U.S. retailers, buffeted by industry disruption and bankruptcies, expect the current tax reform plan to provide welcome relief by fostering consumer spending and enabling companies to invest in brick-and-mortar stores and expand their workforce.
The proposed tax reform framework that Republican leaders are planning to advance in Congress incorporates many provisions that merchants have long pressed for, including a reduction in the corporate tax rate of 15 percentage points and provisions aimed at providing individual tax relief to the middle class.
The plan could potentially hold significant benefits for an industry currently undergoing a transformation and learning to adapt and thrive in a world increasingly dominated by online shopping.
Some argue that tax reform could make retail — which pays the fourth-highest effective tax rates among all industries — more competitive, but one concern is timing. To maximize its potential benefits to the sector, retailers want legislation to be implemented before the spending rush of the holiday shopping season, which could be a tall order for Congress.
The nine-page framework Republican leaders in Congress released in September would reduce the corporate tax rate to 20% from the current 35% statutory rate, a reduction that proponents say will discourage U.S.-based retailers from relocating overseas to countries with lower rates.
According to data compiled by S&P Global Market Intelligence, CVS Health Corp. paid a 38.4% effective tax rate over the past 12 months, while Wal-Mart Stores Inc. paid a 30.9% rate over the same period. Other select retailers, including Lowe's Cos. Inc. and TJX Cos. Inc., also paid effective tax rates over the 35% corporate rate during the past year, at rates of 39.3% and 37.5%, respectively.
The plan is still relatively thin on details, but several retailers and economists told S&P Global Market Intelligence that the resulting corporate savings could allow companies to invest more in stores and their workforce, making them more competitive with online sellers.
In a report released Sept. 14, the National Retail Federation, or NRF, said the current 35% tax rate pushes down wages by as much as $4,690 per worker per year. Reducing the tax rate to 20% could mean a potential increase of more than $2,000 in wages, the group said. To make its calculation, the group divided the total corporate tax receipts of 2015, $343 billion, by the number of corporate workers, which stood at 54.8 million at C-corporations that year.
Based on the $64,000 average salary for a private sector worker in 2016, lowering the rate to 20% could increase total wages anywhere from $32 billion to $97 billion, the NRF said. It could also lead to the creation of between 500,000 and 1.5 million new jobs, the group estimated in the report.
Rachelle Bernstein, vice president and tax counsel for the NRF, said in an interview that reducing the rate would allow companies to not only increase wages and jobs but also allow for a greater investment in stores.
"We think the parameters of this plan are going to be very good for retailers," Bernstein said.
Phillip Swagel, an economics professor at the University of Maryland and a former assistant secretary for economic policy at the U.S. Treasury Department under the George W. Bush administration, said the plan is positive for retailers, though it may get tricky for those that have relocated overseas.
"The effects will be complicated for retailers with overseas operations since they'll face the immediate tax on cash not yet repatriated to the U.S., but their tax rate on future foreign earnings then should be lower," Swagel said. "Overall, that should be a big positive for retailers."
Wal-Mart Stores Inc. released a statement Sept. 27 calling the outline "an important step in the right direction on tax reform."
"The framework recognizes the need to advance tax reform options that encourage investment in the United States, make U.S. businesses more competitive around the world, and help working families," the company said.
In July, Moody's released a report that found that retail and apparel will benefit greatly compared with all major industries because they incur the highest tax relative to earnings before interest, tax, depreciation and amortization.
In the report, Moody's said investment-grade retail, apparel and restaurants incurred $163 billion in taxes between 2012 and 2016, the second-highest amount among major industries over that period.
The push for tax reform comes as many companies in the retail industry struggle to remain afloat. Year-to-date through mid-September, a total of 33 S&P Capital IQ publicly traded retail companies have filed for bankruptcy, the most recent being Vitamin World Inc., which filed for Chapter 11 protection Sept. 11.
The Republican tax plan would also consolidate the current seven-bracket individual tax system to three brackets of 12%, 25% and 35%, which several observers believe would mean more money in the pockets of consumers, especially those in the middle class.
The top rate is now at 39.6%, although Republicans have not yet provided income thresholds for each bracket, which can make predicting the effect on consumers premature.
Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, said a corporate tax cut might provide an immediate boon for the stock market, followed by what he said could be a trickle-down effect into consumer spending.
Dhawan said reducing the top rate will not make a substantial difference in spending, save for "big ticket" items such as holidays and vacations. However, the proposed cuts to the middle class, especially if they are collapsed to a roughly 15%-28% bracket, would give a boost to discretionary items.
"The discretionary spending — eating out, buying clothes, shoes, electronics — that's where you'll get the biggest bang for your buck," Dhawan said.
When analyzing how a Trump tax cut might compare with those of the Reagan and Bush administrations in 1986, 2001 and 2003, Dhawan said it is important to note the existing business climate at the time of their implementation.
"When the Reagan tax cuts came in '86, you had a booming economy at the time, so you probably didn't see much in retail sales because they were going to look good anyway," he said. "When the  tax cut came the economy was a bit weaker so there was more of an impact for retail then. Last month, the hurricanes probably affected brick-and-mortar sales overall, but if you look at retail sales they were off the charts due to replacing damaged items."
Now, he said, predicting where the money will go is trickier. The Economic Growth and Tax Relief Reconciliation Act of 2001, the first of two major tax cuts implemented by then-president George W. Bush, created a new 10% bottom individual tax bracket with lowered brackets of 25%, 28%, 33%, and 35%. At the time of the Bush and Reagan tax cuts, little to no competition existed from online sellers, so any retail gains went to brick-and-mortar stores, Dhawan said.
"Retail will benefit, but the issue is online or in-store," Dhawan said. "Today, if I'm going to spend $100 on clothing, I may spend it 50-50 online and in-store, but in the old days, all $100 went to brick-and-mortar."
Scott Hoyt, senior director at Moody's Analytics, said in an interview that since the bulk of discretionary spending is done by those in the higher income tax brackets, cuts to the top earners could lead to a bigger bump in those types of sales.
"Obviously, to the extent that it is net a tax cut, that's going to put more money in consumers' pockets and potentially increase spending," Hoyt said. "Exactly how the spending is going to be distributed is going to rely on who gets the tax cuts. But we don't have enough detail yet to evaluate that."