Washington, DC, December 8, 2005--The National Retail Federation today welcomed published reports that President Bush will likely postpone any major push for federal tax reform until 2007 or 2008.
“This issue is too big to be pushed through Congress without full and deliberate debate of all its ramifications,” NRF Vice President and Tax Counsel Rachelle Bernstein said. “One of the clearest examples is the proposal to take away the ability to deduct the cost of imports as a business expense. This proposal amounts to a huge new tax on retail merchandise, gasoline for cars and raw materials needed by manufacturers.”
“This delay will give the business community time to explain to the Bush Administration and Congress the effect this proposal would have on the economy,” Bernstein said. “If this provision became law, the price of many consumer products could go up by a third, and gasoline could go up another 50 cents a gallon or more. This proposal risks sending consumer spending into a tailspin and sending a huge number of jobs with it. That’s a risk our economy can’t afford.”
“Our tax code certainly needs simplification, and retailers support efforts to make it simpler and fairer,” Bernstein said. “But if American consumers end up paying more at the cash register or gas pump, that’s tax shifting, not tax reform.”
At issue is a provision included in the Growth and Investment Tax Plan, one of two tax reform options endorsed by the President’s Advisory Panel on Federal Tax Reform in a report submitted to Treasury Secretary John Snow November 1.
Under current law, businesses can deduct the cost of imported merchandise or raw materials as a business expense the same as domestic products are deducted. Under the Growth and Investment Tax Plan, the deduction for imported items would be eliminated, effectively subjecting those items to the plan’s 30 percent corporate tax rate and driving up tax costs for importers. With $648 billion in general merchandise consumer goods imported into the United States during 2004, NRF calculates that the change would result in $194.4 billion in new taxes retailers would be forced to pass on to consumers.
Relatively few consumer goods are manufactured at competitive prices in the United States, so retailers couldn’t easily shift to domestic products to avoid the tax.
Economists on the Advisory Panel said floating exchange rates would compensate for the loss of the deduction. But NRF believes such an adjustment would take too long to achieve, and wouldn’t necessarily help retailers because many countries in Asia, Latin America and the Middle East--all major sources of imports-- do not have floating currencies. In addition, exchange rate fluctuations wouldn’t ease the impact on imported oil because the global price of oil is set in U.S. dollars. As a result, gasoline and home heating oil would face large price increases.
NRF also believes elimination of the deduction would be a violation of World Trade Organization rules and could expose billions of dollars worth of U.S. exports to WTO-sanctioned trade retaliation.
