Of all of President Donald Trump’s ideas for putting “America first,” the proposal most likely to cause retailers agita is the so-called border adjustment tax.
The tax proposal, which is still very much in flux and months away from any prospect of becoming law, is intended to boost U.S. manufacturing and bring back to America jobs that have gone overseas over the years. Trump has said that companies that shut manufacturing plants and lay off workers in the U.S., only to open new facilities abroad, would pay a 35% tax or tariff on products they ship back to the U.S. market.
For retailers, this would effectively create a border tax on imported goods from many of their suppliers. But a more concrete version of the border tax, currently under consideration by House GOP leaders, would hurt them a different way. The House plan would effectively eliminate their ability to deduct the cost of merchandise they bring into the U.S. Instead, stores would be taxed, at the current 35% corporate rate, on the full selling price of imported merchandise and not just their profit. And it’s all the more terrifying for retailers given that about 97% of all clothing and footwear sold in the U.S., and more than 90% of electronics, are imported. Items like sugar, coffee and many foods could also be hit.
Target (tgt) CEO Brian Cornell recently visited lawmakers in Washington to lobby against the House Republican proposal. The visit by Cornell, first reported by Politico, was confirmed by a Target spokeswoman, who said the retailer was “monitoring closely” the potential impact of any legislation along those lines. A Wal-Mart Stores (wmt) spokesman would only say the company is “tracking the issue.”
In an environment that has seen Trump lash U.S. corporations on Twitter, it’s not surprising for companies to be circumspect about criticizing the new president’s plans. Many companies have been publicly proclaiming their commitment to adding more domestic jobs. Last week, just days before Trump’s inauguration, Walmart announced 10,000 new jobs stemming from initiatives like new stores it had announced before Trump was elected.
The retail industry’s trade group has been more outspoken. Last week, at the National Retail Federation’s annual conference and trade show, NRF CEO Matt Shay took pains to say the industry was “optimistic” about Trump’s presidency, citing the president’s status as a businessman (without mentioning his multiple bankruptcies). But Shay also that the border tax could be “potentially disastrous.”
“This can’t be borne by retailers,” Shay said, adding that extra costs from any new tax or tariff “will be passed on to consumers.” The NRF expects apparel prices, for instance, would immediately rise 15% on the first day of such a tax. Prices for electronics and food with sugar, among many other categories, would also go up sharply, the NRF says. And the NRF applauded when Federal Reserve Bank of New York President and CEO William Dudley said at the conference that a border adjustment tax would have “unintended consequences” for American consumers and be a “risky experiment” for the economy.
An NRF spokeswoman told Fortune on Tuesday that the group is bringing some members to Capitol Hill to meet with lawmakers and their staff, and is organizing a briefing with House staff this week.
The NRF points out that retailers cannot easily or quickly switch to domestic sources because they don’t exist for many goods bought by U.S. consumers. The president’s daughter Ivanka Trump conceded as much last year when confronted about the contradiction of supporting her father’s “Made in the U.S.A.” mantra and the fact that her clothing collections are largely manufactured in China.
For now, retailers are in wait-and-see mode, since any legislation is likely months away from passing, with its details uncertain. Trump himself last week suggested he found some elements of the House GOP proposal too complicated.
As for the NRF, it has found much else to cheer about when it comes to Trump. At the NRF conference, Shay notably pointed to what he sees as easing gridlock in Washington (an easy trick, since it is dominated by Republicans in all branches of government), tax code reform including the discounted repatriation of trillions in corporate profits stashed abroad, and a reduced burden on employers from the repeal of many aspects of the Affordable Care Act.
“We see change and disruption and that’s what voters chose this past November,” said Shay. “This is the chance to move our agenda.”