AMBITIOUS AGENDA

JOANNA RAMEY

WASHINGTON -- The supermarket industry's longstanding call for permanent repeal of the estate tax is part of President Bush's wide-ranging agenda for his second term, but like much of the administration's -- and supermarket industry's -- to-do list, meeting with success is expected to be a challenge.

Eliminating the estate tax, pushing to make country-of-origin labeling voluntary for beef, lamb, pork, produce, peanuts, fish and shellfish; reforming employer pension rules to ensure proper funding; and changing the federal formula on how milk is priced, are central to food retailers' 2005 federal government agenda.

Bush, who's slated to be inaugurated Thursday, has exuded confidence over his Republican victory in the fall election and has said he has political capital to spend in order to get his way in the 109th Congress, which this month starts its two-year term.

"The fact we have the continuation of President Bush in office, and with Republicans still in control of the House and Senate, affords the [supermarket] industry the ability to move on a number of legislative issues left undone," said Tom Wenning, vice president and general counsel, National Grocers Association, Arlington, Va.

However, while presidential self-confidence is an asset in hard-nose politicking on Capitol Hill, Bush's agenda is still expected to face roadblocks from within his party, and of course from Democrats.

The Bush agenda is long on major programs, like making changes to Social Security, revamping the federal tax code and limiting medical malpractice claims, which by their nature carry controversy. Moreover, many Bush plans cost the U.S. Treasury money at a time when the federal deficit is escalating and there is no end in sight for increases in defense spending on the Iraq war and anti-terrorism efforts.

Larry Sabato, executive director of the Center for Politics at the University of Virginia, Charlottesville, said the deficit cloud will likely hang over Bush's second term and affect what emerges from Congress. "There's a limit to the goodies," Sabato said; however, he noted Bush did get reelected "despite the enormity of the growing national debt."

There will also be limits to how much leverage Bush can exert on Capitol Hill, Sabato said. "Does Bush have some capital from the election? Of course. The Bush view is that 'I'm president for a short period of time and I'm going to reach for the stars. I may not get there, but I might get to the moon."'

Estate-Tax Repeal

The estate tax is in the process of being phased out under Bush's sweeping tax cuts during his first term, but is scheduled to be reinstated in 2010. The supermarket industry wants to make the phaseout permanent.

Although eliminating the estate tax, as food retailers argue, would benefit their businesses and, in turn, the economy, and be relatively painless for federal coffers -- the tax accounts for about 1% or $24 billion in annual revenues -- success in that elimination is widely viewed as problematic. The same is true for making permanent other Bush tax breaks on dividends and capital gains.

Some of the president's own boosters, like Sens. John McCain, R-Ariz., and George Voinovich, R-Ohio, have expressed reluctance to pass legislation that could worsen the deficit. However, Bush argues tax cuts can easily be accommodated and the deficit halved in two years by trimming federal programs and through economic growth.

John Motley, senior vice president of government and public affairs at the Food Marketing Institute here, said it's difficult to forecast when Bush might ask Congress to make the tax cuts permanent, including estate taxes. "When the president decides to go for it, we and the rest of the business community will fall in behind him and push," Motley said.

However, he said chances for passage would fade next year as the entire House and one third of the Senate begin gearing up for reelection in 2007 when lawmakers typically want to steer clear of controversy, Motley said.

On several occasions during Bush's first term, the House passed legislation to make the estate tax permanent, on the strength of the chamber's sizeable GOP majority. But its passage in the Senate never materialized because of chamber rules requiring 60 votes to curtail a filibuster. Republicans only had 51 seats in the chamber and not enough Democratic support to reach that magic number. Although there are now 55 Republican senators, about three don't support estate tax repeal and there are not enough Democratic backers to make up the difference to reach 60 votes.

Country-of-Origin Labeling

Not all issues before Congress involve Republican-Democrat battling, and that includes the food retailer priority of replacing a mandatory country-of-origin food-labeling law with a voluntary program. The law was passed in 2002 by a Republican-controlled Congress and signed by Bush as a food-safety program. However, retailers complain the paperwork burden is costly and unworkable. Because of the controversy, lawmakers voted to delay labeling for beef, pork and produce until 2006. Labeling of fish and shellfish is scheduled to begin in April.

