A brief look at what the recently proposed deficit reduction plan would mean for retailers and small businesses
By Charles F. Spielmann
The Rivlin-Domenici plan, named for co-sponsors Alice Rivlin, Democrat and former Federal Reserve vice chairwoman, and former Senate Budget Committee Chairman Sen. Pete Domenici (R-N.M.), was unveiled Nov. 17 by the federal Debt Reduction Task Force. The plan charts a path to “create a balanced package of spending cuts and revenue increases that solves the debt crisis.”
While many of its provisions affect primarily private individuals, the plan outlines proposals that would have an impact on the corporate world. Payroll, health insurance offerings and more would be affected.
The plan calls for the enactment of a temporary “payroll tax holiday,” excusing employers and employees from paying the 12.4 percent tax into the Social Security trust funds during 2011 in an effort to create between 2.5 and 7 million new jobs over two years under Congressional Budget Office assumptions.
The plan’s roadmap to debt reduction calls for phasing in various elements starting in 2012. The biggest such element is the imposition of a federal Debt Reduction Sales Tax (DRST), which is also being referred to as a type of value-added tax (VAT). This new tax – which would start low and eventually reach a maximum rate of 6.5 percent – would fall on a broad base that would include privately funded healthcare costs, food and beverages, clothing, legal and accounting services, and many other items not typically captured by state retail sales taxes.
“States will benefit from piggy-backing their taxes on top of a broad-based federal sales tax. State tax authorities will benefit from access to IRS data from sales tax returns, just as they now rely on the IRS to help them enforce state income taxes,” the plan’s final report notes.
The plan would offer enhanced tax benefits in the form of new refundable credits for children and for the first $20,300 of a worker’s earnings to offset the DRST’s burden on lower-income families. Combined with the forecasted economic boost of the tax holiday, improved economic health and other provisions for working families, the DRST is not expected to pose a heavy burden on working Americans.
Another big change is the treatment of tax exemptions for employer-provided health insurance.
Effective in 2018, the plan would cap contributions by employers and employees who are eligible for tax-favored treatment, and then reduce the cap each year by equal dollar amounts so that by 2028, all contributions to employer-based health insurance will be taxed. In addition, the plan also calls for the eventual elimination of Health Savings Accounts (HSAs) as part of a move to remove the incentives for more expensive health insurance.
The Rivlin-Domenici plan would not affect individual states’ sales tax structures but would operate alongside state sales taxes and, as such, would require additional handling procedures to properly remit the federal DRST. This could create headaches initially for retailers, requiring retailers to receive training in the handling and management of DRST monies and the development and deployment of appropriate remittance structures.
While implementation isn’t guaranteed, the Rivlin-Domenici plan presents a path to reduce the federal debt and thus improve the economic climate, thereby creating incentives for business growth.
All in all, the plan looks like it could benefit the economy if it were to make it through congress, but it’s yet to be seen how retailers and businesses as a whole will respond to the “shift” in tax burden and paperwork headaches.