These Small Business Owners Fret Over ‘Devastating’ Import Tax Pitched by House GOP Leaders
Marc Johnson runs a small business with a major footprint.
Johnson’s late father, Boine, who founded the company, and three engineers from England, helped create an instrument that measures the composition and texture of any product imaginable: baked goods, cereals, cosmetics, adhesives — to ensure they are performing well, and consistently.
Johnson imports his finished instrument from the United Kingdom, where it is produced, and sells it mostly to U.S. customers, who number more than 2,500 and include NASA, the Food and Drug Administration, Fortune 500 companies, and universities.
His nearly 30-year-old company, Texture Technologies, employs 12 people and is headquartered in Hamilton, Massachusetts. It exports “next to nothing.” No other company sells a comparable product in the U.S., Johnson says.
As part of the most sweeping corporate tax reform plan proposed in decades, House Republican leaders aim to discourage import-intensive businesses like Johnson’s by imposing a tax on their products consumed in America, while making exported goods and services tax-free.
The plan’s authors, House Speaker Paul Ryan, R-Wis., and House Ways and Means Committee Chairman Kevin Brady, R-Texas, say their border adjustment tax, as it’s known, would encourage companies to produce products in the U.S., and eliminate incentives for corporations to use complex schemes to shift their incomes to lower-tax countries.
But Johnson and other small businesses and retailers say the plan would raise their costs, forcing them to pass the price of that onto the consumer, and potentially cause them to lay off workers.
“If I want to keep importing and pay the tax, I am out of business,” says Johnson, 57, who estimates his federal tax bill under the House plan would soar from about $100,000 a year to $650,000 annually. “If I choose to tear down and build in the U.S., I am out of business. The whole idea of this plan is that importers like me are paying for all the exporters. Somehow, proponents think we will all be hanging around, so the government can bill us our share. But they won’t get that share because I will be out of business. That would be devastating.”
‘Entirely New System’
Supporters of the border adjustment tax acknowledge there will be a short transition period where costs and prices might go up. But eventually, they say, things will return to normal — and be better off in the long term.
Under the plan, the corporate tax rate would fall from 35 percent — the highest such levy in the developed world — to 20 percent. Corporations would pay that 20 percent tax on their imports. At the same time, exports and other foreign sales would become tax-free.
The plan would raise money for the government in the short term — about $1 trillion over a decade, independent estimates show — to help pay for the lower tax rate.
That’s because the U.S. imports more than it exports, with an annual trade deficit of more than $500 billion.
The plan’s boosters haven’t even drafted a bill yet, but the proposal gained traction and attention after President Donald Trump last month seemed to embrace the tax on imports as a way to help pay for a border wall with Mexico. The White House later walked back that interest, saying the plan was simply “one idea” that might work to finance the wall.
Even so, some Republicans in Congress view the tax as a way to deliver the “America first” promise of Trump’s campaign in a way they say doesn’t resort to protectionism or risk a trade war.
“We are not cavalier about the concerns being raised, but the notion of sitting and doing nothing and not addressing fundamentally what’s at issue, which is a tax code that’s pushing manufacturing overseas, would be a lost opportunity,” said Rep. Peter Roskam, R-Ill., the chairman of the House Ways and Means subcommittee on tax policy.
“So we have two choices,” Roskam told The Daily Signal in an interview. “We can do nothing, and the tax base will continue to erode, and we will wake up at some point and say, ‘What happened? Why didn’t we do anything about it?’ Or we can go to an entirely new system that provides real growth and incentives for manufacturing in America.”
‘Don’t Kill Me’
The idea has split the business community. Major importers such as retailers — including Nike, Target, and Wal-Mart — car dealers, toy manufacturers, and oil refiners oppose the plan, warning that consumer prices will rise. Export-driven companies including General Electric, Dow Chemical, and Pfizer support the border adjustment tax.
In interviews with The Daily Signal, Johnson, and other small business owners, said they support the premise of the plan — rewarding companies that build in America — but say shifting manufacturing here isn’t feasible for them, and would be made more difficult if they have to pay a hefty tax.
“The big picture is I know the plan wants to create incentives for me to build in the states,” Johnson says. “It’s not going to happen. I don’t have intellectual property here, or the skill set. It’s taken us 30 years to get this brilliantly produced in the way that we do. I have a beautiful line of credit. But I can’t go to the bank and say I will be in a loss position for the next seven to eight years and I want you to lend to me to build here — just to replace the revenues I am doing now. I don’t have the cash flow to wait.”
Rick Woldenberg is the CEO of Learning Resources, a third-generation family-owned company based in the Chicago suburbs that makes educational toys and employs 150 people in the U.S.
His company makes 98 percent of its products overseas, mostly in China and Taiwan.
Woldenberg, 57, told The Daily Signal that since 2013, he has tried to find U.S. molders interested in making his products here, but he’s been unsuccessful.
“American companies don’t want our business,” Woldenberg said. “Our product is very simple. It requires unskilled labor. We aren’t making a high-value item. American companies have proven they don’t want to make them.”
He said competition in the marketplace has forced him to try to “slice expenses to the bone” and find the most efficient producer overseas.
Woldenberg guessed that his federal tax rate would increase to 165 percent from 39.6 percent under the House Republican plan. He said he would have to raise prices by 10 percent to 15 percent to stay in business.
“What we are being asked to do is liquidate our company in the pockets of the government,” Woldenberg said. “They say they are trying to balance out the trade deficit, and that’s fine, but don’t kill me in the process. In trying to solve that problem, they are creating far worse inequities.”
Leveling the Playing Field
Roskam, the Republican congressman from Illinois, says he’s met with Woldenberg, and assured him and other business owners that the border adjustment tax plan would contain “transition provisions” that phase in the tax liability that importing companies would face.
Supporters of the tax change note that other major nations impose a value-added tax — a levy imposed on domestic consumption. Compared to other countries, the U.S. has few taxes on consumption, while taxing producers more heavily. So the border adjustment tax would level the playing field, supporters say.
“The concept of border adjustment is something every single country we compete with has,” said Brian Reardon, an adviser to the “American Made Coalition,” which supports the tax, who formerly was a special assistant to President George W. Bush for economic policy.
“All of those countries have robust retail operations and consumers are doing just fine,” Reardon told The Daily Signal in an interview. “Many of the people complaining export to those countries and pay those taxes. The idea everybody else can do it and we can’t is just nonsense.”
In addition, economists who support the plan say the dollar will rise as a result of the change, which could offset the tax increase on imports by making those same imports less expensive.
Importers such as Johnson of Texture Technologies worry that change won’t happen fast enough to offset the higher costs they’ll face.
“It’s all based on a bet,” Johnson said. “In theory, currencies will adjust and everything will be good. The whole idea that the economy will magically adjust is just people blowing smoke.”
“I am in favor of boosting exports,” Johnson added. “If the country boosts exports, then maybe more people will want to buy my product. But don’t ask the importers to pay for it. If the entire country will benefit from boosting exports, then have the entire country pay for it.”
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