State of Disunion: What Will Washington Do?

As the nation moves closer to the upcoming presidential and congressional elections that could have a tremendous impact on the business climate, food retailers are keeping a close eye on issues related to health care reform, taxes, product labeling and interchange fees that could impact their operations and planning.

Regulatory and judicial issues will be on the front burner, as much of Congress is expected to be occupied by election issues as the year progresses. Some legislators have already been pulled away from focusing on issues in order to campaign because of the early primaries this year and in some cases because redistricting has thrown some sitting members into new election races.

“Normally in an election year, our rule of thumb for legislation is that everything has to happen before June 30, but the challenge this year with the primaries is that we only have so many legislative days in the first part of the year,” said Jennifer Hatcher, group vice president, government and public affairs, Food Marketing Institute, Arlington, Va. “It’s unclear how that will play out.”

Tom Wenning, executive vice president, National Grocers Association, also based in Arlington, said President Obama’s State of the Union speech, scheduled for later this month, could be quite telling in terms of how well the Democratic White House works with the Republican-controlled House of Representatives and the Democratically controlled Senate.

“The message he delivers there — both what he says and how it is received — will probably set the tone for the relationship between the president and Congress in 2012,” he said.

He cited the recent impasse over extending the payroll tax deduction as an example of the partisanship that has characterized many of the issues in Washington lately.

The recent recess appointments Obama made — naming Richard Cordray the head of the Consumer Financial Protection Bureau and tapping three new members for the National Labor Relations Board — will only serve to increase the rancor between the two parties, Wenning said.

“The big question is what impact are those going to have on the legislative agenda for 2012,” he said. “Certainly we don’t think that contributed in a positive way.”

In addition to Cordray, the president also named Democrats Richard Griffin and Sharon Block and Republican Terence Flynn to the NLRB, restoring the full five-member board and maintaining its Democratic edge by a three-to-two margin.

Hatcher agreed that the recess appointments were agitating to many in Congress.

“For folks like me who are a student of government, I can’t think of anything more outrageous that has happened in the last decade,” she said, noting that it wasn’t the fact that the appointments were made during the recess that was problematic, but that the nominees were only presented to Congress a few days before the recess.

“There was no vetting about whether they were a good candidate or a bad candidate,” she said. “Sometimes things come up and need to be addressed before you put somebody in a position like the one they have been nominated for. That will likely have an impact on a host of different actions, and it really puts a bad taste in the mouths of folks trying to work together to accomplish something, so it really stifles those relationships that were starting to take off a little bit.”

The NLRB appointments could also impact labor regulations by making the board more sympathetic to unions, Wenning explained, as the board had already taken some steps to speed the union election process.

“We are concerned that it is going to politicize the National Labor Relations Board’s agenda even more, and their pro-union aggressive agenda certainly is important to us as the landscape changes for labor relations issues,” he said. “I think we will be watching that regulatory agenda very closely in 2012.”

In 2011 he said NGA relied on its outside labor relations counsel, Epstein Becker Green, to provide advice and counsel to its members about how to comply with labor relations regulatory issues and they will continue to do so in the coming year.

The new election rules proposed by the NLRB, which could reduce the time required for an election to as little as 14 days, are “a major concern,” Wenning said.

In addition, NGA is concerned about a proposed regulation by the Department of Labor concerning rules for consultants and their communications with employers.

“The combination of the National Labor Relations Board reforms and the Department of Labor proposed reforms is a significant concern, not only to employers but also to the labor relations counsel that provides them with advice and counsel,” Wenning said.

NGA has been part of the Coalition for a Democratic Workplace, which filed suit against the NLRB seeking to block the board’s new rule requiring all employers to post a notice called “Notification of Employee Rights Under the National Labor Relations Act.”

The U.S. District Court in Washington held hearings on the matter in December, and Wenning said there could be a preliminary decision on the matter this month.

Wenning predicted more litigation could ensue in opposition to the newer proposed regulations as well.

With the House and Senate being controlled by two different parties, any labor-related legislation is not likely to move through Congress, Hatcher pointed out, leaving regulatory bodies like the NLRB to take up those issues.

“The labor issues are going to have an enormous impact; it’s just more likely to be regulatory or judicial rather than legislative in 2012,” she said.

Interchange Lawsuit

The inclusion of the so-called Durbin Amendment in the financial reform bill in 2010 was a huge victory for the industry, but the Federal Reserve, which gained new powers to oversee debit-card fees through the bill, ended up allowing fees that were much higher than retailers had hoped.

