Because convenience stores bank on America’s disposable income for much of its profits, the effect of tax reform could be significant.
By Mark Battersby, Contributing Editor
The passage of the massive Tax Cuts and Jobs Act (TCJA) received a mix of publicity. Even now, some groups claim any tax savings are illusionary, with the middle-class being hit especially hard in states with high taxes.
But, do the lost personal deductions outweigh the tax cuts and have an adverse effect on disposable income? And, because convenience stores bank on America’s disposable income for many of its profits, the impact of TCJA could be significant.
Economists surveyed by the Wall Street Journal recently predicted that 2018 would see solid growth and a continued decline in the jobless rate. One factor in that rosy forecast was the tax cut bill signed into law this past December, which most say will boost the economy for several years at least.
Growth in healthy food and beverages sales led to positive overall sales at convenience stores in 2017, and retailers expect the momentum to continue in 2018, according to a survey of retailers released by the National Association of Convenience Stores (NACS).
But, questions are now being asked about the impact the recently enacted tax “reforms” will have on convenience store customers.
The tax reform bill was designed to stimulate economic growth by encouraging businesses to invest in the domestic economy. Some economists are predicting that because of new tax reform measures, U.S. businesses will have more net income, and more profits to allocate. But the question remains: will the increased income and bigger profits in the business sector flow through to the consumers that constitute the customers of the average convenience store business?
Despite the hue and cry, the predictions of higher tax bills and the all-too-real loss of many itemized personal deductions, experts say that the effects of these changes will vary. Factors such as family size, income and which deductions they are eligible to claim will all impact on each individual’s tax bill.
It doesn’t take an expert on the new federal tax law to realize its impact on states like New York has been misrepresented by its many critics. Among the many arguments against the new tax cuts are the claims that taxes are going up. This would significantly impact the incomes of convenience store customers. While technically true, according to the Congressional Joint Committee on Taxation, there will be 177 million tax “units” in the U.S. next year. By all accounts, fewer than 5% of those units will see a tax increase in 2018.
Of those 5% who will see a higher tax bill, it’s mostly affluent taxpayers in high-tax states such as New York, New Jersey and California who are having their state and local tax deductions capped and those who continue to itemize deductions, rather than utilize the new, much-higher standard deduction.
In high-tax states, officials have been focused on protecting taxpayers from the impact of the new $10,000 cap on deductions for state and local taxes. In California, Connecticut, Massachusetts, New Jersey and New York, more than one-third of tax filers claim the state and local tax deduction on their federal tax returns with the average deduction in each state being over $15,000.
Governors in a number of other states are reportedly worried that their own current tax policies could inflict pain for taxpayers as a result of the federal changes. More than 40 states have income taxes, and nearly all of them rely to some degree on definitions from the federal tax code.
The true test for the pro-growth policies under TCJA is whether they will result in a more participatory economy in which workers’ incomes meaningfully increase over the long run. The early results appear promising. Some businesses are already handing out bonuses and increasing 401(k) matches, base wages and capital spending, thanks to the new, lower corporate tax rate.
On the heels of businesses awarding bonuses of up to $3,000 to over one million workers due to the anticipated benefit of Trump’s tax reform victory, several major utilities have announced plans to cut rates in a consumer payback related to the lower taxes, according to media reports.
Walmart, the nation’s largest private employer, has, for instance, boosted its starting hourly wage to $11 and is delivering bonuses to employees reportedly to capitalize on the tax reforms and stave off competition in a tightening labor market. To predict the impact on your customers, however, it is necessary to take a look at what they face under the new tax laws.
Under the new law, taxpayers will see seven tax brackets but at reduced rates with the highest tax bracket dropping to 37% from the former 39.6%. The standard deduction doubles to $12,000 for single filers and $24,000 for married couples filing jointly. On the downside, personal exemptions and most additional standard deductions have been suspended.
On the personal side there are new limits on itemized deductions and a $10,000 cap on state and local tax deductions. The mortgage interest expense deduction can be claimed only for mortgages of less than $750,000 and severely limits theft and casualty losses.
The new law also generously excludes 20% of income of owners of “pass-through” businesses like partnerships and limited-liability companies. But that won’t be available to firms involved in legal services, accounting, health, finance or consulting—basically, mostly high-income professionals.
Main Street Impact
For many Americans, the result is expected to be a lower federal tax bill, at least initially. As mentioned, those facing higher bills will, for the most part, be concentrated in some high-tax states. The TCJA closes unfair loopholes, lowers tax rates, simplifies our tax law and repeals the Affordable Care Act’s Individual Mandate, all of which should translate into increased spending power for the convenience store industry’s customers.
On the personal level, the doubling of the standard deduction alone will mean a tax cut for most of the middle-class as even the Tax Policy Center (TPC), a liberal think tank has reported. The TPC, a joint venture of the Urban Institute and Brookings Institution, recently estimated that the TCJA would reduce taxes on average for all income groups in both 2018 and in 2027 when many of the individual rates and tax breaks expire.
The formula is simple: When the economy accelerates, employers compete for employees and wages increase. The stronger the economy, the harder it is to get good employees. Conversely, when growth is weak, as it was during most of the previous eight years, employees compete for jobs and wages stagnate.