Rep. Robert Goodlatte, R-Va., chairman of the House Agriculture Committee, plans to reintroduce legislation early this year to create a voluntary labeling program for all the commodities, according to Alise Kowalski, committee majority deputy press secretary. Last year, the measure cleared the committee, but was never scheduled for a vote. At one point last year, a voluntary labeling law came close to being bundled in last-minute government funding legislation.

Support for mandatory county-of-origin labeling, known as COOL, comes largely from House and Senate members from both parties representing ranchers in Midwest states who want to draw a distinction between meat from the United States and competing foreign meat, particularly from Canada. While one major proponent of mandatory labeling, former Senate Minority Leader Tom Daschle, D-S.D., was defeated in the fall elections, other pro-COOL lawmakers remain to try to thwart a voluntary

program.

The political "equation is about the same after the election, if not a touch better, than the last Congress," said FMI's Motley, noting at least two voluntary COOL supporters joining Congress, Sens. Jim DeMint, R-S.C., and Johnny Isakson, R-Ga.

Health Care Reform

Another issue being tracked by food retailers -- along with the rest of the business community -- for action in Congress is the rising cost of health care. However, curbing the double-digit annual growth rate of health care costs is a major initiative to tackle and one that's only expected to make incremental progress.

The president has proposed expanding the concept of tax-free employee health care savings accounts to allow insurance coverage deductibles to be set higher. The administration argues overall insurance costs would be lowered. Limiting medical malpractice awards is also seen by Bush as another way to lower insurance price tags.

"None of these things are silver bullets for the problem of spiraling costs, but we think they certainly would be helpful," said Paul Kelly, senior vice president, government affairs, Retail Industry Leaders Association, representing discount retailers including Wal-Mart Stores.

Tax Code

Another knotty issue Bush plans to pursue is an overhaul of the U.S. tax code. A White House panel is scheduled to be named to study alternatives, and congressional consideration isn't expected for a couple of years.

One alternative is whether a type of consumption tax upward of 25% on all retail goods should be used to replace all individual and corporate taxes. The idea -- raising fears among retailers of all kinds -- has gained steam among some House Republicans, including Majority Leader Tom DeLay, R-Texas.

"With tax rates of 25% to 30%, that would have a tremendous impact on consumers' mind-sets, and it would create a whole other degree of compliance and technology strategies that retailers would have to address, which are government-imposed costs and that are not without ramifications for the industry," the NGA's Wenning said.

Additional Issues

Other issues food retailers will be pressing Congress to consider include:

Reforms in the management of multi-employer pension plans that would call for more transparency in how they're managed to determine if they're under- or over-funded.

Whether the United States should allow less costly pharmaceuticals from other countries to be imported, with retailers advocating their pharmacists be shielded from liability lawsuits should problems arise.

Capping debit card interchange fees paid banks on transactions, which have been escalating.

Off Capitol Hill, food processors are awaiting release by the Agriculture Department's regular five-year revision of the national dietary guidelines and food pyramid detailing the importance of food groups in a healthy diet. Robert Earl, senior director for nutrition policy at the Food Products Association, formerly the National Food Processors Association, said more consumer testing by the USDA has found diets are positively affected if the guidelines provide more detail and are less negative.

For example, Earl said the guidelines now ask consumers to "choose foods that are moderate in fat and low in saturated fat and cholesterol." A more positive, detailed message would be "choose fats wisely for good health" with examples of good fats, like omega-3 fatty acids found in some vegetables and fish.

Local Regulations Irk Executives

In interviews with SN, industry leaders expressed concern about a raft of national, state and local legislation that they expect to face this year, from country-of-origin labeling at the national level to state workers' compensation laws to local regulation of pseudoephedrine sales.

Following are the responses of food retailing and wholesaling executives who SN asked what they felt were the major legislative issues that could impact their companies in 2005.

