Part II of My Article in Global Toy News about Problems Caused by the Border Adjustment Tax (Feb. 15, 2017)

Why The Border Adjustment Tax Will Harm the Toy Industry

Rick Woldenberg is CEO of Learning Resources, Inc., a 150-employee manufacturer of educational materials and educational toys based in Vernon Hills, Illinois with offices in Gardena, California and Kings Lynn, England.  Rick joined the company in 1990 as a member of the third generation in his family business, and has served as CEO for nearly 20 years. To learn more about the Border Tax visit: www.BorderAdjustmentTax.com.

Last week, I provided a tool for you to estimate the financial impact of the proposed Border Adjustment Tax (BAT) on your business. In this article, I will review the troubling issues posed by the BAT.

1. High Taxes and Unpredictable Taxes. Under the BAT, tax rates can skyrocket to more than earnings because your tax base is converted from Net Taxable Income into a nonsense number. Rather than base Federal taxes on what you earn, the new tax will be a percentage of an odd manipulation of earnings, interest expense, CapEx, import COGS and export sales.  As a result, Federal tax bills will vary wildly year to year, depending on how your numbers shift over time. Companies with exactly the same model, structure, payroll and profitability will face spectacularly different tax bills.
2. Get Used to Gross Tax Inequities. The notion that we all pay similar tax bills becomes obsolete under the BAT. Some of us will pay a multiple of earnings in Federal taxes under the BAT, while others will pay nothing at all. Importers will fare the worst. Do importers really deserve this treatment? Why aren’t jobs at importers “good American jobs”? Multinational Fortune 500 companies are probable winners because of high export sales. No one knows the consequences of such inequities in the business community or society at large.
3. Dollar Appreciation Won’t Save Toy Companies. The "theory" behind the BAT is that the dollar will appreciate by 25% “immediately” and importers will then save enough from renegotiated contracts to pay the big new tax bill on imports. Seemingly the only people who believe this will work are the people putting forth the law. Questions abound from the likelihood and durability of sharp dollar appreciation, the challenge of extracting savings in dollar-based contracts and the negative impact on our factories of cost increases in imported content (e.g., oil, plastics, paper). Dollar appreciation is also likely to further depress U.S. export sales..
4. Small Business in the Crosshairs. Since more than 97% of U.S. importers are small businesses, the BAT unfairly targets Small Business and family businesses. The projected annual proceeds of the BAT, $120 Billion, are approximately equal to the tax on the value of 2014 imports by small businesses. In other words, the burden falls disproportionately on small businesses. This may explain why Fortune 500 companies favor the BAT. They won’t be paying for it.
5. Here Comes Inflation. Many people are openly skeptical that dollar appreciation will make the BAT cash flow-neutral for importers. If savings from the purportedly surging dollar don’t cover the new tax bills, importers will have no choice but to raise prices sharply. Price increases could range from 5% to 25% or more. The BAT will likely unleash an inflationary firestorm on America.
6. Lose Your Job to a Robot? The BAT arguably creates a financial incentive to automate your business. The need to cut costs will be overwhelming for importers like toy companies. Fully deductible CapEx will tempt many companies put into distress by the BAT. Spending on automation will eliminate jobs to fund tax payments. What jobs will be left? Who wants to be a robot repairman?

House Republicans’ Border Adjustment Tax plan will restructure our industry and will cause many casualties. Don’t wait for this to happen to you! The time to make your voice heard is now. Your Congressman and Senators need to hear from you. Remain silent at your peril. If we band together, we can defeat this common enemy.