Tax relief for retailers - a reality check

WEDNESDAY, OCTOBER 5: No Payroll Tax for retailers and their employees. It sounds good. It is good. Good for the business person in retail. Good for people working in retail.

To be clear, this means that the employee gets a 5.25 per cent pay increase with effect from October 1. This happens because the employer is no longer liable for paying Payroll Tax on behalf of that employee. So the employer should no longer deduct 5.25 per cent from the employee’s weekly pay packet. That’s good.

The employer no longer has to pay the employer’s portion of 8.75 per cent on that employee’s pay. So the employer gets tax relief of 8.75 per cent for each person that he pays and employs. That, too, is good.

But what happens at the selling end of the retail scene, where the retailer sells imported thingamajigs to Bermuda customers? Let’s look.

After buying the foreign thingamajigs, paying for inland freight, shipping to Bermuda, paying stevedoring and Bermuda Customs duty and Wharfage, paying Bermuda land transport costs, warehouse handling and storage, land tax and rent and other buildings costs for his retail premises, BELCo and BTC bills, advertising, miscellaneous administrative overheads, and finally paying for the shop floor sales staff; what real difference and impact does that 8.75 per cent tax relief on employee pay really make? What real difference?

On a thingamajig that retails for $150, the retailer probably has a sales staff “cost to sell” of perhaps $10 on that one item. Put another way, the retailer’s figures show that it costs her business $10 in employee pay to sell one $150 item.

The retailer gets 8.75 per cent Payroll Tax relief only on that $10 pay portion. That amounts to $0.88 in Payroll Tax relief. That means that the retailer’s selling price for the $150 thingamajig can be lowered by the amount of Payroll Tax relief. That means that the retailer can knock $0.88 off that price, sell the thingamajig for $149.12 and end up exactly where he was before applying Payroll Tax relief.

So the retailer can take about a dollar ($1) off that one item and still earn about what he earned before tax relief. So the final benefit to ordinary Bermudian customers will be — could be — a price reduction of no more than one per cent.

Applying the same analysis across the whole spectrum of all retail, it becomes clear that, at best, the 14 per cent Payroll Tax relief will translate into a possible across-the-board reduction in price of something like one per cent. Not 5 per cent. Not 10 per cent. Certainly not 14 per cent.

That means that a $5.25 loaf of bread might come down to $5.20. A litre of gas, currently costing $2.07 might drop to $2.05. A pair of shoes now selling for $75 might drop to $74.

Reality? Bermuda consumers can anticipate an overall price drop of no more than one per cent  in all retail prices. There will not be and there cannot be a 14 per cent reduction in retail prices. There will not be a surge in retail sales. Retail sales will continue into a fortieth then forty-first month of decline.

However, some really switched-on retailers will try, should try, to capitalize on this temporary tax move by offering short-term ‘tax savings sales’ on some items.

Don’t go looking for big price reductions. It won’t happen because it cannot happen. Blame the retailers if it makes you happy, but that blame will be wrongly placed. Much of the real blame lies elsewhere.

One real and good consequence is that all retailers should have a six-month disincentive to lay off staff. But without continuing that tax relief, that tax disincentive will disappear on April 1, 2012 and the lay-offs will kick in then. The second real and good consequence is that the 5.25 per cent personal employee exemption should add about $3-$5 million, spread over six months, to consumer purchasing power.

In Bermuda’s economy-on-the-bubble with its very high cost of Government, Bermuda’s unchanged nineteenth century, Victorian era tax structure makes business life extremely difficult for retailers, Government, and consumers.

That big 35 per cent jump in duty at LFW? It’s a pain-in-the-tail way to garner a pointless extra $2.9 million in the five-month period November 2011 — March 2012.

But that $2.9 million of possible extra tax revenue won’t even cover the $4.75 million that the Bermuda Post Office is budgeted to lose in that same period; or the $4.75 million planned loss that the Post Office has already incurred between April 2011 — September 2011.