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Retailers watch closely as Trump administration tax plan deemed 'ready to go'

Retailers watching developments on President Donald Trump's tax plan received more mixed signals April 20 as Treasury Secretary Steven Mnuchin said the administration's tax plan would be released "very soon," and will move on its own timeline.

Mnuchin, speaking at the Institute of International Finance Washington Policy Summit, said: "We are designing it from scratch and running through a lot of scenarios. We've needed the last two months to work on it. We would not have been ready to go a month ago on tax reform. And now we are.”

He also indicated that there are no plans to wait for healthcare overhaul legislation to move in Congress, despite comments Trump made April 12 to Fox Business News that he preferred to see healthcare reform in place before tax reform. House Republican leaders pulled healthcare overhaul legislation from a vote March 24, after failing to secure enough votes for passage.

"Healthcare is going to happen at some point," Trump told Fox in the interview April 12. "Now if it doesn't start fast enough, I'll start the taxes. But the tax reform and the tax cuts are better if I can do healthcare first."

However, Mnuchin vowed to get tax reform done with or without healthcare reform. "Whether healthcare gets done or healthcare doesn't get done, we're going to get tax reform done," he said.

Mnuchin's remarks came as House Republicans get set to hold a round of hearings over their own proposed tax blueprint. The Treasury Secretary said there are "parts of it that we like and parts of it we're very concerned about," without providing further details.

Nearly all lawmakers and retail groups are in agreement that the country's outdated and complex tax code needs to be reformed. But several retail associations have differing views over one key element of a destination-based replacement tax plan floated by House Republicans in 2016, which includes a border adjustment tax that would essentially impose a tax on imported goods and leave exports largely tax-free.

The House GOP tax reform plan, released in June 2016 under House Speaker Paul Ryan's, R-Wis., "A Better Way" agenda, would slash the corporate tax rate to 20% from 35%, but would also remove a tax break that allows importers to deduct a portion of costs from their goods for tax purposes. The House plan would take away that benefit, while continuing to grant it to U.S. producers in an effort to ramp up domestic production.

In the April 12 Fox Business interview, Trump said he was against calling it an "adjustment" tax, referring to it instead as an import or "reciprocal" tax. He stressed in the interview that he "loves" the idea of a reciprocal tax, although it is unclear whether his tax plan would be aligned with the House plan.

Among the proposed tax's most salient opponents is the National Retail Federation, a trade association that represents retailers across a number of industries in 46 countries. Craig Shearman, a spokesman for the National Retail Federation, told S&P Global Market Intelligence that because retailers rely heavily on imports to provide goods at low costs, the tax would greatly harm both retailers and consumers.

"This is one of the biggest challenges to hit the retail industry in years," Shearman said. "This threatens to put a lot of retailers out of business if it goes through as proposed." Making imports more expensive to increase demand for domestic products works well as an academic theory, Shearman said, but he warned that it is a "very dangerous risk" in the real world.

Members of the National Retail Federation met in recent weeks with President Trump at the White House as well as with lawmakers on Capitol Hill. The group also launched a television and digital campaign aimed at dissuading members of Congress from passing the tax reform package. "This has become our absolute top lobbying priority," Shearman noted.

The National Retail Federation estimates that the tax would raise the price of imported merchandise roughly 15%, which it said could cost families as much as $1,700 per year. The trade group projects that the tax would specifically increase the prices of clothing, food, medicine and gas.

Along with 200 businesses and trade associations, the National Retail Federation helped form the Americans for Affordable Products coalition — which includes major importers such as NIKE Inc., Walmart and Macy's Inc. — to fight the proposed tax. Also rallying its troops against the border adjustment tax is the Retail Industry Leaders Association, which has said that taxing imports will have a disproportionate impact on U.S. retailers and retail supply chains. Christin Fernandez, a spokesperson for the Arlington, Va.-based group said it supports reducing the corporate rate, but "vehemently" opposes a border adjustment tax, warning it will hurt not only retail customers but some of the country's largest employers.

Retailers, whose 36.4% effective tax rate is the fourth-highest rate among the 18 major industrial sectors, according to the Retail Industry Leaders Association, could see their tax rate double under a border adjustment tax, Fernandez said. This could offset any cut from a reduced corporate tax rate, she added.

"This would be a nightmare scenario for retailers as they operate on slim margins and would be forced to pass those costs off to consumers," Fernandez told S&P Global.

Similar to the National Retail Federation, the Retail Industry Leaders Association has expressed concern over what it believes are the logistical issues it would pose to certain industries. "Certain foods and many goods like electronics and lifesaving drugs have no domestically manufactured equivalent and won't for the foreseeable future," Fernandez said.

A report released by the NRF and Hackett Associates on April 10 estimated that U.S. imports will continue to see "strong increases" throughout the spring and summer because of increased consumer spending.

Although the proposed tax has its fair share of detractors, it does also have a major proponent in the American Made Coalition, a recently formed consortium of American businesses aiming at keep companies from relocating jobs overseas and instead spurring tax reform that it said would "level the playing field" for U.S. companies. It is also pushing to keep production, technology and headquarters at home.

The group argues the border adjustment tax will help offset lost revenue from the lowered corporate tax rate. A border adjusted tax is necessary to complement a lowered corporate rate, it said, noting that the U.S. is lagging behind the more than 160 countries that currently use such a tax.

More than 25 U.S. companies are members of the pro-border adjustment tax coalition, including General Electric Co., Boeing Co. and Caterpillar Inc. S&P Global is also a member of the coalition.

Despite warnings that the border adjustment tax would raise prices for food and drug retailers, the group also includes pharmaceutical behemoths Pfizer Ltd. and Johnson & Johnson as well as Blue Diamond Growers, the California-based almond producer.

In an April 14 news release, the coalition, which has called it "unacceptable for the federal government to favor foreign corporations over U.S. companies," said that border adjustment tax is not an addition to the corporate tax, but rather "the way … to ensure that the U.S. tax code treats American companies fairly so they can compete on a level playing field in the global economy."

The American Made Coalition and The Tax Foundation have both disputed the National Retail Federation's estimate of $1,700 in annual added costs to American families, instead estimating that the lowered corporate rate and higher wages would equate to $4,600 in extra spending for American families each year to spend at U.S.-based retailers.

Officials from the American Made Coalition could not be reached for comment.

Other proponents of the tax stress that it would raise the value of the dollar by increasing the demand for American-made goods. The border tax has received support from both Ryan and Rep. Kevin Brady, R-Tex., chairman of the House Ways and Means Committee, as well as the American Enterprise Institute. But several major industry leaders, including the National Association of Manufacturers, have remained largely neutral on the matter.

Both the National Association of Manufacturers and the U.S. Chamber of Commerce, also publicly undecided on the border tax, did not return requests for comment from S&P Global.