Lawmakers are currently mulling over a proposed tax code overhaul intended to reduce the tax burden on U.S. companies that could also have the net result of raising prices on the products those companies manufacture overseas, a change that could hit toy companies particularly hard.
The proposal — still in its early stages — would throw out the current corporate income tax rate of 35% and lower it to 20%. However, as a tradeoff, companies would no longer be able to deduct the cost of imported goods from their profits.
As the Wall Street Journal explains, this could be a problem for American toy companies whose largest customer base is domestic, but who manufacture most or all of their products overseas.
The report gives the example of a U.S. company that imports $1 million worth of product, and sells them for $2 million stateside after spending about $500,000 domestically.
Under the current tax code, the company deducts the import and domestic expenses, and pays 35% tax, but only on the $500,000 profit. If the GOP’s proposal is put in place, that company would not be able to deduct the $1 million of import costs, so it would pay the lower 20% tax, but on $1.5 million instead of $500,000.
The nation’s largest toy companies — Mattel and Hasbro — earn about half of their revenue from U.S. sales, but have to import nearly all of those products because the cost of manufacturing domestically is too high.
The CEO of MGA Entertainment Inc., the company behind the Bratz line of toys, tells the Journal that moving production to the U.S. would result in prices that are three times higher than they are now — a change that he believes customers will not stomach.
U.S. retailers like Walmart that import a significant chunk of their wares — particularly apparel– would also see higher taxes, resulting in increased prices for customers, with some analysts saying apparel prices could rise by as much as 15%.
Supporters of the proposal maintain that these companies are not seeing the big picture; that the plan will result in a more valuable dollar and economic growth.
However, U.S. toymakers remain skeptical.
“No recent issue has raised more questions or caused more concern for the Toy Industry Association (TIA) and our members than the possibility of the new Administration and Congress raising tariffs on imported products – as well as the potential for a trade war with China,” wrote TIA President Steve Pasierb yesterday on the organization’s website, while simultaneously acknowledging that their may be financial benefits from the expected light-touch regulatory approach expected to come from the Trump White House.
Pasierb was more doom-and-gloom in his previous letter to the industry, arguing that the tax change could “take away children’s happy birthdays, steal Christmas and destroy quality U.S.-based jobs… no one wants to have to explain to their children why Santa was put out of work.”