In response, FMI and the Merchants Payment Coalition filed a lawsuit against the Federal Reserve Board alleging that it failed to follow the directives given by Congress in the legislation.

While FMI and NGA said some retailers are seeing benefits from the new cap on debit-card fees, retailers are continuing to push for more comprehensive reform that could include credit cards and other forms of payment.

“Politico called it the victory of the year, but for us it was the victory of a decade,” said Hatcher of the Durbin Amendment, citing the industry’s long effort to educate legislators about interchange fees. “Now we have the litigation to try to make the legislative result work for a much broader group of folks, and the way we felt it was supposed to work.”

She also said FMI is keeping a close eye on the emergence of mobile payment systems and the fees associated with those.

“We don’t want to get caught in the same kind of trap with future technologies,” she said.

Although NGA is not a part of the lawsuit against the Federal Reserve, Wenning said his association also is continuing to fight for broader reform in interchange fees.

“While we were concerned that the rules proposed by the Federal Reserve did not go far enough, we think they provide some relief to our members,” he said. “We believe there is still more work to be done in terms of having credit card swipe fees being subject to more transparency and disclosure, and we think Congress should address that from the perspective of retail merchants.

“Certainly we believe consumers have the right to know how much they are paying in swipe fees, and certainly merchants have the right to know what those fees are in advance, rather than have them hidden from them, as they are being levied.”

Tax Reform

Taxes are an especially significant issue in 2012 as several tax breaks favored by businesses are set to expire.

According to a recent survey by FMI, 62.5% of the association’s members use the work opportunity tax credit, which allows businesses to deduct a percentage of the first-year wages of newly hired workers. That credit had previously been extended but did not carry over into 2012.

Another tax issue of concern to food retailers is the so-called “e-fairness” tax, which seeks to levy sales tax on Internet-based retailers to “level the playing field” with brick-and-mortar retailers.

That measure has a chance to gain traction in 2012, Hatcher explained, because of legislative action in California focused on Amazon.

“I think there is at least some motivation by Amazon to start trying to work on federal legislation so they can work on consistent legislation across the country rather than state by state,” she said.

Hatcher said she thinks the tax exemption for Internet retailers — levied in a bid to boost ecommerce in the Internet’s early days — is having an impact on food retailers, as consumers turn to online retailers to buy in bulk and avoid taxes.

Wenning said tax issues are at the “top of the list” for independent food retailers and wholesalers in 2012.

“There are a number of things that expired in 2011, and a whole other number of things that are scheduled to expire in 2012, and if they are not renewed they certainly could have a negative impact on the business, in terms of capital resources that are available to independent retailers and wholesalers, as well as having significant tax consequences to them.”

One of those was the opportunity to write down 100% of the depreciation for certain investments in 2011, which he described as creating an opportunity for independent operators to develop and expand their businesses, and to create jobs. That so-called “bonus depreciation” now goes down to 50%, “and remains a question mark as to whether it gets extended in 2012,” Wenning explained.

In addition, he said the issue of individual tax rates for members who operate as sub-Chapter S companies and limited-liability corporations is important. Increases in taxes on those “pass-through entities” could force companies to put aside money for taxes that they might otherwise invest in capital expenditures, he pointed out.

“For many, their rates might go from 33% to 36%, or from 36% to 39½%,” he said.

The inheritance tax is also a big issue for family-owned businesses, Wenning explained. The so-called “death tax” returned at a rate of 35% with an exemption of up to $5 million, but is scheduled to return to its previous rate of 55% with a $1 million exemption at the end of the year.

“That would make it even more difficult to pass the family business on to the next generation,” Wenning said.

Labeling Issues

Food retailers face several issues related to product labeling in 2012, including an effort to force retailers to adopt restaurant-style menu-labeling requirements listing calorie counts for their prepared-food items.

“That has been both a legislative and a regulatory issue, and we continue to work hard on that,” Hatcher said.

Both FMI and NGA filed comments with the Food and Drug Administration relating to the menu-labeling proposals that were issued as part of the health care reform legislation. Both associations said the calorie counts were designed to only apply to restaurants and would burden supermarkets with undue costs for their limited prepared-food operations.

“NGA has strongly advocated that supermarkets and grocery stores weren’t meant to be covered by that, and if their primary business isn’t providing restaurant-type foods, then they shouldn’t be covered,” Wenning said.

Other labeling issues include a new law requiring nutrition labeling on single cuts of meat and ground beef, which is an issue throughout the food retailing industry.

