By  on December 7, 2005

WASHINGTON — Retailers concerned about a proposal to eliminate a tax deduction on the cost of imported merchandise and raw materials applauded reports that President Bush will likely postpone a push to revamp the federal tax code until 2007 or 2008.

Manufacturers, however, said they were disappointed.

Despite Republican majorities in the House and Senate, Bush has had trouble securing enough votes to move his economic agenda through Congress — notably overhauls of Social Security and the tax code. The president is also facing low approval ratings, flagging support for the Iraq war, dissension within GOP ranks and midterm elections next year, which lessens the Congressional appetite for major tax reform.

"This issue is too big to be pushed through Congress without full and deliberate debate of all its ramifications," said Rachelle Bernstein, vice president and tax counsel for the National Retail Federation.

Bernstein said retailers are concerned about a proposal made by the President's Advisory Panel on Federal Tax Reform on Nov. 1 that would abolish the ability to deduct the cost of imports as a business expense.

Bush instructed a bipartisan panel to review several proposed tax code revisions and it issued a 272-page report recommending two proposals. The Treasury Department is reviewing the findings and will submit its recommendations to the President, who will then decide whether to include any of them in his fiscal 2007 budget.

Bernstein said the panel's suggestion to eliminate the deduction for the cost of imported items, "effectively [subjects] those items to the plan's 30 percent corporate tax rate and [drives] up tax costs for importers."

She said with $648 billion in general merchandise consumer goods imported into the U.S. in 2004, the estimated change would result in $194.4 billion in new taxes retailers would be forced to pass on to consumers. The NRF also believes the elimination of the deduction would violate World Trade Organization rules and possibly lead to sanctions.

Meanwhile, textile associations were concerned about a delay for different reasons.

"This is significantly disappointing ... from the standpoint that our outdated tax code is seriously damaging the U.S. manufacturing base and our ability to compete in the 21st century market," said Auggie Tantillo, executive director of the American Manufacturing Trade Action Coalition. "We are the only industrialized nation in the world that has an income-based tax system. Everyone else has a value-added tax system, which allows them to assess the value-added tax on all imports and then rebate that value-added tax when one of their manufacturers exports."

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