President’s Letter – December 20, 2016: Tax, Trade and Tariffs - A Threat to Toys in 2017
Since the raucous election, no issue has raised more questions or caused more concern for the Toy Industry Association (TIA) and our members than the possibility of significant tariffs being placed on imported products – as well as the potential for a trade war with China. Indeed, last week at TIA’s annual External Affairs Strategy Meeting, a considerable amount of time was dedicated by member companies in attendance to the potential impacts of tax, trade and tariffs in 2017. Accordingly, I want to devote this year-end President’s Letter to an analysis of the issues that could be critical to your company and the entire business of toys in the New Year.
Background
House Speaker Paul Ryan introduced a corporate tax reform proposal this past summer which included a provision called the “Border Adjustment Tax” (BAT). The BAT was pitched by the Speaker and others in House Republican leadership as an alternative to the import tariffs proposed by President-elect Donald Trump during the campaign. In fact, just this week Republican Rep. Kevin Brady of Texas, chairman of the House Ways and Means Committee, emphatically said the portion of the tax plan that would place taxes on imports and would not tax exports is “going to stay.”
A Border Adjustment Tax would move the tax system from one based on location of profits or a company’s headquarters to one that is based on the location of sales. Practically, this would mean that import-intensive businesses like U.S. toy companies would no longer be able to deduct the cost of imported goods sold from their net taxable profit.
While economists and tax professionals are still mired in debate and discussion, the radical change to the corporate tax structure could potentially have a significant negative impact on the toy industry – an industry that supports high-quality jobs here in the U.S. to import toys manufactured overseas. In fact, 61 cents of every dollar spent on toy production is spent here in the U.S.
2017 Outlook
Tax reform is one of the top issues to be picked up by Congress at the start of next year. The proposal is being considered seriously in the key House committee and policymakers are spending a significant amount of time learning from stakeholders and economists about how this proposal will benefit or impact companies and the U.S. economy. While representatives are hearing the concerns, momentum is going in the wrong direction (for us), as it fits in with current rhetoric to bring manufacturing back to the U.S. However, the U.S. toy industry was never an industry that wholly relied on U.S. manufacturing. The U.S. toy industry built upon U.S. companies and valuable jobs to design, engineer, market, and ensure the quality of the 3 billion toys sold in the U.S. every year.
We Won’t Rest and We Have Powerful Allies
TIA’s advocacy activities began shortly after the election and are ongoing. TIA is active in a growing coalition of F100 companies, retail interests and major trade associations with membership reliant on international production of goods sold in the United States – all with an interest in consideration of comprehensive tax reform while being vehemently opposed to the BAT contained in the House reform blueprint. A coalition letter went to Congress last week opposing the proposal with more than 80 association signatures. Early next year, TIA and our coalition partners will hit the ground running to ensure that any form of corporate tax reform does what it is marketed to do – create jobs and not risk current U.S. businesses like America’s world-leading toy industry.
TIA’s next steps include submitting our concerns to Trump trade transition team members and sitting down with all Senate Finance and House Ways and Means member offices to reeducate each on toy industry trade issues and economic impact. We will include trade as our top priority in all communications to the new administration and new congressional members. And we will highlight priorities for the Trump Administration to consider as they identify a new United States Trade Representative and other key trade officials.
What Can TIA Members Do in the Short Term?
As proposals take more shape, we will need our members’ help in reaching out to key lawmakers and making certain they understand the damage this could cause to our industry.
More immediately, we need TIA members to give the Coalition information about the impact this will have on your business if it is enacted as proposed above. Please respond to TIA’s Rebecca Mond with your comments on the following benchmarking questions (we will redact all company-specific information):
- What percentage of your inventory is imported? (We do understand that for many members this answer is 100%.)
- If the corporate tax rate were reduced to 20%, what would your effective tax rate be if you could not deduct the cost of imports?
- How does the answer to #2, above, change if the corporate tax rate were reduced to 15%?
My simplified view is that elected officials know either pain or pleasure: “Will any issue (or group, or meeting, etc.) either help me in what I seek or will it cause me pain – and how much pain?” We are fully prepared to work productively or be a royal, boisterous, media-friendly pain in the backsides of people who would take away children’s happy birthdays, steal Christmas and destroy quality U.S.-based jobs. And no one wants to have to explain to their children why Santa was put out of work.
We welcome any thoughts you have as we move forward—on what we should say and how we can most effectively say it. We’ll be certain to keep members fully apprised.
Until then, I wish you and your families a very Merry Christmas, a joyful holiday season, and good health and prosperity in the New Year.
Steve Pasierb
spasierb@toyassociation.org
@StevePasierb