Tax Reform and the Retail Industry: Is BAT all Bad?

Border TaxTax reform is the next item on the White House agenda after healthcare and the federal budget. Overall, President Trump has promised big tax cuts for corporations and for middle-class Americans, all in the name of strengthening American businesses, creating jobs, and bolstering the economy. The Ways and Means Committee, the chief tax-writing committee in the House of Representatives, released their blueprint plan for tax reform, called A Better Way, last year.

In the United States, we’ve more or less had a very similar same tax code since 1986. Many people believe we’re due for an overhaul, or at the very least a simplification. Proponents for the Ways and Means Committee’s Better Way blueprint say that plan as a whole will strengthen the dollar, encourage businesses and investments to stay in America, and shift towards a consumption tax instead of an income tax.

One of the most controversial aspects of the Better Way blueprint is the Border Adjustment Tax (BAT). The BAT is not like a tariff, but rather it would eliminate companies’ abilities to deduct the cost of imports, as they currently do. At the same time, it would eliminate the tax on income attributable to exports. The idea is that the tax would remain trade-neutral, but shift to a consumption based tax, rather than a production based tax.

Many wholesalers, retailers, and retail organizations have publicly opposed the BAT through an organization called Americans for Affordable Products. The National Retail Federation (NRF), whose mission is to “advance the interests of the retail industry through advocacy, communications, and education,” is one of the loudest opponents of the BAT. David French, senior vice president for government relations at NRF, tells Independent Retailer, “The BAT is particularly bad for retail because retailers rely heavily on imports to provide the products consumers want at the prices they demand. In the face of dwindling or non-existent American manufacturing of key consumer items, retailers are forced to rely on imported inventory. About 97 percent of all clothing and footwear sold in the U.S., and more than 90 percent of electronics, are imported.” Since retailers rely so heavily on imports, which can currently be deducted from corporate taxes, retailers would face higher costs if the industry loses those deductions. Even though many retailers don’t directly import themselves, the suppliers who they purchase from will likely increase prices to offset their tax bill. “Even retailers that do not import directly would see higher costs since their wholesalers would likely pass along the increase,” says French.

BAT and Small Business

The increased costs of imported goods would most likely be passed along to the consumer. The NRF predicts the BAT would cost the average family $1,700 in the first year alone. However, box stores, chain stores, and other retailers who operate at high volumes have more wiggle room and financial resources to keep consumer prices down by making up the costs in other areas. However, independent businesses may not all have the same resources. Their options may be to change suppliers or product lines to keep down costs, to pass along the price increase to consumers, or to absorb the costs and keep consumer prices competitive by lowering your margins. French explains, “America’s small retailers rely heavily on imports the same as their larger competitors. But with fewer financial resources, they have less ability to absorb the new tax. And they are often already at a price disadvantage with price-focused, high-volume national chains, giving them less ability to pass along these increased costs to their customers.”

French continues that the retail industry currently averages a two percent net profit margin. “Most retailers already have net profits margins so slim that it would be impossible for them to cut costs enough to absorb this tax bill. Retailers will be forced to raise prices by 15 percent or more to maintain their current profitability.”

 BAT and Fair Trade

Fair trade is another segment of the retail industry that could be hit especially hard by the BAT. By nature, fair trade products are almost always imports that support artisans or specific communities, usually in developing nations. Tom Costello, the founder of Costello International, a senior member of the Fair Trade Organization and North American Fair Trade Federation, has supported artisans in Mexico for 45 years. He explains, “Our purpose is to support retailers with our product so the artisans have a place in the marketplace.” Costello says his organization takes every possible measure to keep his middleman costs down and is very conscious of providing retailers with great margins and affordable prices for consumers. “We support 200 traditional families in Mexico,” he explains. “The BAT would end our work.”

BAT Not All Bad

Though many in the retail industry are against the BAT, there are also many supporters of the Better Way blueprint. Ross Freitas, the owner of Loose-Neck Land, is one of them. His company imports handmade gifts and souvenirs from Mexico for wholesale. “The BAT would have an effect on our costs and sale price. However, we don’t think a small increase will have any effect on our business.” He continues, “I believe we should get the trade deficit straightened out which means higher prices to retail, but also more jobs and a higher income. Personally, I am in favor of the tax.”

Beyond the BAT, there are many other elements to the Better Way blueprint. One of those elements is lowering the corporate tax rate. David French says, “Retail pays the highest effective corporate tax rate of any sector of the U.S. economy – at or close to the maximum 35 percent. NRF believes comprehensive corporate tax reform is critical to growth and job creation and has led the retail industry’s push for changes that broaden the tax base and lower the corporate tax rate. The House plan eliminates many special interest tax breaks and lowers rates – goals NRF has sought for years.” With the exception of the BAT, the NRF is largely in favor of the current blueprint for tax reform. “NRF believes tax reform can be accomplished without moving the burden to consumers. There are many goods parts in the House plan, but the BAT is not one of them.”