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Retail Affects of Tax Rate Drop


Senate Majority Leader Mitch McConnell on Dec. 22. (Photo by Alex Wong/Getty Images)


Several questions have been asked about retailer’s inclinations when they pay lower federal taxes in the New Year. The corporate tax rate was dropped from 37% to 21%. How will retailers spend the money that they do not have to pay to the government? Will they pay an extra dividend to shareholders? Will they reduce their debt? Will they invest in innovative ideas? Will they pocket the money and report higher earnings? Will they share it with their employees? I have examined the alternatives and recap them below.

Let’s look at the options.

Extra dividend. While this action is attractive to investors and will boost stock prices for a moment, it is really a temporary band-aid that will do nothing to help a company improve its basic operation into the future. In addition, the tax-cut may be short lived and end up being disappointing for long-term investors.

Reduce debt. This is an attractive option since it helps companies have more cash liquidity, and it could reduce long term indebtedness. For many companies, it will give them more breathing space that is much needed. I would favor this option.

Invest in innovative ideas. Companies that have no debt should invest in developing innovative concepts to support evolving customer and market trends. Their investment of tax gains will have long-term benefits for the company, since it will put them on the leading edge of what the customer wants. I like this choice when debt issues aren’t looming.

Pocket the money. Build up a cash reserve. That is a great idea for companies that are acquisition minded and want to opportunistically jump on opportunities. If the company has long-term debt at low interest rates, they can build a kitty for special projects or use it to help fund an acquisition that will enable the enterprise grow faster.

Raise salaries. Of course, companies could raise salaries and raise associates morale by doing so. I am sure some retailers will consider this option, but I believe that most retailers already have built some increases into their growth plan and are unlikely to add to this bucket.

The new tax bill changes are still being reviewed. No retailer has made a final decision on what to do with profits from lower taxes. It is also possible that some states may raise taxes in 2018, thus reducing the windfall. It will be an interesting development for an industry that has struggled and closed over 7,000 stores in 2017 in order to stay viable since many consumers prefer shopping on the internet. E-commerce today accounts for more than 15% of total sales, and the retail industry is searching for new ways to keep their stores alive and profitable.

I believe that we will see most retailers choose to manage debt but I hope they leave room to support investments that keep them exciting and relevant to their customers. It will be a test of leadership to see which paths are chosen.


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