How the GOP tax overhaul could affect the food industry
Companies should brace for change.
The 30-plus-year drought since the last tax code overhaul may be finally over as Congress sets out to vote on and place a now-finalized tax bill on President Donald Trump's desk.
The bill slashes the corporate tax rate from 35% to 21%, and also includes massive changes to how income earned or kept offshore is treated.
In other words, this week could be monumental for business accounts nationwide. Every industry could see effects — including food and grocery. Here's a 60-second overview of what the bill could change, and where industry associations stand on it:
FOOD AND GROCERY
IMPACT: The tax bill is universally welcomed in the food and grocery industry. The lower tax rate would give companies more money to invest in their businesses or to acquire companies working on clean label, organic or other products consumers demand.
POSITION: Major grocers and food manufacturers support the tax reform bill, and believe the legislation will level the playing field for the industry and retail corporations.
ANALYSIS: The Grocery Manufacturers’ Association, a trade group representing more than 250 food, beverage and consumer product companies, said earlier this month that “tax reform will benefit consumers, workers and manufacturers.” The association urged Congress to move aggressively to finish the legislation and sign it into law.
Independent supermarket operators want to ensure the bill achieves rate parity between major players and pass-through entities, such as partnerships and S corporations. Under the current proposal, the corporate tax rate would be lowered to 21% while the pass-through level would be nearly identical at 20%. In an industry beset with razor-thin margins, tax cuts are particularly helpful for retailers, especially smaller, mom-and-pop establishments.
“Supermarkets are a high tax industry with the majority of independent grocers operating on just one to two percent net profit margins, meaning any reduction in the effective tax rate will significantly help these entrepreneurs hire additional staff, expand offerings, and upgrade their stores," the National Grocers Association said late last month.
The Food Marketing Institute has previously expressed support with the proposed tax changes. Jennifer Hatcher, the trade association’s chief policy officer, said in November that FMI wants to make sure the final legislation “lowers effective rates, treats all industries and business structures fairly, and helps promote job creation and economic growth.”
Emma Liem / Food Dive
THE BIGGER PICTURE
The tax reform does not just food and grocery. Here's how the bill may alter other industries.
IMPACT: Due to deep cuts for businesses and mild reductions for middle-class consumers, the tax bill would spur economic growth at a time when retailers could really use it.
POSITION: Passing tax reform, with the priority on lowering the corporate tax rate, has been the retail industry's biggest public policy push for years.
ANALYSIS: Retail trade groups are eagerly heralding the GOP-led House and Senate bills a must-pass measure that, due to deep cuts for businesses and mild reductions for middle-class consumers, would spur economic growth at a time when retailers could really use it.
Despite the differences between the Senate and House bills, the National Retail Federation has been adamant in its stance that "there is far more that the two chambers agree on than they disagree on," from the perspective of retailers, which according to NRF CEO Matthew Shay pay among the highest effective tax rates (although onlookers argue that few pay as high as 35%, currently the effective corporate tax rate). The Retail Industry Leaders Association has also backed the recent GOP-led proposals, which notably exclude the controversial (and now dead) border adjustment tax which retailers fought against earlier this year. The trade association is pushing for "quick" passage of a plan it said will stimulate economic growth and fuel the creation of new jobs.
Retailers also say the tax plan will cut taxes on middle-income consumers, freeing up more money to spend at retail businesses. However, as Morgan Stanley noted in a December report, consumers are spending more on experiences than things, and there's no guarantee any tax savings would go toward retail purchases.
According to a Dec. 4 report from Wolfe Research, the biggest specialty apparel winner under the Senate's tax plan would be Gap, whose corporate tax rate would drop from 39.6% last year to 23.5% once the plan goes into place. Other big winners would include: Nordstrom, Restoration Hardware, Dick's Sporting Goods, Williams-Sonoma and Ulta, which are expected to see their rate drop from the high 30s to between 22.3%-24.2%. Overall, most retailers would be enthusiastic about Congress meeting President Donald Trump's Christmas deadline.
Corinne Ruff / Retail Dive
IMPACT: A cut in the corporate tax rate could increase cash flow, allowing more investment in technology, business expansion and new jobs along the supply chain.
POSITION: Manufacturers and freight industries are for the bill, but ports and airlines have some reservations.
ANALYSIS: For business, the tax reform bill appears to deliver. Increased cash flow from a lower tax rate could prompt the different modes of freight and 3PLs to invest more in supply chain visibility tools, predictive analytics and blockchain alliances.
But if signed into law, the bill would also tax companies for making payments to foreign companies, which could hurt the global supply chain.
In that respect, the bill is a bit of a mixed bag. While the bill may spur expansion and job growth for big and small American businesses, the bill’s “America First” slant could pose serious difficulties for supply chain managers dealing with foreign suppliers, 3PLs or carriers.
The bill will disrupt supply chains, affecting the flow of supplies and products and potentially making it more expensive for American companies to do business and trade with foreigners. While it’s too soon to know whether the lower tax rate will compensate for that provision, supply chains are in for a shakeup in 2018.
- The House of Representatives Tax Cuts And Jobs Act
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