Ron Pearson, chairman, Hy-Vee, West Des Moines, Iowa

One issue I see that's going to go on in almost every state, and certainly in the Upper Midwest, is legislation controlling the sale of pseudoephedrine [the ingredient in over-the-counter cold medicine becoming frequently used in the manufacture of illegal drugs]. Some states are saying the sales should go only in a controlled area of a store, some states are saying they should only be handled by a pharmacist, which we think is going to be expensive and restrictive. We have voluntarily taken it off our shelves, and we're not opposed to having a technician or a clerk handle that in a special area. But its going to be interesting to watch since there are several pending legislations that could affect us -- even on a county level, as opposed to a state level. We're concerned that every county and every city would have legislation because that's going to be troublesome when you have 225 stores.

Jack Brown, chairman, president and chief executive officer, Stater Bros. Markets, Colton, Calif.

The estate tax will be the major issue because unless the laws are changed, many companies could be sold or closed to pay the inheritance taxes. We'd also like to see more teeth put into workers' compensation programs. Some politicians say reductions in workers' comp are a big success because the rates are less, but they're only less than a year ago, which was five times the rate of just a few years ago, so we still need to do some work to bring the costs into better balance.

Al Plamann, Unified Western Grocers, Los Angeles

We'd like to see relief on the estate tax issue. The industry definitely needs that. We'd also like to see tort reform -- that should be high on the list of all business leaders. We've made no progress in that area, but tort reform drives a lot of extraordinary costs we must cope with in terms of defending ourselves in frivolous lawsuits, and that's a very onerous cost of doing business in this country.

At the national level, something has to happen regarding health care, especially Medicare.

Neil Golub, president and CEO, Price Chopper Supermarkets, Schenectady, N.Y.

New York state has its own list of legislative issues. Between the governor, the president of the senate and the assembly speaker, they basically run a three-man show, and they make decisions about what goes on in New York state, and we're continually surprised by the changes that they make. For example, I read in the paper the other day that there's a significant change in workers' compensation, and for us that will mean something like a three quarters of a million dollars increase that we had no warnings of -- it's just due.

We've tried to get wine in food stores, and we think that's been held up for political reasons. It certainly would be good for the state, and good for the state wine industry. There are also different rules around the state about how to define "kosher" -- one rabbi does it this way, another does it differently, and they want to promulgate a lot of new rules. That just creates a lot of paperwork

Rich Parkinson, president and CEO, Associated Food Stores, Salt Lake City

Obviously, country-of-origin labeling is an important issue that needs to be dealt with. With the present administration, we don't need to worry about ergonomics legislation. But we need to find a resolution to the issue of estate taxes, and with the new Congress made up of more people who agree with our position, we could see a total repeal of the estate tax.

Bob Hermanns, president and CEO, Associated Grocers, Seattle

We're concerned about the final outcome of the gubernatorial election in Washington [where Democrat Christine Gregoire was declared the winner as of last week by a narrow margin over Republican Dino Rossi after a third recount]. In addition, we're in favor of the Washington State Medical Association Health Care Liability Reform Initiative, which is being considered by the state legislature. It would affect the escalating costs of litigation in the area of health care and liability reform.

Stan Edde, president, Falley's Inc., Topeka, Kan.

We've been watching closely a lot of the agricultural issues, particularly the country-of-origin issues for meat. Here in Kansas, we're second to Texas in beef production, so obviously the whole process we've seen the last year on beef, beef pricing, mad cow, exporting, has been a real concern for us. We also have a lot of small communities that depend on the wheat crop and the corn crop, and we watch what's happening there because that determines how much of their budgets can be spent.

Darioush Khaledi, chairman and CEO of KV Mart, Torrance, Calif.

We're looking for reform of workers' compensation and health care, which, after competition, are our biggest challenges and two things that are really killing us.

Joe Azzolina, president, Food Circus Supermarkets, Middletown, N.J.

Our biggest concern is that they will try to raise taxes on businesses in New Jersey. We've got a $4 billion budget deficit here, and we don't want them to raise that money by taxing business. On the national level, I don't foresee any major obstacles.