How Recent Reforms, Pending Legislation on Capitol Hill Impact the Industry
Few would deny that 2018 is shaping up to be a fraught and contentious year politically. But, it isn’t likely that political news of the headline-grabbing, “breaking” variety is going to have all that much to do with issues of primary concern to the printing industry.
Those issues, nonetheless, are real, and the need for printers to understand and engage with them has seldom been more urgent.
Taxation, the future of the U.S. Postal Service, health care reform and the regulatory climate are never out of the political picture as far as the printing industry is concerned. But this year, each has new elements that point straight at business owners’ bottom lines. Experts following the trends see a mixed bag of mixed blessings: provisions stimulating growth and profit offset by forfeits that could undercut the very things that the business-friendly enactments were meant to provide.
H.R. 1, the Tax Cuts and Jobs signed into law on Dec. 22, 2017, is a case in point. Much of what’s in it represents the kind of financial relief that printing business owners have been hankering after for years. But this assumes (and it’s a big assumption) that balancing what the tax bill gives against what it takes away works out to their advantage when they sit down with their accountants to file their annual returns.
Rates Press the 'Down' Button
Chief among the what’s-not-to-like features of the bill is the cutting of the corporate tax rate from 35% to 21%, beginning in 2018. Scrapped from the bill’s final version is the corporate alternative minimum tax, which requires companies that reduce their tax liability to zero through deductions and credits to add some of them back and pay tax on the recalculated amount.
But, according to Lisbeth Lyons, VP, Government Affairs, at Printing Industries of America (PIA), an even bigger win for the industry is the rate relief the bill gives to pass-through businesses: sole proprietorships, partnerships, limited liability companies (LLCs) and S-corporations.
Most printing businesses are structured in one of these ways, “passing through” their income to be taxed at their owners’ personal income tax rates. Now, these companies may take a 20% deduction from the first $315,000 of joint income or the first $157,500 if single - an adjustment, say the bill’s sponsors, that reduces their effective marginal tax rate to no more than 29.6%.
Lyons says the reduction aligns with PIA’s position that corporate and pass-through taxation should be addressed together, as they are in the bill. But, she cautions that because this will be one of the most complex pieces of the new package to sort out, printers will want to engage tax professionals for advice. “This is too complicated to ‘Turbo Tax’ one’s way through,” she says.
Advertising Deduction Remains
Something else the bill preserves is the deductibility of money spent on advertising as an ordinary business expense. This break, which encourages advertisers to buy print, “has stood the test of time since the early 1900s,” notes Marci Kinter, VP for Government & Business Information, Specialty Graphic Imaging Association (SGIA). Nevertheless, Lyons called the fact that changes to the deduction weren’t included in either the House or the Senate version of the bill “a huge victory” for print producers, one for which PIA fought hard.
Both government watchers agree that doubling the estate tax exemption limit to $11 million for individuals ($22 million for married couples) will be a boon to printing and specialty graphic business owners and their legatees, as the majority of these firms are family-owned.
Another potential boon - this one as much for equipment manufacturers as for printers - lies in the “full and immediate expensing” provision, which permits companies that buy machinery and software to deduct the full amount of the investment from their taxes in the year in which the purchase is made. Lyons says PIA pressed for immediate expensing of both new and used/refurbished equipment and that this language was included in the final version of the bill.
Hold the Champagne
But, the devil in this highly complex tax package is in the details, where disappointment for some print business owners may lurk as well. The average American, according to Kinter, doesn’t understand its ramifications. This means it may contain downsides that the average business owner will have to discover the hard way.
Projected to add at least $1 trillion to budget deficits during the next 10 years, the plan was required to include ways of blunting that impact. Economic growth from the stimulus that tax cuts are hoped to provide may close some of the gap, but relief also will come from the elimination or curtailment of tax deductions - including some that print business owners may regret seeing modified.
Gone, for example, is the domestic production activities deduction, which gave companies a tax break on income earned from manufacturing things in the United States. H.R. 1 also limits the deductibility of net interest expenses to 30% of the business’s adjusted taxable income.
Removed or made less advantageous to businesses are the deductions for employer-paid moving expenses, employee meals and qualified mass transit and parking benefits, along with various energy-related credits.
