Tax Reform

business people meeting

The issue

Retailers are among the biggest winners under the first comprehensive reform of federal tax law in three decades.

The Tax Cuts and Jobs Act took effect at the beginning of 2018 and NRF believes it will “boost our nation’s economy more than anything we have seen in decades."

The new law eliminates a wide range of corporate tax breaks and uses the money saved to lower rates for all businesses, large and small alike, a goal long sought by NRF and the retail industry. The corporate tax rate is reduced to 21 percent from 35 percent, and small business “pass throughs” receive a 20 percent deduction. The measure also provides relief for middle-class taxpayers.

NRF called passage of tax reform a “major victory for retailers,” who had benefited from few of the deductions and credits that lowered tax bills for other industries under the previous tax code and consequently paid among the highest effective tax rates of any industry. During debate in Congress, NRF called tax reform “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.)

Despite those wins under tax reform, NRF is still working with lawmakers to fix two errors that were made in the legislation. Under won provision won by NRF, the new law was supposed to encourage remodeling projects by allowing retailers to write off the entire cost in the year the work is done, eliminating the previous requirement that half the cost be depreciated over 15 years. Instead, a mistake in the language means that the entire cost now has to be depreciated over 39 years. Key officials have acknowledged that the 39-year requirement was a mistake, but Congress has yet to fix the error.

Under the second provision, Congress mean to let companies that are currently losing money “carry back” the losses to previous years when they had a profit and therefore get a tax refund that would help maintain current operations. Instead, a mistake in the language got the effective date wrong and therefore kept the revision from working as intended. Again, officials have acknowledged the mistake but have yet to fix it.

Why it matters to retailers

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With retailers paying at or close to the full 35 percent corporate tax rate in the past, the industry was a strong supporter of reform that would broaden the tax base and lower rates. As far back as 2013, the NRF Board of Directors adopted a formal set of tax reform principles that would boost the economy and encourage job growth – many of which can be seen in the tax reform law that is now in effect. Retailers will save an estimated $171.4 billion over the next 10 years thanks to tax reform, according to the University of Pennsylvania’s Wharton School of Business. And announcements made by retailers over the past several months show that many are using the savings to reinvest in their businesses and employees, both creating jobs and raising wages.

NRF advocates for corporate tax reform

NRF led the retail industry’s fight for tax reform for years, and played a major role during the months of debate that led to passage at the end of 2017. NRF brought retail CEOs to Washington to meet with members of President Trump’s cabinet, and NRF President and CEO Matthew Shay met with Trump at the White House to voice retailers’ commitment to reform and explain the impact it would have on the industry. NRF arranged for Treasury Secretary Steven Mnuchin to address retailers on tax reform at an event moderated by Shay, and Shay praised benefits for small businesses during a news conference at the U.S. Capitol with Senate Majority Leader Mitch McConnell, R-Ky.

NRF campaigned heavily for reform, saying that reducing business taxes would free up resources for companies to create jobs and bring back investment that has gone overseas to countries with lower rates while middle-class tax cuts would put money into consumers’ pockets. NRF believes the now-passed combination will create a ripple effect throughout the economy.

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NRF research on tax reform found that reducing the corporate rate would free up enough money that employers could potentially create between 500,000 and 1.5 million new jobs. NRF also argued that lowering the corporate rate would encourage foreign retailers to invest more in their U.S. operations.

In a  blog post on NRF.com, Shay explained “Why Passing Tax Reform is Good for Retail.” And NRF Vice President and Tax Counsel Rachelle Bernstein outlined half a dozen times policymakers had 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 focused on the corporate tax rate, NRF pushed for tax relief for small businesses as well because 98 percent of retailers are small businesses and provide 40 percent of retail employment.

In a letter to the Senate Finance Committee, NRF set out a series of principles for tax reform, echoing those backed by the NRF Board. NRF said reform should be neutral among types of businesses so companies are not favored by 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 tax burden to consumers.

The final tax reform law followed an earlier 2017 proposal that would have placed a 20 percent “border adjustment tax” on imports ranging from retail merchandise to oil to parts used in U.S.-made products. NRF successfully 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 by 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.