The White House warned retailers Monday that they face a painful fall off the fiscal cliff unless a bipartisan agreement is reached to prevent expiration of middle-class income tax rates and limit the reach of the alternative minimum tax.
But if the intent was to enlist the retail industry’s support for a bargain with congressional Republicans on the administration’s terms, the White House report concluding that the two critical tax components of the fiscal cliff may cost store owners up to $200 billion in sales next year did not have the desired effect. The industry’s leading trade group made clear it does not intend to get into the middle of a partisan battle over tax and spending issues.
“It is encouraging to see the Administration’s acknowledgement that retailers and their customers will be among the hardest hit if our elected officials fail to address ongoing economic uncertainty,” Matthew Shay, president and CEO of the National Retail Federation, said in a written statement. “However, just kicking the can down the road by cherry-picking reforms only serves to reinforce the well-placed fears of American consumers and retailers that the status quo will once again rule the day.”
The administration brought retailers into the spotlight with a report from White House economists detailing the effect on the economy that could result from allowing current tax rates for families earning less than $250,000 to expire while also failing to extend the “patch” in the alternative minimum tax that lowers taxes for middle-income households.
The president’s Council of Economic Advisers said expiration of the tax rates and the alternative minimum tax provision would increase the taxes paid next year for an average middle-income family of four by $2,200 and make $200 billion less available for the retail spending that now makes up 70 percent of U.S. economic output. And that could reduce growth in consumer spending by 1.7 points next year, while slicing 1.4 points from the gross domestic product.
“American consumers are the bedrock of our economy, driving more than two-thirds of the overall rise in real GDP over 13 consecutive quarters of economic recovery since the middle of 2009,” the White House said in releasing its economic study. “And as we approach the holiday season, which accounts for close to one-fifth of industry sales, retailers can’t afford the threat of tax increases on middle-class families.”
Although retail sales numbers have been growing since hitting a low point in the middle of 2009, the expansion has been relatively tepid until recently. Reports from the retail industry show business has remained lackluster for many store categories since the 2008-2009 recession.
“It has taken five years to get back to sales levels of 2006-2007 in inflation-adjusted dollars,” according to a study by Baltimore-based FTI Consulting. “Some product categories still are not there yet.”
Yet retailers saw their strongest growth in more than a year over the Thanksgiving Day weekend, a period the National Retail Federation said was the best holiday weekend ever for store sales. Consumers spent an estimated $59 billion from Thursday through Sunday, 12.6 percent more than last year with “Cyber Monday” online sales yet to be tabulated.
The White House report cited consumer confidence as an important factor underpinning economic recovery, pointing to recent reports from The Conference Board and Thomson Reuters/University of Michigan showing that consumer sentiment reached a five-year high in November.
But there were some clouds behind those figures, suggesting concerns over taxes were hitting households. The Michigan index, for instance, rose only slightly from the month before, showing some trepidation even as consumers opened their wallets.
“We know that uncertainty about the fiscal outlook and its impact on middle-class families can dampen consumer optimism,” the White House said in its report, noting consumer sentiment fell to the lowest levels last year since the recession as congressional Democrats and Republicans battled over raising the debt ceiling.
The report details specific levels of consumer spending that would be affected by expiration of the tax cuts for the middle class, including $36 billion less spending on housing and utilities, $32 billion less on health care and $15 billion less on groceries.
But the report was also interesting in what it left out. The White House did not detail, for instance, the effect of the expiration of the payroll tax cut, which is scheduled to revert to 6.2 percent from the current 4.2 percent in 2013. The measure is worth an estimated $95 billion in federal revenue next year, according to the Congressional Budget Office, and economists estimate that allowing the rate to return to its earlier level will cost the average household about $1,000 annually.
Retailers say they simply do not want to make choices between such tax provisions.
“If brinkmanship overtakes bipartisanship, we will continue to see less capital investment by retailers large and small, stifled job creation, and dampened consumer confidence, which will ultimately lead to lower retail sales and potentially another recession,” Shay said.