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As tax plan nears finish line, retailers eye spending boost

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As tax plan nears finish line, retailers eye spending boost

As lawmakers work through the reconciliation process of tax reform, retailers remain optimistic that legislation will be signed into law that boosts discretionary spending heading into the new year.

However, there are still uncertainties regarding just how — and if — the plan will benefit the middle class, the group retailers hope will increase spending.

All eyes on middle class

The Senate passed the Tax Cuts & Jobs Act on Dec. 2, a bill that would reduce the current individual rates among multiple brackets as well as lower the current corporate rate by 15 percentage points. Lawmakers will now have to reconcile the Senate bill with a version passed by the House on Nov. 16 in order to advance final legislation. The Senate tax bill would maintain the current seven-bracket tax system — but with reduced rates — while the House bill would reduce the individual tax system to four brackets of 12%, 25%, 35% and 39.6%.

Retailers seized on the long-awaited passage of tax reform in the Senate, declaring that it could boost consumer spending if a final bill is approved. The National Retail Federation, one of the main retail lobbying groups in Washington, posited that the Republican-proposed individual income tax cuts would fully cover the average family's expected holiday spending in 2017.

David French, senior vice president of government relations for the NRF, said in an interview that his group's position is that tax reform "is good for retail — both the bottom line and the top line."

"There will be extra money that is going to find its way into middle-class paychecks," he said. "That will help our consumers."

Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, noted in an interview that the link between take-home pay and consumer spending — specifically holiday spending — has legitimacy.

"People do spend money based upon what your take-home pay is," he said. "Especially holiday spending."

However, Dhawan added that for the current holiday season, any potential tax savings are immaterial because they would not take effect until next year.

Moreover, it is unclear how much of a tax benefit the middle class will see. Dhawan said households making between $50,000 and $100,000 per year will "probably" get a tax cut, which they would see in withholding in 2018.

Households earning between $100,000 and $200,000 per year will have greater financial assets and the tendency to spend on more "big-ticket" items, he said, but those earners do not know at this point if their tax cut will be effective or not.

"The net effect will not be clear," Dhawan said. "I don't see much impact on holiday spending this year based upon potential tax reform."

Additionally, several nonpartisan committees have warned that the tax plan could benefit the upper class rather than the middle class. In a Nov. 16 report, the Joint Committee on Taxation, comprising members of the Senate Finance and House Ways and Means committees, estimated that the Tax Cuts & Jobs Act would largely benefit the wealthy while increasing taxes on the lower and middle classes through 2027.

The Tax Policy Center said in its own Dec. 2 analysis of the Senate bill that the largest cuts would go to taxpayers in the 95th to 99th percentiles, while the overall tax reduction would result in just 0.3% of aftertax income by 2027.

"On average, relative to current law, low- and middle-income taxpayers would see little change and taxpayers in the top 1 percent would receive an average tax cut of 1.1 percent of after-tax income," the group said.

The fate of corporate savings

A major difference between the two tax bills is that the House bill would lower the corporate rate effective immediately, while the Senate bill would trigger a lowered rate on a one-year delay.

The NRF's French said the savings that businesses reap through the lowered rate could go toward a number of areas, including back to shareholders or to expansions in stores or workforce. The amount distributed back to workers from the 15% corporate rate savings could produce wage increases averaging between 17% and 75%, French said, depending on which analysis is considered.

French also noted that another benefit the NRF sees in a lower corporate tax rate is that it could discourage companies from relocating overseas. These sentiments have been echoed by the Retail Industry Leaders Association, or RILA, and the American Made Coalition, which both came out in support of the Senate's bill.

"The retail industry is thrilled to see tax reform that cuts rates for businesses and consumers yet another step closer to becoming reality," said Jennifer Safavian, RILA's executive vice president of government affairs, in a statement.

The American Made Coalition, whose members include MillerCoors and Johnson & Johnson, called on legislators to have a bill on President Donald Trump's desk this month. Treasury Secretary Steven Mnuchin said Dec. 2 that he hopes the House and Senate will send legislation to Trump's desk by the end of the year to be signed into law.