The stakes in the fight over this particular proposal are huge because Republicans are relying on the revenue it would raise — almost $1.2 trillion over a decade — to finance a big chunk of their overall tax-reform plan. | AP Photo Retailers fear massive tax increases under House Republican tax plan

House Republicans hoping to rewrite the tax code next year have a Wal-Mart problem.

Their plan to remake the international tax code — which many experts praise as a clever way to fight “inversions” and other types of tax avoidance — would potentially hammer retailers.


That’s because Republicans want to raise taxes on stuff purchased from abroad to pay for much of their tax reform plan, and companies like Wal-Mart, Target and Home Depot are some of the nation’s biggest importers.

Many retailers fear that, even with Republicans promising to slash the corporate tax rate, they will still face big tax increases that in some cases will exceed their profits.

On high alert over the proposal, retailers have begun a big lobbying campaign on the Hill, warning lawmakers and their aides that any tax hikes will get passed on to their constituents in the form of higher prices.

“Our members have told us that the import tax could be as high as five times their profits,” said David French, chief lobbyist for the National Retail Federation. “I don’t know how viable some retailers would be in the face of this import tax.”

Asked about the complaints, House Ways and Means Chairman Kevin Brady (R-Texas) said: “We welcome this kind of feedback.”

He emphasized there are other provisions in the plan that would benefit retailers, including a much lower corporate tax rate and the ability to immediately write off the entire cost of their investments.

What’s more, he said, the proposal would boost the entire economy, increasing overall demand for the companies’ products. “We are taking a significant step — a game-changing step — towards a stronger U.S. economy and a competitive tax code,” he said in an interview.

Many economists watching the unfolding debate say retailers actually have nothing to worry about.

Sure, their tax bills will probably go up — perhaps by a lot — because of the import tax. But they say Republicans’ tax plan would also strengthen the dollar, and the benefits of a stronger currency should offset the companies’ increased tax costs.

Even so, they acknowledge that is an arcane-sounding argument that’s unlikely to carry much weight in the upcoming political battle over the plan.

The stakes in the fight over this particular proposal are huge because Republicans are relying on the revenue it would raise — almost $1.2 trillion over a decade — to finance a big chunk of their overall tax-reform plan. It is the third-biggest pay-for in the proposal, according to the Tax Policy Center, and dumping it would threaten to send lawmakers back to the drawing board.

Their plan would replace the current corporate tax code with something known among experts as a “border-adjustable, destination-based” tax system. It would amount to a fundamental change, with the government taxing companies based on where they sell their wares, rather than where the business is located.

The idea is that, at a time when companies can hopscotch the globe in search of lower taxes, one thing that is not mobile is their customer base.

Republicans would charge corporations 20 percent on the things they sell in the U.S., regardless of whether they’re based in Ohio or Ireland. Companies could sell their exports completely tax-free, but when they buy things from abroad they would be denied at least some — Republicans haven’t decided how much — of the deduction they normally take for expenses.

Many tax experts like the idea, saying it would go a long way towards fighting international tax avoidance. It suddenly wouldn’t matter where the company is located, they say, so they’d have little incentive to move overseas.

If anything, economists say, it would push more companies to move to the U.S. because they would only be subject to the 20 percent rate; headquartering themselves in Ireland, for example, could mean paying the U.S. tax plus any Irish levies.

And all of that would spare lawmakers from having to devise new “anti-erosion” rules aimed at heading off all the creative ways companies might avoid paying U.S. taxes by booking their income overseas, out of reach of the tax man.

“All the games that companies play with shifting their expenses to the U.S. and shifting their profits to low-tax countries will have no effect on their U.S. tax liability,” said Alan Auerbach, an economist at the University of California at Berkeley. “It would completely end the problem.”

The proposal might also win bipartisan support.

“There is real potential,” said David Kamin, a former tax adviser to Democratic presidential candidate Hillary Clinton and one-time economic aide to President Barack Obama. “One of the key priorities of a number of progressives is making sure that a reform does not worsen the incentive to invest overseas, rather than in the United States, because of the tax rate differential — and hopefully improve that — and this has the potential to do that.”

But the prospect of losing their deduction for buying things from abroad is alarming retailers.

An example of how the math might work: Say a company sells something for $100. Under current law, it deducts its expenses from that sale to determine its taxable income. If the company bought $80 in imported goods, and had an additional $15 in other expenses, it could subtract $95 from that $100 sale. That would leave a $5 profit, on which it would pay the 35 percent corporate income tax — producing a $1.75 tax bill.

Under the Republican plan, the company would get a much lower 20 percent corporate rate. But if it could not deduct the cost of their imported goods, they’d pay 20 percent on that $5 profit along with the $80 for what they bought from abroad. That would mean a $17 tax bill — more than triple their $5 profit.

In many cases, said French, retailers have no choice but to buy from abroad because things like apparel are overwhelmingly made in other countries. Wal-Mart, Target, Home Depot, Lowe's and Dole Food topped the list of the nation’s biggest importers in 2013, according to the Journal of Commerce.

Warning retailers will be forced to pass those costs onto their customers, French said: “Is it politically viable to impose a massive price hike on consumers so that multinational corporations can have lower taxes?”

Economists shrug, saying retailers would be made whole by a stronger dollar.

Republicans’ plans to exempt exports from taxes would allow American companies to sell their wares overseas for lower prices. As foreign customers snapped up their products, they would drive up the value of the dollar as they exchanged their own currencies in order to buy the good.

That stronger dollar would give American retailers more buying power when they’re buying T-shirts from Bangladesh or shoes from Vietnam, reducing their cost of production even though their tax bills would climb.

“Their tax remittances will indeed go up — that’s obvious” and “their tax liability could be very, very high,” said Alan Viard, an economist at the American Enterprise Institute. But “the currency movement would reduce the cost of their imports so that they’re not losing on net from this policy change.”

Retailers are skeptical, questioning how much and how quickly currencies would adjust.

“There’s a lot of uncertainty about how this works in the real world,” said French.

And even Viard is doubtful that arguments about currency fluctuations will persuade many lawmakers.

“These issues are very complicated” and “there’s always a tendency to focus on the visible effects, and to ignore the less-visible ones,” he said. “This Walmart issue is going to be a significant factor in the political deliberations.”