Preserved through 2019, on the other hand, is the work opportunity tax credit, available to businesses that hire people from groups deemed to face significant barriers to employment. Kinter points out that its loss would have been keenly felt by screen printing companies with handicapped workers on their payrolls.
‘Not as Robust’
Lyons concedes that the tax package is “not as robust” as PIA would have liked and that its gem - the tax cut for pass-through businesses - may not be equally beneficial for all of the printing companies that try to take advantage of it. Like the rest of the nation, the industry will have to “wait and see” what it’s actually capable of delivering.
Delivering is what the U.S. Postal Service (USPS) does six days a week, but with mounting losses as its expenses continue to outpace its income. Since about half of everything printed enters the mailstream, whatever threatens the solvency of the postal system also threatens the viability of print as a medium of communication and advertising.
The new year has brought no immediate fixes. But, two developments - one in Congress, and the other in the agency with regulatory oversight over the Postal Service - may start changing the picture for better or worse in 2018.
“Development,” admittedly, isn’t the most accurate term for what H.R. 756, the Postal Service Reform Act of 2017, is presently experiencing. Introduced in January 2017 by Rep. Jason Chaffetz (R-UT), the bill aims to save money - more than $10 billion over 10 years, according to a Congressional Budget Office estimate - by establishing a new health benefits program for USPS employees and changing the way their retirement benefits are calculated. It would also permit the Postal Service to raise rates on certain mail categories and phase out delivery of mail directly to business customers’ doors.
Little Orphan Enactment
But Chaffetz’s unexpected retirement from Congress last June 30 has left H.R. 756 “something of an orphan bill,” even though it enjoys bipartisan support, points out Leo Raymond, managing director of MailersHub, an online community for the commercial mailing industry. Absent trouble bigger than the Postal Service already is in, Raymond doesn’t anticipate much legislative progress on it in 2018. “Congress doesn’t react unless there’s a crisis,” he observes.
Jim Andersen, CEO of IWCO Direct - ranked first in segment sales among the Top 5 direct mail printers within the current Printing Impressions 400 list - is more sanguine: “We are hopeful that this bill will pass in early 2018, especially as some of the larger issues on Capitol Hill, such as tax reform, have been resolved or are moving toward resolution,” he comments.
Andersen also sees H.R. 756 as a better way for the Postal Service to cure its financial woes than what the Postal Regulatory Commission (PRC) has in mind: a plan that he says “will accelerate the erosion of mail volume and will be damaging to the mailing industry and to the Postal Service.”
PRC: Let Rates Exceed Inflation
He is referring to the findings of a review by the PRC of the Postal Service’s first 10 years of operation under the Postal Accountability and Enhancement Act (PAEA) of 2006. On Dec. 1, 2017, the PRC declared that while the postal system had met some of its PAEA mandates, its financial health remained poor enough to warrant permitting the USPS to raise rates faster than the rate of inflation (CPI plus 2%) for the next five years.
Another 2% could be added for “underwater” categories mailing at rates that don’t fully cover the Postal Service’s cost of handling them. The USPS could earn an additional percentage point for improving operational efficiency and service. Worksharing discounts to commercial mailers would be tightened as well.
Everything is included in a recently issued PRC rule proposal that, following a period of public comment, the commission will use as its basis for the ratemaking process going forward. The net effect, according to Andersen, may be annual rate increases in the 4% to 7% range without any additional incentive for the USPS to keep costs under control.
Don’t Malign the Mailman
Raymond believes that, no matter what happens, the Postal Service mustn’t be cast as the villain of the story - much of the current situation isn’t of its making.
Some mailing categories really are underwater: Raymond says that the periodicals rate, for example, covers only 70% to 80% of attributable costs. The Postal Service’s burden is compounded by the fact that it receives no taxpayer funding and, alone among public and private entities, has to prefund retiree health benefits (an obligation imposed on it by the PAEA). As digital communications replace the paper-based kind, steadily declining mail volumes have led to sharp drops in revenue for the beleaguered system.
The “cruel irony” in all of this, contends Raymond, is that giving the Postal Service the rate-setting leeway it needs to restore its finances to health also drives business away from it by making the system more expensive to use. There will be no easy way out of this rock-and-a-hard place situation either for the Postal Service or for the mailing industry, he cautions.
In as much need of wellness as the ailing postal system are printing and graphic industry employees who depend on their jobs for the health care coverage they need. On this front, the news so far is mostly neutral.
