bill was approved, NRF President and CEO Matthew Shay praised its benefits for small businesses during a news conference at the U.S. Capitol with Senate Majority Leader Mitch McConnell, R-Ky. House approval came the same week Treasury Secretary Steven Mnuchin spoke at an Ohio Council of Retail Merchants event in Columbus, telling retailers tax reform is “all about creating economic growth” as Shay served as moderator. In October, Shay told President Trump during a White House meeting with trade associations CEOs that retailers strongly support tax reform as a way to boost the nation’s economy.
NRF has campaigned heavily for reform, saying that reducing corporate taxes would free up resources for companies to create jobs and bring back business investment that has gone overseas to countries with lower rates while middle-class tax cuts would put money into consumers’ pockets. NRF believes the combination would create a ripple effect throughout the economy.
Why it Matters to Retailers
Retail benefits from few of the tax breaks that lower tax bills for other industries, and pays the highest effective corporate tax rate of any sector of the U.S. economy – at or close to the maximum 35 percent. Because of that, the retail industry is a strong supporter of income tax reform that would broaden the tax base and lower the corporate tax rate. Based on economic studies performed by the congressional Joint Commission on Taxation and conducted for NRF by Ernst and Young, doing so would increase gross domestic product, wages and consumer spending. The NRF Board of Directors adopted a formal set of tax reform principles nearly five years ago that would boost the economy and encourage job growth.
NRF Advocates for Corporate Tax Reform
NRF research on tax reform finds that reducing the corporate rate to 20 percent would free up enough money that employers could potentially create between 500,000 and 1.5 million new jobs. NRF has also argued that lowering the corporate rate would encourage foreign retailers to invest more in their U.S. operations.
In a recent blog post on NRF.com, Shay outlined “Why Passing Tax Reform is Good for Retail.” Earlier, NRF Vice President and Tax Counsel Rachelle Bernstein outlined half a dozen times policymakers have unsuccessfully tried to pass tax reform since the 1986 update of the tax code but said “the politics and the policy may finally be aligning for the first time in 30 years.”
While much of the debate over business tax reform has focused on the corporate tax rate, NRF has pushed for tax relief for small businesses as well because 98 percent of retailer are small businesses and provide 40 percent of retail employment.
In a September letter to the Senate Finance Committee, NRF set out a series of principles for tax reform. NRF said reform should be neutral among types of businesses so that companies are not favored on their form of legal entity (such as C corporations vs. “pass through” businesses that pay taxes as part of owners’ personal income tax), how they hold their property (leased stores vs. owned) or distribution channel (online vs. bricks-and-mortar). NRF said an adequate transition time should be provided after passage, and that reform should not shift the burden to consumers as would have happened under the border adjustment proposal.
The United Framework proposal and the Tax Cuts and Job Act supersede the “Better Way” tax reform plan proposed last year by House Speaker Paul Ryan, R-Wis., and House Ways and Means Committee Chairman Kevin Brady, R-Texas, both of whom now support the new approach. The Better Way plan also would have cut corporate taxes, but included a 20 percent “border adjustment tax” on imports ranging from retail merchandise to oil to parts used in U.S.-made products. NRF argued that the BAT would have driven up prices for consumers while driving some retailers out of business and putting their employees out of work. NRF helped defeat the BAT proposal, taking retail CEOs to Washington and producing an “As Seen on TV” commercial that aired on Saturday Night Live and went viral on the internet.
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A report from Ernst & Young examines the potential impact on consumers and the overall economy of inaction on tax reform in the United States over the past several decades and the potential economic benefits that could arise from reform of the U.S. tax system.
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