 The rule will require on-pack or point-of-purchase labeling to list, at minimum, calories, calories from fat, total fat, saturated fat, cholesterol, sodium, protein, iron and total carbohydrate content on all single-ingredient muscle cuts and ground meat and poultry products. The USDA’s Food Safety Inspection Service had originally set Jan. 1, 2012, as the deadline for compliance, but has extended the deadline to March 1.

Hatcher said front-of-pack nutrition labeling should move forward this year, as FMI as been meeting with FDA to clarify some issues. The program, which had previously been called “Nutrition Keys” and is now called “Facts Up Front,” has create a uniform nutritional labeling system that would appear on both national-brand and private-label products.

Another labeling issue that could come in 2012 related to country-of-origin labeling, or COOL, after the Word Trade Organization late last year said that certain labeling of meat products was unfair to producers in Canada and Mexico.

Hatcher said the requirements are also causing problems for supermarket operators, who find they must “triple-sticker” every bunch of bananas lest a customer break apart the bunch and leave a banana unlabeled as to its country of origin.

“When you are in full compliance, and you get written up for something like that, it’s ridiculous,” she said.

Farm Bill

The Farm Bill is also up for reauthorization in 2012, and Hatcher said the potential exists for Congress to enact changes in terms of what products are covered by the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps.

Such changes could provide challenges for food retailers who have to code the accepted products into their scanning systems, she said.

“There has been a big push for people to eat healthier foods, but some of the ways that people are proposing that would be technologically challenging for supermarkets,” Hatcher said. “So we are trying to explain to people that you don’t just wave a magic wand and have something change in your system.”

(See this story about state issues and this story about GMA plans for more in the potential chnages to the SNAP benefit program.)

Additionally, FMI will be keeping an eye on food-cost inflation in 2012, Hatcher noted, after some retailers reported that some product costs — peanut butter, for example — sometimes increased more than expected in 2011, surpassing the allowable retail pricing allowed for those products under nutritional assistance programs like SNAP and the Women, Infants and Children (WIC) benefit.

The prices are determined three months in advance, Hatcher explained, and surprise spikes sometimes occur.

Health Care Reform

As the industry awaits the Supreme Court’s ruling on the Affordable Health Care and Patient Protection Act, food retailers have several concerns, including requirements for providing health insurance coverage for part-time workers.

“Definitions are a key point for us,” Hatcher explained. “What is a full-time worker vs. a part-time worker, and what is a seasonal worker?”

FMI has sought to allow a yearly reckoning of which employees are considered full-time and which are considered part-time, Hatcher explained, rather than a monthly evaluation as had been proposed.

“We have been working with a coalition on that issue, and we have had a lot of interest from [Health and Human Services], and the [Internal Revenue Service], because we do have a unique labor market,” Hatcher said. “We have a lot of companies using seasonal workers, depending on their location, and a lot of stores employing seniors, older people, and younger people, high school students, who are on their parents’ policies.”

She noted that the Supreme Court is expected to issue a decision by the end of June on the legality of certain aspects of the law that have been challenged.

“That sets things up for potential legislative action, depending how that goes,” she said. “Some of the things that were tucked into the bill that have an enormous impact on our industry are the menu-labeling piece, and also the flexible-spending piece [concerning the need for a prescription to purchase OTC medications], so if there’s legislation in the health care arena, we’d like to get those things fixed.”

(See this story for more on pharmacy implication of the law.)

Wenning said NGA has engaged Epstein Becker Green to educate its members and provide regulatory analysis about health care reform.

“We are particularly concerned about having to cover part-time employees who work less than 30 hours, and some of the other measures that are included,” he said.

“I think this will be a historic decision by the Supreme Court,” he added, noting that the justices have set aside a longer period than usual to hear opening oral arguments.

Food Access

FMI is seeking to shift the terminology describing areas that are underserved with fresh foods using the term “food access” as opposed to “food deserts,” Hatcher explained.

She also said that government incentives to operate stores in underserved areas are “icing on the cake.”

“We are seeing some things that make sense on the government-resources side,” Hatcher said, with more involvement from government financial institutions such as the Treasury. “That is important, because the businesses need to be viable. If you have a store open in an area that hasn’t had access to healthy foods, and then it closes a year later, that doesn’t do anything for the community.”

Wenning said NGA supports financial incentives to open in underserved markets, but added that such initiatives could face funding challenges.

“With the budget considerations, that will be a challenging endeavor,” he said.