Tax reform, especially corporate income tax reform, has been in the news significantly in recent months. In summary, the broadening of the tax base would come by elimination of tax incentives (called “tax expenditures”) that have been added to our tax system over the past half-century. If this happens, U.S. retailers would appear to benefit from this rate reduction/base broadening strategy.

Why now?

Continued interest in multinational corporations seeking corporate inversions highlights the U.S. corporate income tax rate as being high when compared to other developed nations’ corporate rates of taxation. The incentive is to move earnings offshore to apply lower foreign corporate income tax rates compared to U.S. income tax rates. The pressure is on Washington to reduce corporate tax rates yet not compromise overall revenues. The thought is that rates can be reduced but only if the base of income subject to tax is broadened.

Eliminating tax breaks and incentives in favor of overall corporate tax reduction?

In order to broaden the tax base, tax reform advocates target the elimination of most or all business tax expenditures. Several reform advocates advocate a “blank slate” approach whereby all specialized tax benefits or incentives are eliminated so as to not have to pick winners or losers retaining any such benefits. Among the significant tax incentives likely eliminated in the base-broadening attempt would be:

  1. Accelerated depreciation benefits;
  2. Repeal of the Domestic Production deduction;
  3. Elimination of LIFO inventory or other favorable inventory methods;
  4. Repeal of the Research and Development (R&D) Tax Credit and expensing benefits;
  5. Repeal of the Work Opportunity Tax Credit (WOTC)
  6. Repeal of corporate charitable donation tax deductions.

What does this mean for retailers?

Retailers generally do not benefit from the list of above tax expenditures to the extent others in the U.S. economy may benefit. For example, the Domestic Production deduction applies predominately to U.S. manufacturers. Additionally, the R&D tax credit would rarely apply to retailers. Retailers do of course benefit from favorable inventory methods and recently enacted favorable 15-year accelerated depreciation methods, and to a certain extent also benefit from the WOTC tax credits. However, as a whole, a significant corporate tax rate reduction at the expense of the loss of tax expenditures from the list above would appear to benefit retailers. Work done by Robert Carroll and John Muir MacPherson at Ernst & Young estimate that the U.S. tax burden for retailers would decline by a range of 8.2% to 22.7% depending upon the retailer’s structure of operations and the extent of tax expenditure repeal under specific reform proposals.

Overhaul Realistic?

Mark Mazer, assistant secretary for tax policy at the U.S. Treasury Department commented April 21, 2015 that the “fundamentals for tax reform are as good as they’ve been since 1986”, the last major overhaul of our tax system. He believes groundwork has been done at various Washington congressional committees for reform to take place. If anything is to happen though, time is short – probably 2 – 3 months before election year politics will put the brakes on hopes for significant reform. Given the potential likely benefit from U.S. corporate tax reform, U.S. retailers should be advocating for reform in my view.

 

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