Proposal Ups Consumer Prices

November 4, 2005 - 12:28

Consumer prices for products ranging from clothing to gasoline could increase by nearly 1/3 under a proposal to tax imports included in a report submitted to Treasury Secretary John Snow recently by the President’s Advisory Panel on Federal Tax Reform, the National Retail Federation (NRF) said. NRF urged Snow, President Bush and Congress to reject the proposal.

“This proposal amounts to a huge new tax increase for American consumers that would dramatically drive up the price of everyday necessities,” NRF President and CEO Tracy Mullin said. “The Advisory Panel seems to have forgotten that the majority of consumer products sold in U.S. stores are made overseas. We’re talking about everything from underwear to gas for our cars and virtually all of the toys that go under the tree during the holidays. If the prices of those products jump by a third, consumer spending is going to go into a tailspin and take a lot of jobs along with it. Much of the Advisory Panel’s report would bring us the simplification that our tax code so badly needs. We should focus on adopting those aspects and not on provisions that drive up costs for consumers.”

“This new import tax goes far beyond retail,” Mullin said. “This is going to have a huge impact on manufacturers who rely on raw materials from overseas. And with gasoline prices already out of control, it’s unfathomable that our government would want to impose a new tax on the imported oil that fuels our cars and trucks and heats our homes and businesses. If this is tax reform, Americans can’t afford it.”

“With attention focused on cutbacks in the home mortgage interest deduction and state and local tax deductions, the proposed new import tax has largely been ignored,” Mullin said. “It’s important for the Administration, Congress and the public to realize that this overlooked piece of corporate tax language could take billions of dollars out of the pockets of everyday working Americans. This provision of the Advisory Panel’s recommendation cannot be allowed to become law.”

Wrapping up close to a year of hearings and debate, the Advisory Panel recently submitted its final report to Snow, who will, in turn, make recommendations to Bush that could eventually be presented to Congress.

The report endorses two sweeping tax reform options, including a “Simplified Income Tax Plan” that would refine the current income tax system, and a “Growth and Investment Tax Plan” that would turn the income tax system into more of a consumption tax system. Under the Growth and Investment Tax Plan, the corporate income tax deduction for all imports, including consumer goods, raw materials and other items, would be eliminated, thereby increasing importers’ tax bills.

A total of $648 billion in general merchandise consumer goods was imported into the United States during 2004, according to U.S. Census Bureau statistics. At the 32-percent corporate rate proposed under the Growth and Investment Tax Plan, NRF calculates that the figure would result in $207 billion in new taxes that importers would be forced to pass on to consumers. Relatively few consumer goods are manufactured at competitive prices or in commercial quantities in the United States, so retailers can’t easily shift to domestic products to avoid the tax.

Economists on the Advisory Panel said last month that floating exchange rates would compensate for the loss of the deduction. But NRF is concerned that such an adjustment could take a long period of time to achieve, and many countries in Asia, Latin America and the Middle East — all regions that are major sources of imports — do not have floating currencies. In addition, the price of imported oil would not get the exchange rate offset because the global price of oil is denominated in U.S. dollars. As a result, gasoline and home heating oil would face large price increases.

NRF also believes elimination of the deduction would be a violation of World Trade Organization (WTO) rules on national treatment and could expose billions of dollars worth of U.S. exports to WTO-sanctioned trade retaliation.

NRF wrote to Bush on October 20, urging that he reject the import tax proposal; the federation will continue to lobby against the plan with both the Administration and Congress.

The panel rejected a controversial proposal to replace the income tax system with a National Retail Sales Tax (NRST), which the Treasury Department said could have required a tax rate as high as 84 percent, stated the NFF. NRF argued that the NRST would prove devastating for consumer spending and the nation’s economy, and the Advisory Panel agreed with NRF’s arguments that the tax would be highly regressive and require too high a rate. The panel also rejected an add-on Value Added Tax, which NRF said would also have a chilling effect on consumer spending.

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