Although the tax reform bill repeals the provision of the Affordable Care Act (ACA) that requires most individuals to purchase health care insurance or pay a fine, they are still free to obtain what coverage they can through exchanges created under the ACA. Left intact by the tax bill is the ACA’s employer mandate, penalizing employers with 50 or more full-time employees for not providing coverage or for providing coverage that fails to meet minimum value and affordability standards.
Trump Touts ‘Association’ Concept
There may be an opportunity to expand the availability of coverage through association health plans (AHPs), in which companies band together to leverage their insurance-purchasing power. Last October, President Donald J. Trump signed an Executive Order directing federal agencies to broaden eligibility for participating in AHPs and to permit the groups to purchase insurance across state lines.
These plans have their critics, however, and the Department of Labor, which has principal jurisdiction over them, hasn’t yet published regulations to facilitate the expansion that the Executive Order wants to see.
Given its Republican character, the Trump administration will be expected to continue rescinding or rolling back previously adopted regulations that impact business. Lyons, of the PIA, says it’s fair to see this as a “regulatory freeze” that will keep new rules from popping up. But, this doesn’t mean that printers will no longer be answerable to the government agencies from which they’re used to receiving directives.
Lyons notes that inspections conducted at “an all-time-high” rate by the Occupational Safety and Health Administration (OSHA) during the previous administration are happening at pretty much the same pace under the present one. Thus, now is not the time for printers to become “complacent” about their OSHA obligations. Kinter agrees. The mandates remain in place, and “people are still being inspected,” she says.
Kinter also advises the need to stay vigilant about environmental matters. Here, she says, the regulatory climate “has really not shifted,” with states continuing to be aggressive about air quality, waste and recycling, solvents and chemicals used in graphic processes (for example, flame retardants added to digitally printed fabrics).
You Speak, They’ll Listen
The question for 2018 then becomes one of how much owners of printing and specialty graphic imaging businesses can do to gain more influence over the adoption of laws and regulations that affect them individually and impact their industries as a whole.
The answer, according to those interviewed for this article, is plenty.
The first thing for mail service providers to understand, notes Andersen, is the heft of influence they possess. These businesses “need to realize, act on and leverage the fact that we are part of a $1.4 trillion industry that represents 4.6% of GDP and employs 7.5 million people - approximately 6% of the U.S. workforce.”
Lyons intends to flex some of that muscle on Capitol Hill during the 2018 Print & Packaging Legislative Summit in Washington this June.
She describes this year’s edition of the event, which brings industry members face-to-face with Congressional lawmakers, as a “big tent project” co-hosted by PIA, SGIA, the Associated Industry of Corrugated Converters (AICC), the Fibre Box Association (FBA), Idealliance and NPES The Association for Suppliers of Printing, Publishing and Converting Technologies.
Lyons adds that PIA has launched a “next level advocacy campaign” for the 2018 election year and that it will have news to share soon. PrintPAC, the association’s political action committee, is expected to be a critical tool for political advocacy in what promises to be a turbulent mid-term election.
“Between a polarizing President, unexpected sexual and workplace allegations forcing lawmaker retirements, and an electorate as energized as it was for a presidential election in 2016,” Lyons advises, “it will be more important than ever to focus on identifying and supporting pro-print, pro-business candidates who can weather the storm.”
Let Them in; Let Them See
One of the bedrock notions of U.S. politics is that above all, it’s local - a concept that owners of printing and graphic businesses can capitalize on as effectively as any professional politician. The way to do it, according to Raymond, is simply to invite local legislators to visit your plant.
It’s “scary,” he says, to contemplate how little knowledge of the industry most elected officials actually have. A visit opens their eyes to the fact that their decisions affect people - and jobs - in their districts. (Lyons says PIA has “facility tour in a box” guidance for members who want to give it a try.)
Political strength also comes from standing together in advocacy organizations. “We need to speak with a united voice on the steps needed to build a financially secure future for the hub of our industry - the U.S. Postal Service,” Andersen declares. “We urge others in the industry to join in making our voices heard through our industry associations.”
This means, according to Kinter, that when a call to political or regulatory action is issued by a trade group, members should heed it before it gets lost in the weeds of running their businesses.
“People underestimate the clout that they have” by reaching out to lawmakers as their associations urge them to, she observes.